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Federal Gov to adopt US-style insolvency rules for expected wave of business closures

The Federal Government is planning to overhaul insolvency rules, adopting an American-style model to help small businesses struggling because of the coronavirus pandemic to either restructure or fold.

  • Finance bodies expect a wave of insolvencies when emergency protections for business owners expire at the end of the year
  • The reforms will allow small businesses to restructure their debts while remaining in control of their business, the Treasurer says
  • The cost of putting a business into administration or liquidation can be so expensive it consumes the remaining assets of small businesses

The reforms will allow small businesses to restructure their debts while remaining in control of their business, the Treasurer saysThe cost of putting a business into administration or liquidation can be so expensive it consumes the remaining assets of small businesses

The new system would be two-tiered, with large companies required to work under existing insolvency rules while business with liabilities of less than $1 million having a simpler system.The changes would see small business owners remain in control of their company and assets, rather than immediately being placed in the hands of an administrator or creditors.

Treasurer Josh Frydenberg said: as part of our economic plan, the Morrison Government will continue to provide regulatory relief for businesses that have been impacted by COVID-19 by extending temporary continuous disclosure provisions that apply to companies and their officers’ for a further six months until 23 March 2021.

Given the impact of COVID-19 and the uncertainty it generates, it remains considerably more challenging for companies to release reliable forward-looking guidance to the market. 

The Government will extend the existing relief which temporarily amends the Corporations Act 2001 (the Act) so that companies and officers remain liable where there has been “knowledge, recklessness or negligence” with respect to updates on price sensitive information to the market.

The extension will be made under the instrument-making power that has been inserted into the Act as part of our response to COVID-19.

The heightened level of uncertainty around companies’ future prospects as a result of COVID-19 exposes companies to the threat of opportunistic class actions for allegedly falling foul of their continuous disclosure obligations if their forecasts in the middle of a pandemic are found to be inaccurate.

In response, companies may hold back from making forecasts of future earnings or other forward-looking estimates, limiting the amount of information available to investors during this period.

Importantly, evidence to date shows that the temporary exemption has assisted companies to continue to update the market during this difficult and uncertain time. In fact, Treasury has identified that there has been an increase in the number of material announcements to the market during the period the relief has been in place, relative to the same period last year.

So while this temporary measure has not detracted from information being provided to the market, it has made it harder to bring such actions against companies and officers during the coronavirus crisis and while allowing the market to continue to stay informed and function effectively. 

In addition to this extended regulatory relief, the Government is providing an unprecedented level of support totalling $314 billion to cushion the blow for households and businesses as part of our economic recovery plan for Australia.

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