JobMaker—Insolvency law changes

Budget Review 2020–21 Index

Ian Zhou


The Government’s JobMaker package contains proposals to change Australia’s insolvency laws (p. 48). The proposed changes, which don’t have any associated spending measures, are set out in a Treasury factsheet for small business operators and include:

  • a new debt restructuring process for businesses with liabilities of less than $1 million
  • transition from a ‘creditor in possession’ model to more of a ‘debtor in possession’ model which will allow company directors to remain in control of their business and continue to trade while they restructure their existing business debts. The Government says this means that small business owners can retain control of their companies and plan for recovery without their businesses being handed over to external administrators and
  • a series of complementary measures, including use of technology and relaxing registration requirements for insolvency practitioners involved in small business restructuring and liquidations.

The Budget announcements follow the temporary loosening of insolvency laws in March 2020, as explained in the next section.

The proposed changes to insolvency laws relate closely to JobMaker measure, ‘Removing barriers to credit’ (p. 47) aiming to loosen consumer credit lending laws (described in a Treasury factsheet). The proposals are interrelated because many small business owners use their family home as security for business loans. A loosening of credit lending regulation means business owners have the potential to obtain additional bank loans to support their businesses in response to the economic challenges posed by the COVID-19 pandemic, while the changes to the insolvency laws may offer business owners more opportunities to restructure their business debt, continue trading while insolvent, and avoid foreclosure of their family home.

Temporary relief measures—March 2020 and September 2020

The Government’s proposed changes to insolvency laws are designed to provide a longer term solution to the issues addressed by the temporary insolvency relief measures introduced in March 2020.

The temporary measures, which are detailed in a Treasury factsheet and a Parliamentary Library FlagPost blog article, include:

  • insolvent trading—temporary relief for company directors from personal liability for trading while insolvent, in relation to debts incurred in the ordinary course of business. Ordinarily, company directors may be personally liable for debts incurred by the company if it trades while insolvent and
  • statutory demand regime—temporary increase in the threshold (from $2,000 to $20,000) at which creditors can issue a statutory demand, and a temporary increase in the time (from 21 days to six months) companies have to respond to a statutory demand.

Ordinarily, a company that has become insolvent (where the company cannot pay its debts when they fall due for payment) may enter into voluntary administration by handing control of the company over to external administrators. These administrators investigate the company’s affairs to see if it is possible for the company to restructure and continue trading before deciding whether to liquidate the company. Nevertheless, once the administrators are appointed, the company directors lose control of the company and cannot trade while insolvent.

Intended to complement the JobKeeper program, these temporary changes to insolvency laws were introduced to provide relief to businesses by easing the burden of cash flow restrictions and reducing the immediate risk associated with incurring a debt in this time of crisis.

The temporary measures were legislated initially in the Coronavirus Economic Response Package Omnibus Act 2020. These measures were intended to last for six months but were extended to 31 December 2020 by the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 made in September 2020.

Subject to the enabling legislation being passed, the announced insolvency law changes are due to commence on 1 January 2021 following expiry of the current COVID-19 insolvency relief measures on 31 December 2020 (see Table 1 below).

Table 1: timeline of insolvency law changes

Legislation Effective date Consequences
Coronavirus Economic Response Package Omnibus Act 2020, schedule 12 25 March to 25 September 2020 Insolvent trading—temporary relief for company directors from personal liability for trading while insolvent. Statutory demand regime—temporary increase in the threshold at which creditors can issue a statutory demand and a temporary increase in the time companies have to respond to a statutory demand.
Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 amended the Corporations Regulations 2001 26 September to 31 December 2020 Extend the temporary relief measures from 26 September to 31 December 2020.
Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (exposure draft) 1 January 2021 onwards A more permanent change that will shift the insolvency laws from a ‘creditor in possession’ to a ‘debtor in possession’ model.

Policy debate on the insolvency law changes

The Government’s proposed insolvency law changes, if enacted, would commence on 1 January 2021 following expiry of the current COVID-19 insolvency relief measures on 31 December 2020.

The timing of the proposed insolvency law changes and the Treasurer’s media statement indicate that the Government recognises that as the economy starts to recover, it will be critical for distressed businesses to have the necessary flexibility to restructure or wind down their operations in an orderly manner.

