Small Business Insolvency Reforms

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Small Business Insolvency Reforms

On 1 January 2021, the federal government’s insolvency reform package relating to small business became law. The new laws provide for a debt restructuring process which is intended to give eligible small businesses the flexibility to restructure debts while the directors remain in control of the business, and for a new simplified liquidation process for small business.

The introduction of the reforms coincides with the rollback of the temporary insolvent trading safe harbour and statutory demand relief measures introduced in response to Covid-19 (Covid-19 Insolvency Relief).

New restructuring process

The new restructuring process will allow eligible small businesses to work with a “small business restructuring practitioner” to develop and propose a debt restructuring plan for creditors which, if accepted, will bind the company and most of its creditors. It is a “debtor-in-possession” model, so the directors of the company will remain in control of the business while the restructuring plan is being developed.

Eligibility for the process

The process subject to eligibility criteria, the most significant of which is that the company’s liabilities must be less than $1 million, including secured and related-party debt, but excluding employee entitlements.

Whilst the Covid-19 Insolvency Relief has been rolled back, eligible companies who are intending to avail themselves of the new restructuring provisions are, subject to certain conditions, able to benefit from a temporary extension to the Covid-19 Insolvency Relief for such companies.

Making a restructuring plan

The company has 20 business days to prepare and propose the restructuring plan to its creditors. During that period, the company will have the benefit of a stay on security enforcement (similar to the existing voluntary administration regime). While the directors will remain in control of the company, there are some protections for creditors during the process.

The directors and the restructuring practitioner work together to develop a plan for the company’s creditors. The restructuring practitioner has powers to investigate the company’s business, property and affairs and is required to give advice and assistance to the directors.

Companies considering utilising the new process should be aware that:

  • by proposing a restructuring plan, the company is taken to be insolvent;
  • a company cannot propose a restructuring plan to its creditors unless it has paid all employee entitlements that are payable, and that all of its tax lodgements are up to date; and
  • secured creditors will only be bound by a restructuring plan to the extent their claims exceed the value of their security interests, or otherwise if they vote in favour of the plan.

The regime sets out the content requirements for a restructuring plan and the information that must be provided to creditors.

The period for accepting a plan is 15 business days, although that period can be extended where a creditor disputes the assessment of its claim in the proposal statement and a varied schedule is provided to creditors as a result.

The plan will be accepted if a majority in value of the company’s creditors who vote on the proposal vote to accept it. Related creditors are ineligible to vote, and creditors who have acquired a debt are only permitted to vote to the value of the price paid for the debt and not its face value. If creditors vote to accept the plan:

  • The company is taken to have made the plan and it will bind the company, the restructuring practitioner and creditors with admissible debts or claims under the plan; and
  • Once the plan is made, the directors and the restructuring practitioner are responsible for implementing it, with the practitioner additionally responsible for receiving money and holding it on trust and then distributing it to creditors.

Ending the restructuring process

The restructuring process can be ended at any time, and for any reason, by a resolution of the company’s directors, and by the restructuring practitioner if the practitioner believes the company doesn’t meet the eligibility criteria, or that it would be in the interests of the creditors for the restructuring to end. The process will also be ended if:

  • The company fails to propose a restructuring plan to creditors;
  • The creditors vote against the plan;
  • The restructuring practitioner cancels a proposal to make a plan after becoming aware that relevant information has been omitted or was incorrect or there has been a material change in the company’s circumstances;
  • An administrator or liquidator is appointed to the company; or
  • A court orders that the process should end.

Once a plan is made, it can end prematurely if:

  • The plan is conditional, and the relevant conditions are not satisfied;
  • An administrator or liquidator is appointed to the company;
  • There has been a contravention of the plan which has not been rectified; or
  • The court orders that the plan should be terminated.

Simplified Liquidation Process

1 January 2021 also saw the introduction of a simplified liquidation process for small businesses. The process is available in any creditors’ voluntary winding up where the company meets the eligibility criteria. These are broadly the same as for debt restructuring, including the $1 million liabilities cap, but include an additional requirement that the company has all of its tax lodgements up to date.

The simplified liquidation differs from the standard creditors’ voluntary winding-up process in the following ways:

  • Obligations on the liquidator to investigate the company’s affairs and make reports to ASIC are reduced;
  • Information and voting will be handled electronically and, as such, meetings of creditors are not required;
  • There are no committees of inspection or reviewing liquidators; and
  • There are some limitations on a liquidator’s ability to recover voidable transactions.

Should you require any assistance with respect to the new insolvency laws or in navigating financial distress, please do not hesitate to contact Alexander Nielsen on 0428 033 601.

*This article is intended to be general commentary only and should not be taken as legal advice. Before taking action, ensure you obtain legal advice in relation to your specific circumstances.