Josh Frydenberg wants to give more control to small businesses facing financial hardship to protect then from being wound up.
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Drawing on key features of bankruptcy laws used in the United States, the treasurer wants to introduce more flexible insolvency laws, particularly in the face of the coronavirus pandemic.
"Many businesses who are doing it tough through the COVID crisis because of health restrictions, they have had to close their doors but the liabilities have kept building up," Mr Frydbenberg said on Thursday.
"The focus is to give those business owners more control as they deal with these liabilities."
He wants businesses to work with an insolvency practitioner to come up with a plan to repay accumulating debts over time, rather than handing over the keys to an administrator and seeing their assets chewed up.
"This will apply to those businesses with liabilities of less than $1 million, that's about 76 per cent of small businesses who are currently going through the insolvency process," Mr Frydenberg said.
Some 98 per cent of these businesses have less than 20 employees.
The planned changes follow the extension of temporary insolvency protections to support small businesses impacted by COVID-19.
As the temporary relief expires at the end of December, the number of companies being put into external administration is expected to increase.
Reserve Bank governor Philip Lowe warned of a wave of business failures in August.
"There will be insolvencies. There will be bankruptcies. There will be some businesses that will not recover," he told a parliamentary committee.
The longer-term reforms are earmarked to start on January 1, subject to federal parliament passing legislation.
"These are the most significant reforms to Australia's insolvency framework in almost 30 years, and will help to keep more businesses in business and Australians in jobs," Mr Frydenberg said.
Key elements of the changes include:
* The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million;
* Moving from a one-size-fits-all "creditor in possession" model to a more flexible "debtor in possession" model, allowing eligible small businesses to restructure existing debts while remaining in control of their business;
* A period of 20 business days to develop a restructuring plan by a small business restructuring practitioner, followed by 15 business days for creditors to vote on the plan;
* A simplified liquidation pathway for small businesses;
* And red tape cuts for the insolvency sector.
Australian Associated Press