On 24th September 2020, the Federal Government announced a package of proposed reforms to insolvency laws and practices directed at assisting small businesses through what is expected to be a difficult period once the Jobkeeper support comes to an end whilst the economy is still in recovery. These reforms are part of the Federal Government’s support package in response to the COVID-19 pandemic.
The Federal Government hopes that a cheaper and more streamlined insolvency process will better serve small business owners, creditors and employees. Subject to the passing of the necessary legislation it is expected that the changes will apply from 1st January 2021.
The fundamental difference between the proposed insolvency reform and the existing insolvency law and practice is that the reforms introduce to Australia a “debtor in possession” regime more akin to the U.S. and step away from the “creditor in possession” model that have been the main feature of the U.K. and the Australian corporate insolvency laws for more than a century.
The highlights of the package are:
Existing business owners can continue operating the businesses on the basis that they present a viable plan to restructure the debts and work with an independent small business restructuring practitioner.
A simplified liquidation process for those businesses that are unable to demonstrate a viable plan and where liquidation is the only option.
Business with liabilities of less than $1 million
Employee entitlements must be paid.
In order for the small incorporated business (“SIB”) to take advantage of the reforms, the following steps should apply:
The company’s board of directors, or in the case of a company with only one director, the director, must resolve to appoint a Small Business Restructuring Practitioner (“SBRP”) for the purpose of the restructure. At that point, creditors (in some instance including secured creditors) will be prohibited from taking action against the company or enforcing any personal guarantees in respect of company debts. Creditors will be unable to terminate certain contracts on the grounds of the company’s insolvency only.
Over the next 20 business days the director(s) will, with the oversight of the SBRP, develop a restructure plan which must be certified by the SBRP and then submitted to creditors for approval. It is expected that the plan and information to creditors will be sufficient for creditors to be able to make an informed decision. This plan will also include the remuneration to be paid to the SBRP for the management of the plan.
The SBRP then sends the supporting documents to creditors and certifies that what is proposed is viable and giving 15 days’ notice of voting on the plan. For the plan to be adopted more than 50% of creditors by value must endorse the plan noting that related parties cannot vote. Secured creditors will be limited in the amount by which they can vote.
Once approved the business continues and the SBRP administers the plan by distributing to creditors in accordance with the plan.
The SBRP has an ongoing obligation to monitor any misconduct of directors. The government proposes that the SBRP can terminate the plan if he or she becomes aware of any misconduct by the business owners.
Additionally, the government is looking to reduce the time and expense involved in the liquidation of small businesses by reducing the power and obligations of liquidators. This will include:
Reducing the circumstances under which claims for unfair preferences can be made.
Reports to ASIC are only required where there are reasonable grounds to believe misconduct has occurred.
Removing requirements to call creditor meetings.
Simplifying the dividend declaration and payment process by adopting an e-commerce environment as a preferred platform.
More details will become available once draft legislation and consequential regulations are available for any review and comment.
At Barrett Walker we are happy to assist small business and creditors with the options available to them.
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