Business groups have described new changes to bankruptcy laws as a crucial “lifeline” that will prevent thousands of insolvencies.

But credit agencies said they only kicked the can down the road.

With less than two weeks until the Federal Budget, Treasurer Josh Frydenberg on Thursday announced what he described as the “the most significant reforms of insolvency law in almost 30 years”.

The changes would allow small business owners to remain in control of their companies while restructuring their debts – increasing their chances of survival by enabling them to enter the insolvency process much sooner.

• Read: The government’s fact sheet on the changes

“Under the new process, incorporated businesses with liabilities of less than $1 million will be able to keep trading while they develop a debt restructuring plan, which is ultimately voted on by creditors,” Mr Frydenberg wrote in The Australian Financial Review.

“This $1 million threshold will cover about 76 per cent of businesses subject to insolvencies today, 98 per cent of which have less than 20 full-time employees.”

The Treasurer also said he would not pursue a budget surplus until unemployment had fallen below 6 per cent. Photo: AAP

The Treasurer said the new process would involve a small business restructuring practitioner helping the business to prepare a plan, which they would have 20 business days to develop.

Creditors would then be given 15 business days to vote on the plan, which would only become binding if at least 50 per cent of creditors supported it.

The Australian Small Business and Family Enterprise Ombudsman Kate Carnell said the changes had thrown a “lifeline” to struggling businesses and would make it easier for firms to restructure or wind up operations.

She said the changes were in line with recommendations outlined in her Insolvency Practices Inquiry, and would give otherwise strong businesses a chance “to turn their business around”.

But a crucial policy was missing, she said.

“Deloitte Access Economics modelling estimates about 240,000 small businesses are at risk of failure,” Ms Carnell said.

“This highlights the need for small businesses to sit down with their trusted financial adviser for a viability assessment.

“Unfortunately a measure to address this critical first step was missing from today’s announcement.”

Ms Carnell said this was why her office would continue to ask the government to set up a small business viability program, whereby the federal government awards $5000 vouchers to struggling business owners to access tailored financial advice on the state of their business.

“The voucher would ensure small businesses have access to the expertise they need to judge business viability,” she said.

Kate Carnell is calling for a voucher scheme to help owners access tailored advice. Photo: AAP

“Unfortunately small businesses with cash flow issues, compounded by falling revenue, may not seek out professional advice because it’s deemed to be unaffordable.

“This could prove to be devastating for the business owner and their family.”

Meanwhile, credit agencies also voiced concerns.

“In August, RBA Governor Phillip Lowe warned that a considerable number of insolvencies would emerge, with many businesses unlikely to recover from the ‘forced economic hibernation’ imposed in March,” said Harley Dale, chief economist at CreditorWatch.

“That remains the case, regardless of any legislation that allows companies to continue trading while insolvent.”

Ai Group chief executive Innes Willox, however, described the changes as “an important step in addressing the rigidities for businesses with relatively small levels of liabilities”.

“Australia’s current overly risk averse insolvency arrangements provide little scope for businesses to work with their creditors to restructure their operations to put the business on a sustainable footing,” he said.

“Many businesses that could work their way out of trouble face too many barriers and are prematurely wound up.”

The Morrison government wants to implement the new insolvency regime from January 1 – the day after temporary measures designed to keep businesses afloat during the pandemic come to an end.

Among other things, these measures allowed business owners to legally trade while insolvent, and upped the debt threshold at which creditors could issue statutory demands from $2000 to $20,000.

As a result, insolvencies are tracking 50 per cent lower than 2019 levels – prompting warnings of an avalanche of insolvencies when the measures are wound back on December 31.

Small business squeezed

The announcement came after payroll data released by the Australian Bureau of Statistics on Tuesday showed small firms across the country were cutting jobs while large firms were putting on staff.

Businesses with under 20 employees cut payroll jobs by 1.9 per cent over the fortnight to September 5, while firms with 20-199 employees reduced jobs by 0.6 per cent and firms with more than 200 employees increased jobs by 0.5 per cent.

EY Oceania chief economist Jo Masters said the results were unsurprising for two reasons.

First, the recession had mostly affected industries with a high proportion of smaller businesses, such as cafes and restaurants, in the hospitality sector, and smaller operators within the accommodation space.

Second, larger firms have access to more cash and credit facilities, as well as better technologies to enable people to work from home more productively.

“The surprising thing for me was that, in companies with over 200 employees, we actually saw jobs added onto the payroll in every state and territory, except the Northern Territory, including Victoria,” Ms Masters added.

“So again, it might just tell you that those sectors that can work from home are more likely to be bigger firms, or that bigger firms have better scaffolding to help people from work.”

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