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Australia | Publication | March 2023
From 1 January 2021, Australia’s insolvency framework for small businesses changed. The purpose of the change was to assist small businesses, with debts under AUD $1 million, to survive – specifically, by providing these businesses with simpler, more flexible restructuring options outside the existing “one size fits all” voluntary administration and scheme of arrangement processes available under the Corporations Act 2001 (Cth). In many cases, those processes are too costly and time-consuming to be a realistic option for financially distressed, but viable, small businesses to pursue, often leading to a premature liquidation.
The new insolvency framework also introduced a simplified liquidation process for small businesses.
The adoption of bespoke restructuring and liquidation frameworks for small businesses is recommended by international bodies such as UNCITRAL, the World Bank and INSOL International.
Under the new Australian framework, there are two phases to a small business restructuring:
Importantly, under a small business restructuring, the directors remain in control of the insolvent company and do not cede control to the restructuring practitioner. This is different to other formal insolvency appointments in Australia.
Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC), released a report in January 2023 on small business restructurings. The report covers the period 1 January 2021 to 30 June 2022. ASIC’s key observations are:
ASIC accepts that there has been a slow (and low) uptake of the small business restructuring process. Some of the reasons proffered are:
Australia is in the midst of an inquiry into corporate insolvency, which will examine the operation of the existing insolvency framework and options for reform. One of the areas that will be considered by the inquiry is small business restructurings.
It is expected that the AUD $1 million debt threshold will receive significant focus and potentially be raised given worsening economic conditions. We would argue that the other issues identified above to explain the slow uptake of the small business restructuring process should also form part of the inquiry’s review. Small businesses play a significant role in the Australian economy and any insolvency reforms that affect them should take that role seriously.
Indeed, flexible and efficient restructuring processes for small businesses (along with simplified liquidation processes for unviable entities) are ultimately a key enabler of innovation, entrepreneurialism and growth in any modern economy.
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