Small Business Insolvency Reforms
November 17, 2020
Goverment to make legislative changes, assisting insolvent small businesses.
The Federal Government announced on 24 September 2020 that more insolvency changes will be implemented from 1 January 2021. These reforms include:
- a new debt restructuring process to give viable small businesses a better chance of survival;
- a new, simplified liquidation process to reduce the cost and time of the winding up process where that is the only option for small business; and
- a series of complementary measures, including use of technology and relaxing registration requirements for insolvency practitioners involved in small business restructuring and liquidations.
These reforms are due to commence on 1 January 2021 following expiry of the current COVID-19 insolvency relief measures on 31 December 2020. The changes will impact incorporated businesses with liabilities of less than $1 million and will enable a company to continue to trade under the control of its directors while a debt restructuring plan is developed and voted on by creditors. In short, the new process will involve the following:
- a company will appoint an insolvency practitioner as its “small business restructuring practitioner”;
- once appointed, unsecured and some secured creditors will be prohibited from taking actions against the company and any personal guarantee/s cannot be enforced against a director or one of their relatives (i.e. a moratorium similar to the current situation involving voluntary administrations);
- the company and the ‘small business restructuring practitioner’ will work over a 20 business-day period to develop a plan to restructure the business’s debts and provide supporting documents for creditor consideration. The plan will likely involve a proposal to pay $x in the dollar to unsecured creditors);
- during the 20 business-day period, the company will continue to trade (i.e. the small business restructuring practitioner does not take control of the company and the control is not removed from the director);
- once a plan is developed, the ‘small business restructuring practitioner’ will circulate the plan and supporting documents to creditors for their approval;
- creditors will have 15 days to vote on the plan. If more than 50% of creditors by value endorse the plan, it will be approved and will bind all unsecured creditors; and
- if approved, the business will continue to trade and the ‘small business restructuring practitioner’ will administer the plan. If the plan is not approved, the company may then be placed into liquidation or voluntary administration.
The draft legislation has not yet been released and will need to be considered in more detail when that occurs.
In the meantime if you have concerns around the viability of your small business, please contact us.
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