Australia overhauls bankruptcy laws to help firms over COVID-19

Australia overhauls bankruptcy laws to help firms over COVID-19

The changes are effective from from 1 January, 2021

Credit: ID 55578362 © Victor Diola Jr | Dreamstime

Australia has unveiled its biggest shakeup in bankruptcy laws in nearly three decades, allowing small businesses to trade while insolvent and take more control over debt restructuring, in a bid to help firms through the coronavirus crisis.

The new rules will help manage an expected avalanche of insolvencies when wage subsidies introduced to help companies survive the virus-triggered recession start to wind down early next year.

Under the proposed rule changes, businesses with liabilities of less than $1 million will be able to keep operating for 20 business days while they come up with a debt restructuring plan, rather than be placed in the hands of administrators.

The changes, effective from 1 January, 2021, aim to move the system "from a rigid, one-size-fits-all creditor in possession model to a more flexible debtor in possession model," Federal Treasurer Josh Frydenberg said in a statement.

The government would adopt some rules from the US-style Chapter 11 bankruptcy process, he said, which gives struggling companies a window to restructure debt while being protected from the threat of legal action by creditors.

"It is welcome news that there will be a quick and cheap process for small business to either rehabilitate or be wound up," said Maria O'Brien, the Australian head of lawyer Baker McKenzie's restructuring and insolvency practice.

However, unlike the Chapter 11 process, Australia's new restructuring process will not be court-supervised, and she warned that the reforms, whose details have not been released, needed to ensure adequate oversight to avoid abuses.

Australia has largely escaped the high number of deaths from the coronavirus pandemic recorded in other developed nations, helped by strict lockdowns, but the curbs have taken a steep toll on the economy.

To lessen the impact, the government rolled out stimulus packages worth about $314 billion, including wages subsidies, but it expects a wave of insolvencies when they expire.

(Reporting by Renju Jose and Paulina Duran; editing by Richard Pullin)

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