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New insolvency rules commence

09th Feb, 2021

Important changes to Australia’s insolvency laws commenced operation on 1 January 2021. The Federal Government has called these the most important changes to Australia’s insolvency framework in 30 years.

The measures apply to incorporated businesses with liabilities less than $1 million. The intention is that the rules change from a rigid “one size fits all” model to a more flexible “debtor in possession” model, which will allow eligible small businesses to restructure their existing debts while remaining in control of their business. For those businesses that are “unable to survive”, a new simplified “liquidation pathway” will apply for small businesses to allow faster and lower-cost liquidation.

The measures are expected to cover around 76% of businesses currently subject to insolvency, 98% of which have fewer than 20 employees. The new rules do not apply to partnerships or sole traders.

To be eligible to access this new process a company must:

  • be incorporated under the Corporations Act 2001;
  • have total liabilities which do not exceed $1 million on the day the company enters the process – this excludes employee entitlements;
  • resolve that it is insolvent or likely to become insolvent at some future time and that a small business restructuring practitioner should be appointed; and
  • appoint a small business restructuring practitioner to oversee the restructuring process, including working with the business to develop a debt restructuring plan and restructuring proposal statement.

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