Australia is looking to adopt key aspects of the US Chapter 11 Bankruptcy Code as a way of keeping businesses afloat during the COVID-19 pandemic.
Under the change, businesses with liabilities of less than $1 million will be allowed to continue trading while they develop a debt restructuring plan within 20 business days.
The Treasury states these reforms will cover around 76 per cent of business subject to insolvency today and 98 per cent of businesses that have fewer than 20 employees.
“As the economy continues to recover, it will be critical that distressed businesses have the necessary flexibility to either restructure or to wind down their operations in an orderly manner,” said Treasurer Josh Frydenberg.
“Together, these measures will reposition our insolvency system to reduce costs for small businesses, reduce the time they spend during the insolvency process, ensure greater economic dynamism, and ultimately help more small businesses get to the other side of the crisis.”
CreditorWatch chief economist Harley Dale warned that a considerable number of insolvencies would emerge, with many businesses unlikely to recover from the “forced economic hibernation” imposed in March. That remains the case, regardless of any legislation that allows companies to continue trading while insolvent.
“It is crucial that the federal government continues to provide support to businesses and households in a year of unprecedented economic challenge,” Mr Dale said.
“However, while the decision to apply US-style Chapter 11 bankruptcy laws that will allow small businesses to trade their way out of insolvency is well intentioned, it will do little to generate jobs and growth down the track.”
Instead, Mr Dale believes businesses that cannot survive without government support should not be the focus.
The focus should therefore be on those small businesses that have a viable capability of emerging from the COVID environment with their balance sheets intact and an ability to successfully trade without government support.
“There’s a lot of uncertainty out there for creditors as they don’t quite understand how this will affect them,” Mr Dale said. “Ultimately, if it helps businesses survive or at least flattens the inevitable insolvency curve, it’s a good thing. The government should be commended for working on such big policy changes in short, pressure-filled time.”
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