On 24 September 2020, the Federal Treasurer and Assistant Treasurer announced a package of reforms targeted at simplifying and streamlining the administration and liquidation processes for struggling small businesses. The reforms, touted as the largest shake-up of Australia’s insolvency framework in 30 years, are set to come into effect on 1 January 2021, pending the passage of legislation. In the meantime, all that we have is a fact sheet and a press release, so here is what we know so far.

The Impetus

The impact of COVID-19 on economic systems has been well-documented the world over. In Australia, this impact has been somewhat delayed. The advent of the Federal Government’s JobKeeper and JobSeeker schemes have ensured that the official unemployment rate has never strayed above 7.5%, but these schemes were initiated with a time limit in mind. Despite an extension to the schemes, most temporary relief will dry up in December 2020, leaving many businesses, particularly small and medium businesses, facing similar economic conditions as they faced in March 2020. Cognisant of this fact, the Federal Government is predicting large-scale small and medium business insolvencies in the New Year. In an insolvency framework geared towards dealing with large corporations and complex insolvencies, there is a risk that the widespread failing of small and medium businesses will leave many creditors and employees high and dry. The new insolvency reforms are a direct attempt to combat this likelihood through simultaneously simplifying the insolvency processes and providing further relief for businesses in the short term.

The Key Reforms

The key reforms mentioned in the government’s press release and fact sheet can be broadly split into three categories: administration, liquidation and complementary measures.

The administration reforms are focused on providing better long-term outcomes for small and medium businesses that are struggling with their debt loads. The reforms will be accessible to any incorporated entity with less than $1 million in debt and aim to make the process of administration more accessible by adopting a ‘debtor in possession model’.

The new model is largely decentralised and incorporates the services of a ‘restructuring practitioner’. A restructuring practitioner is effectively an administrator who does not manage the day to day affairs of the insolvent business and, consequently, has a lower bar of registration. The new administration model works like this:

  1. The owner of an insolvent business approaches a restructuring practitioner to restructure the business’ debts. The business’ board votes to engage the practitioner and, from that moment on, normal insolvency protections apply to the business’ operations.
  2. Over the next 20 business-days, the business owner and insolvency practitioner will prepare a restructuring plan. During this period, the business owner continues to conduct ordinary trading through the business.
  3. The practitioner will then send the restructuring plan, supporting documentation and their certification that the business can make the repayments detailed in the plan to the business’ creditors.
  4. The creditors then have 15 business-days to vote on the plan.
  5. If more than 50% of the creditors by value endorse the plan, the plan becomes binding on all unsecured creditors and any secured creditors to the extent their debt exceeds the realisable value of their security interest. The business will continue to engage in its ordinary trading activity and the restructuring practitioner will oversee the implementation of the plan.
  6. If the creditors fail to endorse the plan, the business owners may opt to go into voluntary administration or use the proposed simplified liquidation pathway laid out below.

This new model is coupled with measures that restrict directors’ opportunity to use it for the illegal phoenixing (over-leveraging a company into administration only to start a new company providing exactly the same service) of companies. Principal among these are a bar on companies and directors accessing the new model of administration more than once in a proposed 7-year time period, and a ban on related-party creditors voting on a restructuring plan. Key creditors’ rights under existing voluntary administration processes are also preserved.

The reforms to liquidation follow broadly the same lines as those relating to administration, with a focus on simplifying the process of liquidation to maximise value for creditors and employees. The new liquidation process will be largely based on the existing liquidation process, but will be available to all incorporated businesses with liabilities totalling less than $1 million and will incorporate the following modifications:

  • There will be fewer circumstances in which liquidators can attempt to claw-back unfair preference payments from creditors that aren’t related to the company.
  • Liquidators will only have to report to ASIC when there are reasonable grounds to believe that misconduct has occurred in the management of the insolvent business.
  • There will be no requirement that the liquidator call creditor meetings or form committees of inspection.
  • The dividend and proof of debt process for creditors will be simplified.
  • An emphasis will be placed on technology neutrality in voting and other communications between parties.

To prevent illegal phoenixing, the same 7-year exclusion period will apply as with administration. Creditors will also be able to convert the liquidation back to a ‘full’ liquidation process if they feel that the new system is being misused.

A raft of other measures, of varying permanence, will also be put in place to ease pressure on businesses. These are:

  • The temporary waiving of registration fees for liquidators until 30 June 2022 to allow for greater competition in the liquidation market.
  • The removal of overly rigid registration requirements for insolvency practitioners that do not improve the integrity of the profession.
  • Ensuring that key parts of the process are ‘technology neutral’.
  • Providing temporary insolvency relief (up to 3 months) for eligible companies waiting to access the new restructuring process.

Taken as a whole, these changes appear to be a fair attempt at improving the Australian insolvency system for small to medium businesses. Whether this will be reflected in the legislation when it is passed will remain to be seen. In the meantime, you can check out the Federal Government’s full fact sheet here.

Need more specific advice on how these insolvency changes will impact your business? Arrange a consultation with Standard Law Co’s specialist commercial practitioners here.