The Federal Government’s proposed changes to the insolvency framework, which will commence on January 1 if legislation is passed, could result in an “unprecedented number of possible claim events” for trade credit insurers, Lockton Companies Australia has warned.

The reforms, announced in September by Treasurer Josh Frydenberg, draw on key features from Chapter 11 of the Bankruptcy Code in the US.

Mr Frydenberg says the proposed changes will help more small businesses with liabilities of less than $1 million restructure and survive the economic impact of COVID-19.

Under the proposed reforms, eligible small businesses will be allowed to restructure existing debts while remaining in control of the operations.

There will also be a rapid 20-business day period for the development of a restructuring plan by a small business restructuring practitioner, followed by 15 business days for creditors to vote on the plan.

A new, simplified liquidation pathway for small businesses to allow faster and lower cost liquidation is also included in the reforms.

Treasury has closed consultation on the draft legislation.

Lockton says the reforms could impact trade credit insurers.

“With the new reforms set to make it easier for companies with debts below $1 million to enter into a new form of insolvency, come the January 1 there is the potential for trade credit insurers to face an unprecedented number of possible claim events,” National Manager Dean Jenkins told insuranceNEWS.com.au.

“These new reforms will also see a rise in requests to agree repayment proposals from practitioners acting on behalf of client’s customers.”

He says much will also depend on how each insurer classifies the “debt restructure” element of the proposed insolvency framework.

“If they classify it as a new form of insolvency, some may be paying out full claims once the debt restructuring process is voted in,” Mr Jenkins said. “This could potentially too see claim numbers increase."

He says the reforms are a challenge for trade credit insurers.

“Although not all have issued exact guidelines quite yet, there is a potential that the new reforms will be treated as an insolvency trigger under policies and a full claim will be considered as soon as a ‘debt restructure’ is voted in,” Mr Jenkins said.

“This would be an obvious win for policyholders as it will allow them to receive the full claim, with any recoveries after the debt restructure, allocated between the insurers and client as per policy terms post-claim payment.”

He says Lockton is currently in ongoing discussions with trade credit insurers about their final positions on the looming insolvency reforms.

A spokesman for QBE, the largest trade credit insurer in Australia, says it is difficult to comment until the draft legislation is circulated.

Click here for the exposure draft bill.