Insolvency Reforms Announced for Small Businesses

The Government has announced that it will introduce insolvency reforms to help small businesses restructure in response to COVID-19. Key elements of the reforms include:

• the introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million, drawing on key features from Chapter 11 of the US Bankruptcy Code;
• moving from a one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model which will allow eligible small businesses to restructure their existing debts while remaining in control of their business;
• providing a rapid 20-business day period for the development of a restructuring plan by a small business restructuring practitioner, followed by 15 business days for creditors to vote on the plan; and
• creating a new, simplified liquidation pathway for small businesses to allow faster and lower cost liquidation.

Treasurer Josh Frydenberg said the reforms will cover around 76% of businesses subject to insolvencies today, 98% of whom who have less than 20 employees. Further details are set out in a Government fact sheet.

The Government said safeguards will be included to prevent companies from using the new processes to undertake corporate misconduct, including firms seeking to carry out illegal phoenix activity. This will include allowing creditors to convert the liquidation back to a “full” process, and preventing directors from using the process more than once within a prescribed period (proposed at seven years). Company directors seeking to use the process would also be required to declare that they believe the company is eligible and has not engaged in illegal phoenixing.

Complementary measures will also seek to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to meet the needs of small business.

The new insolvency processes are proposed to be available from 1 January 2021.

Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.