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COVID-19: New Bankruptcy Measures

September 28th 2020 

As mentioned in my last letter, the Government’s important measures to financially support families and businesses during the pandemic are coming to an end. This means that lifelines, like the $101 billion ‘Job Keeper’ payments - that did not discriminate between viable and unviable operations - enabled employers to keep staff and operate – albeit at reduced levels – will cease.

The payments were much needed. They saved businesses from bankruptcy, kept unemployment levels to surprisingly moderate numbers and ensured our economy did not contract to the levels of the US, UK and other European nations. This can only be celebrated.

“The new bankruptcy rules – said to be the biggest overhaul of bankruptcy regulation in decades – give a lifeline to small businesses with liabilities of less than $1 million.”

However, you will be aware that the AICR has had concerns about the consequences of unviable businesses limping along, thanks to these payments, only to crash when the lifeline of subsidies stops. They were also kept in the equivalent of ‘economic cotton wool’ via the pressure on other creditors not to chase the debts these otherwise unviable businesses have incurred. As with the subsidies, that practice won’t be able to continue at current levels.

Mindful of the risks, and with an eye on economic recovery and regulatory reform, the Government has announced an extension of the temporary regulatory measures it introduced earlier this year to stave-off threats of bankruptcy and insolvency for pandemic-struggling – but otherwise viable – small businesses.

Likened to the United States’ Chapter 11 laws, the new bankruptcy rules – said to be the biggest overhaul of bankruptcy regulation in decades – give a lifeline to small businesses with liabilities of less than $1 million. It means if deemed viable, the businesses can keep operating while restructuring their debt.

The aim is also to cut the cost of liquidators' investigative processes, mandatory meetings and reporting requirements that often swallow any capital a business has, and to ensure that small business operators function without fear while they seek guidance to repay creditors. It means that struggling, but otherwise sound, businesses can operate as a “debtor in possession”, rather than the current system of “creditor in possession”. This is laudable.

“Businesses can operate as a “debtor in possession”, rather than the current system of “creditor in possession.”

Indeed, it is axiomatic that measures that keep viable small businesses operating are essential for our economy to thrive. However, as always, the caveat is the risk of abuse.

The AICR has long had concerns about recalcitrant businesses using bankruptcy laws to avoid paying debts. Often called “phoenixing”, it’s a corrosive and destructive scheme where unscrupulous operators avoid paying their creditors – including their staff – by declaring insolvency, only to ‘rise’ again and repeat the behaviour. It is not only unconscionable corporate behaviour, it undermines our economy and the way we function. It robs workers from their entitlements, and in turn, breaks otherwise healthy supplier operations in the business chain that have been left with considerable debt. Those creditors also risk bankruptcy. The Treasurer says he is aware of this issue and is mindful of the need to avoid any opportunities for “phoenixing” with extra safeguards and measures designed to prevent poor corporate behaviour.

It is the AICR’s hope that the new laws will do as intended, and provide genuine relief to otherwise viable and well run small businesses so they can restructure, flourish, and restore our economy as we all work our way out of this pandemic.

More information about the new laws can be found at the Treasury website: https://www.treasury.gov.au