Insolvency reforms to support small business

On 24 September 2020, Federal Treasurer the Hon Josh Frydenberg MP along with the Michael Sukkar MP, Minister for Housing and Assistant Treasurer, announced significant reforms to Australia’s corporate insolvency laws as part of the Federal Government’s economic recovery plan.

The reforms are said to be the most significant reforms to Australia’s insolvency framework in 30 years and draws on key features from US Chapter 11 style Bankruptcies.

The reforms will cover around 76% of Companies subject to insolvencies today, 98% of whom who have less than 20 employees.

THREE key elements of the proposed insolvency reforms:

  1. A new formal debt restructuring process for small businesses (with liabilities of less than $1 million) to provide a faster, less complex and cost-effective mechanism to restructure their existing debts.
  2. A new, simplified liquidation pathway for small businesses (with liabilities of less than $1 million) to allow faster and lower-cost liquidation, resulting in increased returns for creditors and employees.
  3. Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to the needs of small business.

Brief Overview and Summary of the Proposed Reforms

Who Will Be Able to Use the New Processes?

An Incorporated business (Pty Ltd company) with liabilities of less than $1 million.

*We note that the reforms do not currently appear to foreshadow changes to the personal insolvency regime (Bankruptcy laws).

When Will the New Processes Be Available for Small Business?

From 1 January 2021 (subject to the drafting and passing of legislation)

How is the New Formal Debt Restructuring Process Said to Operate?

  • The proposal adopts a ‘debtor in possession’ model. That means that the business can keep trading under the control of its owners/Directors, who is said to know the business best.
  • Directors of a small business facing financial distress approaches a Small Business Restructuring Practitioner.
  • The Small Business Restructuring Practitioner’s role is to:
    • Help determine if the company is eligible for the new debt restructuring process
    • Support the company to develop a plan and review its financial affairs
    • Certify the plan to creditors
    • Manage disbursements once the plan is in place
  • If the Small Business Restructuring Practitioner advises that the new debt restructuring process is the most appropriate option Company, the practitioner proposes a flat fee for the practitioner’s work in helping the business develop a restructuring plan.
  • The company Directors decide to accept the advice and pass a company resolution to appoint the Small Business Restructuring Practitioner.
  • Notably, it is proposed that all current employee entitlements must be paid before a plan can be put to creditors.
  • On commencement, unsecured and some secured creditors are prohibited from taking actions against the company, personal guarantees cannot be enforced against the Director(s) (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).
  • 20 business-day period commences:
    • The Directors work with the practitioner to develop a plan to restructure the company’s debts and provide supporting documents for creditor consideration.
    • During this time, the Directors continue to control the business and can trade in the ordinary course of business.
    • The practitioner develops a remuneration proposal to cover their management of the plan once in place, which will operate as a percentage fee of disbursements made under the plan.
    • The practitioner certifies whether they consider the business can meet the proposed repayments and has properly disclosed its affairs.
    • The practitioner sends the plan and supporting documents to creditors.
  • 15 business-day period commences:
    • Creditors have 15 business days to vote on the plan, including the proposed remuneration for the practitioner.
    • If more than 50 per cent of creditors by value approve the plan, it is approved and binds all unsecured creditors.
    • Secured creditors are bound by the plan only to the extent their debt exceeds the realisable value of their security interest.
    • Related-party creditors are not entitled to vote.
    • If the plan is approved, the business continues and the practitioner administers the plan by making distributions to creditors according to the terms of the plan.
    • If voted down by creditors (being if more than 50 per cent of creditors by value do not approve the plan), the process ends and the Directors may opt to go into Voluntary Administration or to use the new simplified liquidation pathway proposed by the reforms.

How is the New Simplified Liquidation Pathway Said to Operate?

  • The simplified liquidation process will retain the general framework of the existing liquidation process with modifications to reduce time and cost associated with existing processes.
  • Time and cost savings with the new simplified liquidation pathway are said to be achieved through:
    • reduced investigative requirements,
    • reduced requirements to call meetings, and
    • reduced reporting functions.
  • Under the new simplified liquidation pathway, Directors appoint a liquidator who will:
    • Take control of the company.
    • Realise the company’s remaining assets for distribution to creditors.
    • Investigate and report to creditors about the company’s affairs and inquire into the failure of the company.
  • Key modifications to the existing liquidation process include:
    • Reduced circumstances in which a liquidator can seek to clawback an unfair preference payment from a creditor that is not related to the company.
    • Only requiring the liquidator to report to ASIC (under section 533) on potential misconduct where there are reasonable grounds to believe that misconduct has occurred.
    • Removing requirements to call creditor meetings and the ability to form committees of inspection.
    • Simplifying the dividend process and the proof of debt process.
  • The rights of secured creditors and the statutory rules as to the payment of priority creditors such as employees will not be modified.

Who Will Administer the New Processes?

A new class of Insolvency practitioner called a “Small Business Restructuring Practitioner” whose practice will be limited to the new simplified restructuring processes only.

  • Registered liquidators will also be able to manage the new process.
  • Significantly, we note that a Small Business Restructuring Practitioner will not take on personal liability for a company or manage its day to day affairs.
  • It is unclear what the requirements will be to qualify as a Small Business Restructuring Practitioner.

What Other Reforms Are Proposed?

  • Temporary insolvency relief for eligible companies waiting to access the new restructuring process.
  • When a company announces its intention to access one of the new processes, they will be entitled to benefit from the existing temporary insolvency relief for up to 3 months until the process commences.
  • Temporarily waiving fees associated with registration as a registered liquidator for approximately 2 years until 30 June 2022.
  • Making changes to allow for more flexibility in the registration of insolvency practitioners.
  • Making the key parts of the process set out in the Corporations Act 2001 ‘technology neutral’ so that external administrations can be carried out more efficiently.

As experienced insolvency and restructuring lawyers, Rostron Carlyle Rojas Lawyers look forward to reviewing the draft legislation along with any further clarification from the Federal Government on the technical details of the proposed insolvency reforms. That being said, the reforms to our corporate insolvency laws are certainly well overdue.

If you have felt the effects of the pandemic on your company or require assistance or clarification in relation to the current temporary relief for financially distressed companies, now is the time to get advice on how to structure your company’s affairs.

Speak with one of Rostron Carlyle Rojas Lawyers’ qualified restructuring and insolvency lawyers today, at:

QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]

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