INSIGHT

Insolvency reforms to support small business

By Tania Cini, Matthew McCarthy
Banking Restructuring & Insolvency

What the new reforms mean for small businesses 4 min read

The Federal Government today announced a package of reforms directed at streamlining insolvency processes for small business. They include:

  • a new debt restructuring process to give viable small businesses a better chance of survival;
  • a new, simplified liquidation process to reduce the cost and time of the winding up process where that is the only option for small business; and
  • a series of complementary measures, including use of technology and relaxing registration requirements for insolvency practitioners involved in small business restructuring and liquidations.

These reforms are due to commence on 1 January 2021 following expiry of the current COVID-19 insolvency relief measures on 31 December 2020.

For lenders currently managing tens of thousands of non-performing business loans and who have concerns about the prospective wave of insolvencies following the lifting of the COVID-19 insolvency relief at the end of the year, these changes may provide a useful framework for otherwise viable small businesses temporarily affected by COVID-19 to take control of their situation and create a pathway (working with their lenders) for ongoing solvent trading into the future. 

We are yet to see the legislation which implements these reforms, but a paper outlining the new measures was released by the Treasurer today. We will report further as more information and the draft legislation is released.

Highlights of the reform package:

What are the criteria for use of the proposed new debt restructuring process?
  • Must be an incorporated business (not a personal sole-trader)
  • Liabilities of less than $1million – not clear yet whether this includes or excludes secured debt and/or related party debt
  • Must have paid any employee entitlements – this may lead to requests for funding of outstanding entitlements to enable access to the new regime
What are the key features of the proposed new debt restructuring process?
  • The company's existing management/directors remain in control of the business and it can continue to trade in the ordinary course
  • A Small Business Restructuring Practitioner (SBRP) is appointed by the company to advise on the restructuring process and its implementation
  • Once the SBRP is appointed, creditors are notified by a 'technology neutral means' that a debt restructuring process has commenced
  • Upon commencement of the process, certain protections and moratoria (similar to those that apply in a voluntary administration) apply
  • The existing management/directors (working with the SBRP) have 20 Business Days to develop a plan to restructure the business's debts
  • Creditors are provided with information concerning the plan
  • The SBRP must certify the plan, including that the business can meet the proposed repayments under the plan and that it has properly disclosed its affairs
  • Creditors have 15 Business Days to vote on the plan (including the proposed remuneration for the SBRP)
  • To be approved, 50% of creditors by value must vote in favour of the plan
  • Secured creditors are bound by the plan only to the extent their debt exceeds the realisable value of their security interest. Details around the treatment of secured creditors are not yet clear at this stage – it may be that they can only vote on a plan to the extent that their security does not cover their debt
  • Related party creditors are not entitled to vote on the plan
  • If the plan is approved, the business continues and the SBRP administers the plan
  • The SBRP will have power to stop the process where misconduct (eg illegal phoenix activity) is identified
What if creditors do not approve the restructuring plan?

If the plan is not approved, then the company owners may opt to go into a traditional voluntary administration or use the proposed simplified liquidation process.

What are the key features of the proposed new small business liquidation process?
  • The liquidator's regulatory obligations will be simplified to be more appropriate for the asset base, complexity and risk profile of a small business
  • The reduced obligations are expected to reduce cost and therefore increase returns to creditors, including employees
  • The circumstances in which a liquidator can seek to claw back unfair preference payments from creditors (where they are not related-party creditors) will be limited
  • The proof of debt and dividend payment processes will be simplified through the increased use of technology
  • The existing order of priority (including rights of secured creditors and employees) will be maintained
What are the complementary measures likely to be introduced to facilitate the new small business restructuring and liquidation processes?
  • More flexibility in the registration of insolvency practitioners to expand the availability of practitioners to assist small businesses that may seek to use the new debt restructuring process
  • Establishing a new classification of insolvency practitioner whose practice will be limited to only the new simplified restructuring process
  • Use of technology so that processes can be carried out more efficiently
  • A three-month extension of the existing COVID-19 insolvency relief for businesses that announce an intention to access the new restructuring process

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