Reforms to Australia’s insolvency framework have now taken effect for eligible businesses with liabilities of less than $1 million.
The new legislation, which shifts Australia’s corporate insolvency regime for small business from a largely creditor-led regime to a debtor-in-possession model, is expected to slow the anticipated wave of insolvencies in the wake of the cessation of the government’s temporary relief measures in response to the COVID pandemic.
The reforms are designed to reduce complexity, time and costs for small businesses seeking to restructure their debts and if a debt restructure is not possible, enable businesses to wind up faster with the hope of greater returns for creditors.
1. Provide for a formal debt restructuring process for eligible companies
In order to access the new debt restructuring process, the directors of an eligible company must file a Declaration of Eligibility for Temporary Restructuring Relief. This declaration must be published on ASIC’s Published Notices Website.
After filing the declaration, an eligible company and its directors will have 20 days to develop a debt restructuring plan, with help from a Small Business Restructuring Practitioner (SBRP). Creditors are unable to act against the company during this time.
The debt restructuring plan will be submitted to creditors, who will have 15 days to vote on the plan. The plan will be implemented if 50% of creditors vote in favour.
If creditors vote against the plan, the directors of the company will need to consider either the appointment of a voluntary administrator or a liquidator.
An eligible company:
- Must have liabilities of less than $1m
- Must not have been under restructuring or the subject of a simplified liquidation process within the preceding seven years, and
- Must not have a director or former director (within the 12 months preceding restructuring) that has been a director of another company that has been under restructuring or subject to a simplified liquidation process within the preceding seven years. However, certain exemptions apply.
2. Introduce a new simplified liquidation process for eligible companies in a creditors’ voluntary winding up
In the event that the eligible company has to subsequently appoint a liquidator, it is possible for the liquidator to use the new simplified liquidation process which will enable the liquidation to proceed without meetings of creditors and matters determined by creditors can be competed via a ‘proposal without a meeting process’.
The liquidator involved in the process must report to creditors within three months of the liquidator’s appointment on work performed by the liquidator, their opinion on when the process might be finalised, and the likelihood of a dividend paid to creditors.
This process is designed to allow for a quicker, less expensive liquidation for those companies that fail to get creditor approval for debt restructuring plans.
In addition, the reforms refine the requirements for registrations as a liquidator and provide for a greater use of electronic documents and signatures in an external administration.
What to watch out for!
As a small business owner or company director, if your company is experiencing financial difficulty, seek advice at the earliest signs of hardship.
Early intervention will enable the necessary planning to be completed prior to the restructuring process which will greatly improve the likelihood of successfully completing a restructure of your business.
We recommend that that you check the ASIC Published Notices Website on a regular basis for company’s lodging a Declaration of Eligibility for Temporary Restructuring Relief (see Appointment Type – Restructuring (Part 5.3B)) to see if any of your suppliers are attempting to use the new debt restructuring process.
If your business is experiencing financial hardship, contact your local William Buck Restructuring and Insolvency specialist today. We can act as your Small Business Restructuring Practitioner to guide you through this process, or alternatively we can provide advice to you on the restructure of your business.