New Year Means New Insolvency Regime

The “most significant changes” to Australia’s insolvency framework in almost 30 years are to come into affect from 1 January 2021, maximising businesses recovery from COVID-19.

It has been widely reported that the March 2020 temporary insolvency protections for troubled businesses have been extended until 31 December 2020. These protections resulted in an estimated 2,000 fewer liquidations this year — a fall of approximately 50% compared to the same time last year.

It can be said however that not all of these “saved” businesses are viable and while the insolvency protections have been of great benefit to viable businesses significantly impacted by COVID 19, the protections may have merely delayed the ultimate collapse of others.

With the ending of these protections, the New Year changes are aimed to introduce both a low cost restructuring framework and a simplified (and cheaper) liquidation process. Both are targeted at small businesses with less than $1m in creditors. The hope is that the former will allow small businesses to quickly restructure and to survive. However where restructure is not possible, the latter will mean that businesses can then be wound up faster hopefully offering greater returns for creditors and employees.

At the time of writing, draft legislation has yet to be released. However, the entry criteria for this new insolvency regime is that the small business must have all of its ATO lodgements up to date and paid its employee entitlements.

The Government has outlined the legislation’s three key elements:

1. A new small business debt restructuring process

Similar to the existing Voluntary Administration and Deed of Company Arrangement process, this ‘lite’ version aims to allow SME’s with less than $1Million in liabilities to restructure their debt however in a simplified and more cost efficient way by following the following steps:

• Step 1: A 20 day moratorium period commences when the directors appoint a Small Business Restructuring Practitioner (SBRP), a new classification which will include Registered Insolvency Practitioners, to help them formulate a proposal to restructure or compromise the company’s debts.
• Step 2: When this period expires, the proposal put together and “certified” by the SBRP is sent to all creditors by the SBRP. No meetings are held. A 15 day period from sending is allowed so that creditors can cast their votes. The proposal outcome is determined by way of votes returned to the SBRP.
• Step 3(a): Should 50% in value (excluding related parties) vote in favour then the proposal is binding.  A dividend process is then commenced with the SBRP validating creditor claims and making payments to them (in part or in full) in settlement of their claim. OR
• Step 3 (b): If the proposal is voted down, the company can opt to be placed into a “liquidation lite” process, which has limited reporting or investigation obligations.

A key ingredient of this new process is that the company’s director — not an independent Voluntary Administrator — will remain in control of the company throughout the process. It will therefore be very important that creditors have the confidence in the director’s ability to continue to trade the business operations and return it to profitability.

2. A simplified liquidation pathway

For businesses that are not able to put forward an offer, the government seeks to provide a simplified lower cost pathway to winding up the business and in doing so increase returns for creditors and employees, and allow the business owner to move forward with their lives. a, It is anticipated that this process will result in reduced investigation work and creditor reporting that a liquidator is currently required to undertake.

3. Complementary measures

To assist in the industry deal with companies in financial distress in the short and longer term, a number of administrative amendments are also being introduced. This is to include an increased usage of technology (such as emailing reports to creditors) to be allowed – rather than the current postage requirements.

In light of this announcement, we recommend accountants consider which of their clients may qualify for this new insolvency process.  For those companies that don’t, because their debt level may exceed $1M and whose directors wish to protect themselves from insolvent trading since 25 March 2020, they will need to appoint an External Administrator before 31 December 2020 when the current moratoriums on trading whilst insolvent are due to end.

Prior to taking any such steps, we recommend that you contact us to discuss specific client circumstances to ensure the right choices are made in this rapidly changing landscape.