Small Business Insolvency Reforms – Draft Legislation Released

21 October 2020

In the midst of the current recession and with the fear that there will be a very significant wave of insolvencies once many of the Covid-19 related government programs come to an end, the Federal Government recently released draft legislation which will enable substantial reform to support small business recovery to commence from 1 January 2021.

The draft legislation, which will be proposed through the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth)) and which was announced by the Treasurer on 24 September 2020, comprises three key elements:

  1. A new formal debt restructuring process for eligible small companies to allow for a faster and less complex process to restructure existing debts;
  2. A new simplified liquidation pathway for eligible small companies to allow for a faster and lower cost liquidation process; and
  3. Further measures to ensure that the insolvency and restructuring sector can respond more effectively to the proposed small business insolvency reforms and needs of small businesses.

In essence, the key features of the legislation will:

  • Be available to incorporated entities who have debts under $1million;
  • Be akin to a “debtor in possession” model with the result that directors will keep control throughout the restructure;
  • Enable directors to enter the new debt restructuring process through the appointment of a Small Business Restructuring Practitioner (SBRP) who will have 20 business days to develop a plan to be put forward to the creditors of the company;
  • Give the company’s creditors 15 business days to vote on the plan;
  • Bind all unsecured creditors of the company if more than 50% of creditors by value vote to approve the plan;
  • Give creditors the option of appointing an administrator or liquidator should the plan be voted down;
  • Prohibit unsecured creditors and some secured creditors from taking action against the company and creditors will be prevented from enforcing guarantees against directors or relatives except with the leave of the court once the SBPR has been appointed; and
  • Move towards a new streamlined and less expensive liquidation process (such as removing requirements to call creditor meetings and simplifying the proof of debt and dividend process) in the event that the company should be placed into liquidation under the small business recovery procedures.

We support a lower cost and more streamlined model for small businesses facing financial distress however there is still considerable detail which needs to be fleshed out concerning some of the key features (for instance, how will the $1million cap be calculated to ensure that a small business entity may qualify to enter the new debt restructuring process, how will the proposed reforms interact with other key parts of insolvency law such as voidable transactions and insolvent trading and what qualifications will the new SBPR need before taking on any appointment). There may be more clarity about these and other issues later and it is also expected that certain key matters in relation to the proposed reforms will be provided for in regulations which have not yet been made available.

The government gave only a very small window of some five days to allow for public consultation on the proposed bill. In relation to previous insolvency reform, the public consultation process took far longer, often years before any bill made its way into legislation which has been enacted upon. However this is the time of Covid-19 and far reaching laws have, and will be put into place with far greater urgency than before.

Should anyone like to discuss the proposed new legislation or require assistance generally in the area, please feel free to contact Howard Chait on 0417 344 184 or at any time.