2021 Federal Budget – Likely Insolvency Reforms

With Australia facing its second Federal Budget whilst under the cloud of the COVID-19 pandemic, the federal government has indicated that the 11 May Federal Budget will include various non-spending reforms focusing on the insolvency sector.

Following the 2020 Federal Budget, which included sweeping insolvency reforms, the broadest of which had been seen in 30 years, the 2021 Federal Budget intends to further build upon these reforms.

New reforms flagged as being included as part of the non-spending reforms in the 2021 Federal Budget include –

• Corporate structures involving trusts are to be reviewed to provide clarity during insolvency, ensuring that approximately 550,000 trading trusts are also able to benefit from the existing protections for small businesses previously introduced in the 2020 Federal Budget.
• A review of the Safe Harbour Provisions introduced as part of the 2017 Insolvency Law Reforms Act, to ensure that they remain fit for purpose.
• From 1 July 2021, Statutory Demand thresholds for corporate entities will increase from $2,000 to $4,000.
• Amendments to company schemes of arrangement to include a ‘debtor-in-possession model’, which would provide a moratorium on creditor enforcement while schemes are negotiated between creditors and the company itself. Currently, such moratoriums are only available to companies which are placed into external administration.

The Business Council of Australia’s (BCA) Chief Executive, Jennifer Westacott endorsed these potential new measures, stating that BCA ‘welcome the government’s willingness to consider long-term change so that Australia’s restructuring and insolvency regime works to support viable employers through crisis and help keep businesses open’.

These proposed new reforms, if included as part of the 2021 Federal Budget, will undergo a period of consultation and review to determine if and how they will proceed. Following the release of the 2021 Federal Budget on 11 May, a further update will be provided by our office in relation to the above.