Last week, the Federal Government announced proposed changes to corporate insolvency laws designed to help boost the survival rate of small businesses.
The proposed changes would take effect from 1 January 2021 and aim to reduce the complexity, time, and costs involved for small businesses dealing with financial distress. This reform is in response to the economic impact of COVID-19 and allows small businesses to either restructure or alternatively streamline the liquidation process.
The new procedure is a 'debtor in possession' model which draws on features of the US-style chapter 11 bankruptcy procedure. Essentially this means that the director of a debtor company remains in place during the relevant moratorium period and does not have to hand over control of the business to an external insolvency accountant.
The process is only available to incorporated entities with liabilities of less than $1 million.
The overhaul of the insolvency rules is to create a new debt restructuring procedure. The process involves:
- The director of a small business in financial distress appoints a small business restructuring practitioner to assess whether the business is eligible to access the restructuring process.
- If the small business is eligible, the director will remain in control for a period of 20 days to prepare a debt restructuring plan. The restructuring plan must be certified by the practitioner.
- The certified restructuring plan will be made available to the creditors and the creditors will have 15 days to vote on whether the plan is either:
- approved, if more than 50 percent of creditors (by value) vote in support of the plan. The practitioner will be appointed, and the plan commences; or
- rejected, if more than 50 percent of creditors (by value) vote against the plan. The director may choose to enter another insolvency process.
Note: The company must pay all employee entitlements and taxes which are due and payable before a plan can be put to creditors.
The liquidation process for small business will be streamlined to reduce time and costs, and to allow assets to be quickly reallocated. The new proposal will modify the general framework of the existing process by reducing the investigative requirements, requirements to call meetings and reporting functions, along with increasing technology neutrality to allow for more convenient communications.
Greater use of technology
The new reforms will include complementary measures to increase the use of technology in respect of the registration requirements and creating an online portal for creditors to access information.
The process set out in the Corporations Act 2001 will be modified to include technology neutrality, so that the external administration process can be carried out more efficiently.
The legislation implementing the reforms has not been released but the Commonwealth Treasurer has released an outline of the new measures, which can be found at this link: Insolvency reform for small business.
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