New Insolvency Rules Commence
Important changes to Australia’s insolvency laws commenced operation on 1 January 2021. The Government has called these the most important changes to Australia’s insolvency framework in 30 years.
The measures apply to incorporated businesses with liabilities less than $1 million. The intention is that the rules change from a rigid “one size fits all” 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. For those businesses that are “unable to survive”, a new simplified “liquidation pathway” will apply for small businesses to allow faster and lower-cost liquidation.
The changes were enacted by the Corporations Amendment (Corporate Insolvency Reforms) Act 2020.
The measures are expected to cover around 76% of businesses currently subject to insolvency, 98% of which have fewer than 20 employees. The new rules do not apply to partnerships or sole traders.
On 24 December 2020, Treasury released a factsheet entitled Simplified Debt Restructuring: a factsheet for small business. It states that to be eligible to access this new process a company must:
- be incorporated under the Corporations Act 2001;
- have total liabilities which do not exceed $1 million on the day the company enters the process – this excludes employee entitlements;
- resolve that it is insolvent or likely to become insolvent at some future time and that a small business restructuring practitioner should be appointed; and
- appoint a small business restructuring practitioner to oversee the restructuring process, including working with the business to develop a debt restructuring plan and restructuring proposal statement.
A list of restructuring practitioners that can undertake this work is available on the Australian Securities and Investments Commission (ASIC) website.
The temporary insolvency and bankruptcy protections were extended until 31 December 2020 (having otherwise been due to expire in September 2020). To access the relief, companies were required to declare their intention to access the restructuring provisions by publishing the declaration on the published notices website from 1 January 2021. Companies must also notify ASIC within five business days that they have made this declaration.
From the date a declaration is published, temporary relief from insolvent trading liability and responding to statutory demands from creditors applies to the business for up to three months. The ability to declare such an intention will be available until 31 March 2021.
ASIC confirms that for a debt restructuring, a company is required to make a declaration that it is eligible to access the new process, which must be published on the ASIC site (and a copy given to ASIC).
Important: 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.