Small Business Insolvency Reform

24 September 2020

The Government has today announced reforms to insolvency law to support and streamline insolvencies relating to small business. Following on from the Government’s announcement on 22 March concerning temporary measures to support corporations and individuals during the COVID-19 pandemic (see link here) that were recently extended to apply until 31 December 2020, the small business reforms announced today are, among other things, designed to provide a faster and less complex mechanism for viable small businesses to survive. The reforms are expected to commence on 1 January 2021.

In essence, some of the announced reforms relating to small business include the following:

New Process

  • Will apply to incorporated businesses with liabilities of less than $1 million;
  • A small business would operate as a “debtor in possession” model – meaning that the directors remain in control of the business;
  • Upon commencement of the new process a moratorium will be in place against creditor action. It is expected to be broadly similar to the present moratorium in a voluntary administration process;
  • The directors will work alongside a Small Business Restructuring Practitioner for up to 20 business days to develop a plan to restructure the business;
  • Employee entitlements are to be paid;
  • Creditors will have a further 15 business days to vote on the plan;
  • To be successful a plan will require 50% of creditors by value to approve the plan. The plan is expected to bind all unsecured creditors. Secured creditors will only be bound to the extent their debt exceeds the value of the security interest; and
  • If the plan is unsuccessful then the directors may opt for a voluntary administration process, or, a simplified liquidation process (see below).

Simplified Small Business Liquidation Process

  • Similar framework to existing liquidations but with modifications to reduce time and cost. Applicability is as above – namely, incorporated businesses with liabilities less than $1 million;
  • Reduced circumstances to seek clawback of unfair preferences;
  • Reduced reporting to ASIC concerning potential misconduct;
  • Modifications to calling creditors meetings and any committee of inspection;
  • Streamlining dividend and proof of debt processes;
  • Technology neutral processes in voting and other communications; and
  • It is expected that the rights of secured creditors will be largely unmodified.

Practitioners and other matters

  • Temporary waiving of fees for registered liquidators until 30 June 2022;
  • Flexibility in the registration of insolvency practitioners;
  • Small businesses will be eligible to access the existing insolvency relief (see link above) for a further 3 months following 31 December 2020 if a small business declares their intention to access the above simplified framework through ASIC’s published notices. This is a transitional measure while practitioners get up to speed with and register as Small Business Restructuring Practitioners; and
  • Interestingly, the Government has also indicated that consultation will also be undertaken on the appropriateness of permanently raising the minimum threshold at which creditors may issue a statutory demand.

It is expected that legislation will be released in due course. The devil will always be in the detail and we await with interest as to what that detail will look like. Among others, these reforms are expected to impact suppliers, landlords, financiers as well as directors themselves. It remains to be seen but the reforms may also be an answer to the so called wave of “Zombie Companies” that are small businesses and also seek to prevent an avalanche of mostly asset-less liquidations that invariably follow the winding down of such companies.

The objective of the reforms are largely aimed at small businesses to restructure their debts while remaining in control of their business. It will be one of the more significant reforms to insolvency laws in 30 years and will potentially save thousands more small companies from entering some form of external administration.

Finally, unsecured creditors dealing with small businesses may also look to re-assess their credit policies (possibly moving to cash on delivery or other secured arrangements).

Our National Insolvency teams have experience working closely with directors, companies and creditors to help them navigate through this difficult and evolving period. If you would like to find out more on how our team can assist you, please reach out to any of our national insolvency team members.

This article was written by Grant Whatley, Partner, Jonathan Kramersh, Partner and Richard Johnson, Partner.

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