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Small Business Insolvency Reforms – What does it mean for your client?

Caroline Hutchinson, Benjamin Pullen

On 1 January 2021, one of Australia’s largest small business insolvency reforms came into effect. As the Insolvency Safe harbours introduced by the Australian Government in the wake of the COVID-19 pandemic concluded, the Government introduced the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) (The Act) aimed to streamline the insolvency process for small businesses.

The Act is made up of two key changes:

1. Reformed Small Business Restructuring - The Act has introduced a new ‘formal debt restructuring process’ for eligible small businesses; and,

2. Reformed Small Business Liquidation – The Act has introduced a simplified liquidation process for eligible small businesses.

Eligibility

For the purposes of the Act, a company is deemed to be eligible if the total liabilities of the company does not exceed $1 million. The Government have stated that based off current insolvencies figures, approximately 76% of businesses currently insolvent would fall under this eligibility.

Reformed Small Business Restructuring

The new restructuring process will afford eligible small businesses the opportunity to appoint an accredited small business restructuring practitioner to develop a debt repayment plan to all existing creditors. In the event that the proposed plan is accepted by the creditors, the plan will become binding on the company and its creditors. The benefit of the new approach is it allows the directors to maintain day-to-day control of the business whilst the restructuring plan is developed.

During the process, the role of the appointed restructuring practitioner will be similar to that of a liquidator in that the practitioner has the power to:

Once a practitioner is appointed, the directors and the appointed practitioner have 20 days (although this time can be extended upon request) to develop and supply the creditors with its proposed restructuring plan. During this period, the eligible company will have the benefits of moratoria on security enforcement. Once this has occurred, the creditors then have a period of 15 days to confirm in writing whether they accept the proposed plan. In the event that the proposed plan is accepted, the appointed practitioner will be responsible for receiving money and distributing it to the appropriate creditors. If the proposed plan is not accepted by the creditors, the restructuring plan is deemed to have concluded and creditors are at liberty to commence debt recovery processes.

Small Business Liquidation

The Reforms have also introduced a vastly simplified liquidation process for small businesses which intends to expedite the liquidation process for small businesses. Similar to that of the restructuring process, the simplified process is available to any creditors’ voluntary winding up of a company where the current liabilities do not exceed $1 million, with the only additional requirement being that the company has all of its relevant tax lodgements up to date.

When an eligible company is wound up, the directors must notify the liquidator within 5 days of the wind up of their eligibility for the simplified process. The liquidator must then notify all outstanding creditors confirming the companies eligibility and an explanation as to the logistics of the simplified process.

The simplified process works by removing certain provisions of the existing creditors voluntary wind up process. Specifically:

1. Reducing the amount of reporting obligations the liquidator is required to make to ASIC;

2. Reducing the amount of investigative obligations the liquidator is required to undertake on the company affairs;

3. Removing the requirement for creditors meetings;

4. Removing the requirement for committees of inspection or reviewing liquidators; and,

5. Putting in place limitations for the liquidator’s ability to recover voidable transactions.

The overarching purpose of the changes it to enable creditors to receive any funds payable to them as quickly and seamlessly as possible, without the need for the often long and drawn out liquidation process.

Given the expected influx of small business insolvencies as a result of the COVID-19 related government incentives ending, it is important that all organisations familiarise themselves with the new insolvency legislation.

If you have a query relating to any of the information in this piece, please do not hesitate to get in touch with a member of Coleman Greig’s Litigation & Disputes team, who would be more than happy to assist you.