As of January 1, 2021, new insolvency reforms for small businesses became law. These changes are the most significant made to insolvency laws in the last 30 years. The new processes reduce the complexity and costs.
These updated laws allow small businesses to restructure quickly to respond to the challenges of COVID-19. Where restructuring is not feasible, businesses can wind up quicker, which means that creditors and employees will be left better off.

Insolvency System in need of Reforms
An insolvency system that is effective and efficient is vital to ensure employees and creditors receive fair payments. But the system faces some challenges, including:
The increase of small businesses facing financial issues due to COVID-19 lockdowns.
The system does not take into account the size and complexity of individual businesses, but instead imposes the same obligations on all.
High costs and complex processes which prevents small businesses from using the insolvency system as soon as possible. This decreases the opportunity to reorganise to survive.
Three Key Elements of Reform
On March 22, 2020, the Federal Government announced temporary relief to help businesses survive COVID-19. These ended in December 2020. With an increase in small business insolvency, these new insolvency reforms help businesses survive successfully over the long term.
There are three elements to the reform package:
A faster, less complex system to allow viable small businesses to restructure current debts.
A revised liquidation pathway that simplifies the process so it is quicker and not so expensive, which also gives employees and creditors a better financial return.
Measures that allow the sector to effectively respond to an increased demand over the short and long term.
The reforms impact incorporated businesses that have less than $1 million in debt. They are not applicable to sole traders.
Debt Restructuring Process Changes
An eligible business will still have control of their business, affairs and property while working with a specialist small business restructuring practitioner (SBRP) to create a plan to reorganise the business structure. This is an important change that allows a business to continue trading as it allows them 20 days to restructure their debts.
This gives businesses breathing space. Creditors cannot take action against the company and any personal guarantees by company directors cannot be enforced.
Once the plan is completed, the SBRP submits it to the creditors. They then have 15 days to vote to accept or reject the plan. There needs to be a majority vote to accept or reject the plan. If they accept the plan, the SBRP continues working with the distressed business to administer the plan. Where creditors vote against the plan, the business can either go into voluntary liquidation or administration using the current processes.
Protections in Place
There are also protections put in place to ensure businesses do not misuse the new laws. These include:
The business must pay out all employee entitlements before the restructuring plan is put to a vote.
Creditors related to company directors cannot vote on a restructuring plan.
A business can only use this process once every seven years.
If you are a small business struggling to stay afloat, talk to your accountant or solicitor to see whether the business insolvency reforms will help you survive.