Industry wary of new insolvency laws
Small businesses with liabilities up to $1m will be able to trade on under new measures to be announced in the October budget, but industry leaders are wary of the proposed scheme.
Andrew Macaulay, CEO at PVCA said the “devil is in the detail”, while Kellie Northwood at TRMC said the new scheme was “open to abuse”, and also wanted to see the details.
Under the new measures small business will be able to seek advice from an insolvency practitioner and develop a restructuring plan, which if accepted by 50 per cent of creditors will allow the company to trade on. Currently they have to go into external administration, which is costly, and takes the business out of their hands.
The 50 per cent creditor vote will specifically exclude related entities, who in the past have sometimes been used to get DOCAs through against the wishes of other creditors. And the process can only be used once every seven years to prevent repeated attempts at debt reduction.
The scheme will start on 1 January, and will replace the temporary bankruptcy protect measures put in place during Covid, which lifted the threshold for statutory demand tenfold, to $20,000, and extended the time indebted companies have to respond to statutory demands from creditors from 21 days to six months – a measure that has attracted mounting criticism as unscrupulous operators have sought to take advantage.
Andrew Macaulay said: “It appears to be a means of preserving the assets of the owner. Liquidators fees are exorbitant, so getting those out of the equation is good. However, letting the business owner deal with it all is fraught with risk. Chapter 11 works in part because it is used by big companies with access to finance. SMEs, and with debts of less than $1m they will be on the small side, they will not have access to finance. I have asked for more details. Print business owners need to be careful that they are not being used by their customers.”
Commenting on the proposal TRMC CEO Kellie Northwood said: “I can see what the treasurer is trying to achieve. However, it does ring alarm bells, and we would want to see the substance before we give it any support. On the one hand it may free up small business to be able to restructure and move forward, on the other hand t may be open to abuse.”
The numbers of small businesses becoming insolvent has plummeted during Covid, with businesses propped up by JobKeeper, rent relief and the six month stay on creditors taking court action.