Changes to small business insolvency processes

KEY TAKE OUTS

• The Federal Government will introduce a new model to deal with small business insolvency matters.
• Rather than creditors being handed full responsibility, the reforms allow small businesses with under $1 million in liabilities to continue trading whilst restructuring and directors can retain control during this period.

Amongst the raft of learnings and realizations collected during COVID-19, one specifically stands out; a one-size-fits-all approach is neither the most effective nor manageable method to apply to companies dealing with bankruptcy.

Currently, insolvent companies are required to appoint administrators, external to the company, to oversee the insolvency transition and manage liquidation matters.

The Reform

Under reforms put forward by the Federal Government, the new method will scrap the current method for insolvent companies with under $1 million in liabilities and allow directors to retain control whilst a small business restructuring practitioner will assist in restructuring debt. The directors will assist in developing the plan and creditors will not be allowed to act against said company.

Once 20 days have passed, creditors will have 15 days to vote on said plan; if 50% of creditors vote in favor then the plan is implemented, whereas if it fails to gain creditor approval, the company can go into voluntary administration.

It is important to note however that safeguards will continue to be applicable during this process. These include anti-phoenixing measures to prevent creditors related to directors from voting on restructuring plans and employee entitlements are to be paid out in full prior to creditors voting on said plan.

For insolvency practitioners involved in small business insolvency, these reforms will result in them having less influence than the current process, whilst creditors retain their final say on the plans.

The reforms are slated for implementation from January 1, 2021.

With future uncertainty regarding COVID-19 and the disease likely lingering for some time still, as well as an emerging economic recession, small business directors will rely on these reforms to manage their companies in the new year. This is especially important considering that the current stimulus measures conclude by years end and will likely lead to further business and consumer uncertainty; it is predicted that 76% of businesses currently undertaking insolvency measures will fall under these reforms.

It is envisioned that whilst many businesses continue to be hard hit from the COVID-19 fallout and recession, these reforms mean that insolvency isn’t the end of the road for these companies. If you have concerns regarding these reforms, are seeking insolvency clarification or assistance, do not hesitate to contact our team here at Coutts on 1300 268 887 or info@couttslegal.com.au and our team is here to assist.