The full economic impact of COVID-19 will be felt by businesses when government relief measures, such as the JobKeeper program, cease and an increase in demand for insolvency processes is expected to follow. The timing of the insolvency law changes aligns with this higher demand.

Business groups, such as the Victorian Chamber of Commerce and Industry and the Chartered Accountants Australia and New Zealand, welcomed the Government’s proposal to change the insolvency laws. This is because the proposed changes draw key features from the Chapter 11 provisions of the US Bankruptcy Code, which place a greater emphasis on rescuing corporations instead of liquidating them.

Prior to the temporary relief measures, voluntary administration was the main formal statutory procedure available to Australian companies looking to restructure or reorganise their debts. As explained in a Treasury factsheet, the Government considers voluntary administration to be a ‘one-size-fits-all’ approach that is not well-suited to smaller businesses because:

Barriers of high cost and lengthy processes that can prevent distressed small businesses from engaging with the insolvency system early, reducing their opportunity to restructure and survive.

Furthermore, the Government argues small business owners are often reluctant to place control of their business into the hands of an external administrator. A 2015 Productivity Commission report found (p. 24) that almost 60 per cent of Australian companies that entered voluntary administration were deregistered within three years.

Australia’s current ‘creditor in possession’ insolvency model is widely perceived to protect the interests of creditors over debtors. The Chief Justice of Western Australia, Wayne Martin, argued in 2009 that Australia has some of the strictest insolvent trading prohibitions in the developed world. This limits the possibility that, through some restructuring or assistance, insolvent companies could return to profitability and preserve the interests of both creditors and debtors.

On the other hand, stakeholders, such as the Australian Restructuring Insolvency and Turnaround Association, have expressed concern that the new ‘debtor in possession’ insolvency model could risk Australia’s credibility as a destination for investors and creditors.

The shift from a ‘creditor in possession’ to a ‘debtor in possession’ insolvency model means there will be significant complexities to be addressed. Details of the legislative changes have been released in the Government’s Exposure Draft Bill.

‘Zombie firms’

While economists from the OECD propose that it is important to prevent otherwise healthy businesses from going into liquidation during the COVID-19 pandemic, many have expressed concern that the relief measures and insolvency law changes will only delay the inevitable collapse of ‘zombie firms’. Zombie firms has become a popular term to refer to indebted businesses that are being kept on ‘life-support’ by the Government’s relief measures rather than being allowed to die naturally as part of the ‘creative destruction’ process.

Insolvency statistics from the Australian Securities and Investments Commission (ASIC) indicate that since the Government’s temporary relief measures were introduced in March 2020, the number of companies entering into external administration has dropped drastically (see Figure 1 below). This implies that insolvent firms that would normally enter into external administration have been ‘propped up’ by government support.

Figure 1: number of companies that entered into external administration—comparing March, April, May and June, 2017–2020

Source: ASIC, Insolvency statistics, ‘Series 1 Companies entering external administration’.

This analysis is supported by Deloitte’s modelling, which estimates that 240,000 Australian businesses are at a high risk of failure when the Government winds back its relief measures. Furthermore, the Australian Bureau of Statistics’ Business Indicators survey, published in June 2020, observed that nearly 30 per cent of small businesses reported that they only have enough cash on hand to support operations for a period of less than three months.

As the Government phases out its temporary relief measures, according to the Reserve Bank Governor Philip Lowe, there will be an increase in business insolvencies (dubbed an ‘insolvency tsunami’ in some media). Mr Lowe told the House of Representatives Standing Committee on Economics in August 2020 that Australia will have to:

... confront the reality that there are firms in Australia that are no longer viable because of the pandemic and they will need to be wound up. We’re going to be better off if that’s a managed process that takes place over time rather than occurs because we go over a cliff because of some change in regulation. So there will be insolvencies. There will be bankruptcies. There will be some businesses that will not recover. That’s the harsh reality of an economic downturn that's the worst in 100 years.


All online articles accessed October 2020

For copyright reasons some linked items are only available to members of Parliament.

© Commonwealth of Australia

Creative commons logo

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to

This work has been prepared to support the work of the Australian Parliament using information available at the time of production. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Enquiry Point for referral.