As part of its ongoing reforms to assist businesses hit by the COVID-19 Pandemic, the Federal Government has announced plans to change insolvency law by giving small business-owners more control over their ailing businesses.

While the Government’s bill containing the proposed changes is yet to be released, Treasurer Josh Frydenberg outlined the proposed changes in a recent Media Release.

In essence, the proposal would change Australia’s corporate insolvency regime from a one-size-fits-all external administration model to a director-driven model based on the United States’ Chapter 11 bankruptcy process.

The new process is for companies with liabilities of less than $1 million which, according to Government figures, would account for three-quarters of companies that entered voluntary administration in the 2018-19 financial year.

Under the proposed model, rather than an external administrator being placed in control of the company, the company’s directors remain in control while a Small Business Restructuring Practitioner is brought in to develop a restructure plan. While this is happening, the company’s directors will be able to trade in the ordinary course of business without running foul of insolvent trading provisions.

The company’s directors work with the Small Business Restructuring Practitioner over a 20-day period to develop a plan to restructure the business’ debts. At the end of that period, the company presents the plan to its creditors, who have 15 days to vote on it. If a majority of the creditors (by value) approve, the restructure plan binds all unsecured creditors. If the creditors reject the plan, the directors may opt to go into voluntary administration.

In addition to these radical changes, the Government has also announced it plans to create a ‘simplified liquidation pathway’ for small businesses, which would streamline regulatory obligations for some businesses. In particular, the Government proposes reducing the circumstances in which a liquidator can seek to claw back unfair preference claims, removing the requirement to call creditor meetings, and simplifying the dividend process.

The nitty-gritty of the Government’s proposals will likely not be known until the Bill is presented to Parliament in the coming weeks. The Treasurer anticipates that the changes will be in place by 1 January 2021. Given that a lot of COVID-19 economic relief ends in December 2020, it will be worth considering the potential effects that the Government’s propped insolvency changes could have on businesses still struggling in the new year.