The most significant reforms to Australia’s insolvency framework in 30 years
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The Federal Government announces the “most significant reforms to Australia’s insolvency framework in 30 years”
On 23 September 2020, the Federal Government announced its plans to introduce a ‘debtor in possession’ restructuring process modelled on the US Chapter 11 bankruptcy rules and a simplified liquidation process. Both measures are only available to small businesses with less debts of than $1 million, which would cover around 76% of all companies entering into formal insolvency appointments in 2018-19.
New “debtor in possession” restructuring process
The government will introduce a new restructuring process to facilitate simpler, cheaper and faster debt restructuring for small businesses. Due to commence on 1 January 2021, the proposed process will be available to financially distressed but viable companies with liabilities of less than $1 million, and will allow the company to continue trading under the control of its directors while a restructuring plan is being developed with the aid of a small business restructuring practitioner.
The main procedures involved in the new restructuring process are as follows:
- The company resolves to appoint an insolvency practitioner as its small business restructuring practitioner. After confirming the company is eligible for the process, the practitioner accepts the appointment and sends a notice of process commencement to the company’s creditors. During the process, a moratorium is imposed to prohibit creditors taking actions against the company.
- The directors have 20 business days to develop a restructuring plan with the support of the practitioner. Upon certifying the proposed plan is workable based on their assessment of the company’s financial affairs, the practitioner sends the plan, the remuneration proposal and the accompanying material to creditors for a vote. Employee entitlements must be paid in full before a plan can be put to creditors.
- Creditors vote on the plan within 15 business days of receiving it. Approval requires the proposal to be supported by more than 50 percent of the creditors by value.
- If the plan is approved, it becomes binding on all unsecured creditors and secured creditors to the extent their debt exceeds the realisable value of their security interest. The plan commences and the practitioner is appointed to administer the plan.
- If the proposal is not approved, the business can go into voluntary administration or a modified liquidation process with simplified obligations as detailed below.
To ensure the integrity of the process and prevent corporate misconduct such as phoenixing activity, related creditors are prohibited from voting on the proposal, and the same company or directors cannot use the new process more than once every 7 years.
Given that the new restructuring process is expected to receive much interests from distressed small businesses but the insolvency practitioners available are limited, the Government has also introduced a declaration mechanism to facilitate a smooth transition. A small business that is eligible but unable to access the new restructuring process immediately on 1 January 2021 will be able to make a declaration of its intention to access the process to its creditors, such as through the ASIC published notices website. Following the declaration, the small business would enjoy the temporary insolvency relief measures current in force for up to three months until they are able to engage an insolvency practitioner. This measure is transitional and will only be available until 31 March 2021.
Simplified and streamlined liquidation process
Moreover, the Government has announced a simplified liquidation pathway which retains the general framework of the existing liquidation process, but with reduced investigative and reporting obligations to reduce time and costs. Similar to the new restructuring process, this simplified liquidation will only be available to companies with liabilities of less than $1 million.
Key modifications include:
- Reduced circumstances in which a liquidator can pursue an unrelated creditor to recover an unfair preference payment;
- Reducing liquidator’s obligation to report potential misconduct to only where there are reasonable grounds to believe that misconduct has occurred;
- Removing requirements to call creditor meetings and the ability to form committees of inspection.
- Simplifying the dividend process and the proof of debt process; and
- Enabling the use of technology in voting and other communications.
To protect creditors and prevent the misuse of the simplified liquidation pathway, directors must issue a declaration that they believe the company is eligible and has not engaged in illegal phoenixing and will only be able to use the simplified liquidation once within a prescribed period which is proposed at 7 year. Moreover, creditors will have the right to convert the liquidation back to a “full” process.
Further information on the measures can be found in this fact sheet.
The team at Collins Wentworth are experienced in business financial matters. If you have concerns about the financial position of your business and wish to know more about how we can assist you, contact us today.
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