The Australian Government has announced proposed major reforms to corporate insolvency laws for incorporated businesses with liabilities of less than $1 million that are facing financial distress.
The proposed reforms include a new 'formal debt restructuring process', drawing on some 'debtor in possession' aspects of the US Chapter 11 bankruptcy protection model, that would introduce a new process for eligible businesses to work with specialist restructuring practitioners to restructure existing liabilities under a restructuring plan approved by creditors.
The proposed reforms also include a new 'simplified liquidation pathway' available to eligible businesses, as well as various complementary measures to ensure effectiveness of the reforms.
The Australian Government has announced proposed major reforms to corporate insolvency laws, including a new formal debt restructuring process and a new simplified liquidation process for eligible incorporated small businesses with liabilities of less than $1 million.
On 24 September 2020 the Australian Government released a fact sheet 'Insolvency reforms to support small business' (Proposal) outlining proposed major reforms to corporate insolvency laws to support small business recovery following the expiry of temporary COVID-19 insolvency law relief at the end of 2020.
The Proposal is in response to liquidity challenges faced by many Australian small businesses impacted by the COVID-19 pandemic, and in recognition that current insolvency processes are not generally appropriate for small business insolvencies.
The measures in the Proposal would commence from 1 January 2021, and apply to eligible incorporated small businesses with liabilities of less than $1 million. In setting this eligibility threshold, the Government noted that around 76% of companies entering into external administration in financial year 2019 had less than $1 million in liabilities.
The Proposal is subject to the passage of enabling legislation, which is yet to be released.
The three key elements of the Proposal are:
The key features of Small Business Restructuring include:
A small business in financial distress would appoint a SBRP to advise on:
Unlike voluntary administrators, SBRPs will not be required to take on personal liability for a company's debts incurred during the process, or manage its daily affairs. Under the Proposal, directors will remain in control of the small business.
In the 20 business day period during which a restructuring plan is being developed, businesses will be permitted to trade in the ordinary course of their business.
For businesses seeking to trade outside the ordinary course of business, prior approval of the SBRP would need to be obtained.
The new process is proposed to operate as follows:
Eligible small businesses facing financial distress would approach a SBRP who will advise on the appropriateness of the new process for the company. The SBRP will charge a flat fee for assisting with the development of the restructuring plan.
The directors of the company would resolve to appoint the SBRP. Upon appointment of a SBRP, unsecured and some secured creditors will be restricted from taking action against the company, personal guarantees will not be able to be enforced, and the stay on the enforcement of ipso facto clauses will apply as during a voluntary administration.
A notice that the process has commenced will be provided to creditors by a technology neutral means, which outlines how information relevant to the process can be accessed by interested parties.
The directors and the SBRP will work collaboratively with the business during a period of 20 business days to develop a restructuring plan (including a remuneration proposal to cover their management of the plan once in place).
Creditors will have 15 business days to submit a proof of debt and vote (through an online platform or other technology neutral means) on the proposed restructuring plan (including the proposed remuneration of the SBRP). Companies must pay any employee entitlements which are due and payable before a plan can be put to creditors. A 50% majority of creditors by value would be required to approve the plan.
If the restructuring plan is approved by creditors, the business continues and the SBRP will administer the plan by making distributions to the creditors in accordance with the terms of the restructuring plan. If the plan is not approved, the directors may opt to go into voluntary administration, or utilise the alternative Small Business Liquidation process under the Proposal.
For a three month period from 1 January 2021 to 31 March 2021, the government has proposed that an eligible small business will be able to declare its intention to access the Small Business Restructuring process to its creditors, including through ASIC's published notices website. This is in order to address the issue of eligible small businesses not being able to access the process immediately whilst insolvency practitioners become familiar with Small Business Restructuring and to register as SBRPs. Following their declaration, the existing temporary insolvency relief in place until the end of 2020 (relief from insolvent trading liability under section 588GAAA of the Corporations Act 2001 (Cth) (Corporations Act) and the curtailment on the issuing of creditors' statutory demands) would then apply to the business for a maximum period of three months, until they are able to access a small business restructuring practitioner or other insolvency practitioner.
The Proposal sets out measures to protect the interests of creditors including:
Additional safeguards include:
Under the proposed new Small Business Liquidation process, liquidators' regulatory obligations would be simplified, so that they are more appropriate for the size and scale of eligible small businesses with liabilities of less than $1 million. (This is the same eligibility threshold that would apply for Small Business Restructuring).
The reforms propose to retain the general framework of the existing liquidation process, while introducing modifications to reduce time and costs associated with investigative functions.
The time and cost savings under Small Business Liquidation are proposed to be achieved through the following modifications:
According to the Proposal, the rights of secured creditors and the statutory priorities afforded to creditors such as employees would not be modified.
Safeguards will be included to prevent companies from using the process to undertake corporate misconduct, including illegal phoenix activity, including:
The Proposal also sets out the following permanent and temporary measures to expand the availability of insolvency practitioners to deal with an expected increase in the number of businesses seeking to undertake formal restructuring and insolvency processes:
The proposed reforms represent a step in the right direction for small businesses facing financial distress, particularly in light of the expiry of the temporary COVID-19 insolvent trading safe harbour and the increased statutory demand thresholds at the end of 2020.
We support the proposal by government to shift to a 'debtor in possession' model for the majority of businesses that face financial distress on the basis that it will streamline the process of, and reduce costs in, the formal debt restructuring process. That said, the Proposal does not disclose some important details that will be pertinent to businesses, creditors and the restructuring and insolvency sector alike. We look forward to the draft legislation being released as well as a meaningful consultation process being undertaken, by way of direct consultation with Treasury or through a Parliamentary inquiry.
The essential elements of the Proposal are broadly supported by the Australian Restructuring Insolvency and Turnaround Association and the Turnaround Management Association Australia, however there are matters relating to the Proposal that should be further considered by Government prior to release of the draft bill.
We observe the following matters that warrant further consideration:
We anticipate these matters will be comprehensively addressed during a period of consultation and reflected in the draft bill.
The Proposal also states that consultation will be undertaken on the appropriateness of permanently raising the minimum threshold at which creditors can issue a statutory demand on a company (which is normally $2,000). This is a significant development affecting debtors, creditors and insolvency practitioners.
We will provide further updates on these reforms as and when additional details are made available.
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