Introduction of a New Insolvency Framework for Small Businesses

The Federal Government has introduced the most significant reforms to Australia’s insolvency framework under the Corporations Act 2001 (Cth) (the Act) in 30 years.

The new framework that comes into effect 1 January 2021 will see a move from a rigid one-size-fits-all insolvency model to a more flexible regime for small businesses that aims to reduce complexity, time and costs.

The reform package ultimately consists of three key elements:

1. a new formal debt restructuring process;
2. a new, simplified and lower cost liquidation pathway; and
3. complimentary measures to ensure that the insolvency sector can respond to and meet the short and long-term insolvency demands of small businesses.

Proposed Restructuring Process

The Proposed Restructuring Process will enable financially distressed but viable small businesses to access a single, streamlined process that is faster and far less complex to restructure existing debts and maximise chances of survival.

Who is eligible?

Incorporated businesses:

• must have liabilities of less than $1 million;
• not have previously utilised a small business restructuring or simplified liquidation process, or be subject to another external administration; and
• by the time a restructuring plan is presented to creditors, have all tax lodgements up-to-date and employee entitlements paid.

Overview of the Proposed Restructuring Process

1. The process begins with the appointment of a Small Business Restructuring Practitioner (SBRP). The SBRP will determine if the business is eligible to access the simplified restructuring process.
2. Directors will work with the SBRP over 20 business days (the Proposal Period), to develop a plan to restructure the business’s debts and provide supporting documents for creditors consideration.
3. During the Proposal Period, unsecured creditors are prohibited from taking actions against the business, including enforcing security and terminating contracts.
4. Throughout the Proposal Period the business remains in the control of the directors and can continue to trade in the ordinary course of business.
5. The restructuring plan and supporting documents will then be circulated to the creditors of the company, who will have 15 business days to vote on the plan (the Decision Period).
6. The business will be taken to be insolvent if it proposes a restructuring plan to its creditors.
7. If more than 50% of creditors by value endorse the plan, it is approved and binds all unsecured creditors. Secured creditors are not bound unless they vote to be accepted as part of the plan.
8. If the plan is accepted, the business continues and the SBRP administers the plan.
9. If the creditors reject the plan, the restructuring process ends and the business must elect to proceed with voluntary administration or liquidation or utilise the new simplified liquidation process.

Proposed New Simplified Small Business Liquidation Process

Under the new reforms, eligible companies will be able to access a simplified liquidation process, intended to reduce the cost of liquidation and maximise the return to creditors.

Who is eligible?

The incorporated company must have:

• resolved to be wound up voluntarily;
• total liabilities of less than $1 million; and
• all tax lodgements up-to-date.

Overview of the Proposed Simplified Liquidation Process

An eligible company can be placed in liquidation using the simplified liquidation process if a special resolution is passed and the directors sign an acknowledgment that the company is eligible to take advantage of the liquidation process.

The aim of the simplified liquidation process is to reduce the high costs usually associated with liquidation. The main differences between the current liquidation process and new simplified process is as follows:

• 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 on potential misconduct where there are reasonable grounds to believe that misconduct has occurred.
• Removing requirements to call creditors meetings and the ability to form committees of inspection.
• Simplifying the dividend proof of debt process.
• Maximising technology neutrality in voting and other communications.

For more specific information on any of the material contained in this article please contact Vas Marinos on (08) 8210 1283 or vmarinos@normans.com.au or Stefanie Magliani on (08) 8217 1373 or smagliani@normans.com.au.