Insolvency reforms for small business
Article by Sophie Cliquet
On 24 September 2020, the Federal Government announced insolvency reforms to support small business. In his media release, Treasurer Josh Frydenberg, qualified it as “the most significant reforms to Australia’s insolvency framework in 30 years as part of our economic recovery plan to keep businesses in business and Australians in jobs”.[1] Once adopted, the new legislation will see a new debt restructuring process including transitional measures and a simplified liquidation process for small businesses.
The Government has not presented a bill yet however the objectives and main features of the reforms can be found in a booklet. Please see link below:
When will the new legislation commence?
On 1 January 2021, as the temporary relief for financially distressed companies announced by the Government on 22 March 2020 will end on 31 December 2020.
Which companies are covered by the reforms?
The new restructuring process and the simplified liquidation process will be accessible by incorporated businesses with liability of less than $1 million.
What are the main features of the insolvency reforms?
New debt restructuring process
The Government announced a fast and cost-effective process. Additionally, under the debt restructuring process, unlike a business going into voluntary administration, the directors of the business remain in control of the company during the whole debt restructuring process.
The process has several steps. First, a small business facing financial distress can approach a small business restructuring practitioner to discuss their options. The practitioner proposes a flat fee for their work in helping the business develop a restructuring plan. After the appointment of the practitioner by a resolution of the board, unsecured and some secured creditors are prohibited from taking actions against the company, a personal guarantee cannot be enforced against a director or one of their relatives, and a protection from ipso facto clauses (that allow creditors to terminate contracts because of an insolvency event) apply (with the same protections applying as during voluntary administration).
Then the business owner has 20 days to develop a plan to restructure debt and provide supporting documents to creditors.
Creditors have 15 business days to vote on the plan, including the proposed remuneration for the practitioner. The business must pay any employee entitlements which are due and payable before a plan can be put to creditors.
If more than 50 per cent of creditors by value endorse the plan, it is approved and binds all unsecured creditors.
If voted down, the process ends, and the company owners may opt to go into voluntary administration or to use the simplified liquidation pathway.
Simplified liquidation pathway
The Government announced that a simplified liquidation process will be created with reduced fees and reduced duties for the liquidator.
Transitional measures
A number of small business restructuring practitioners will need to support the new demand of small businesses facing financial distress. To address this transitional issue, an eligible small business will be able to declare its intention to access the simplified restructuring process to its creditors, including through ASIC’s published notices website. Following the declaration, the existing temporary insolvency relief (relief from insolvent trading liability and responding to statutory demands from creditors) would then apply to the business for a maximum period of three months, until they are able to access a small business restructuring practitioner or other insolvency practitioner. Relief only applies to a business once a declaration is made. As a transitional measure, the ability to declare such an intention will be available until 31 March 2021.
It is not clear whether a company which has already benefited from a temporary extension to the time to respond to a statutory demand from 21 days to 6 months under the COVID-19 temporary measures, will be able to further extend the time to respond to the statutory demand by declaring its intention to access the simplified restructuring process to its creditors under the new debt restructuring process.
While it is too early to predict the long-term success of the insolvency
reforms, we anticipate that the transitional measures will interest numbers of small
businesses wanting an extension of the temporary measures.
[1] [1] 24 Sep 2020, The Hon Josh Frydenberg MP & The Hon Michael Sukkar MP joint media release, ‘Insolvency reforms to support small business recovery’