Insolvency law relief measures were introduced in March 2020 to protect businesses financially from the impact of COVID-19. Following this, relevant reforms were announced on 24 September 2020 by the Treasurer. 

The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 commenced on 1 January 2021. 

The new laws provide for a debt restructuring process which intends to give eligible small businesses more flexibility in restructuring debts. Directors are able to remain in control of the business, and there’s also a simplified liquidation process.

The Act features three major reforms:

  1. New Small Business Restructuring: providing small businesses with the opportunity to work with a Small Business Restructuring Practitioner (SBRP) to develop a plan for their existing debts.
  2. New Small Business Liquidation: simplified liquidation process for small business to minimise costs and allow a faster liquidation process. 
  3. Further measures: to ensure that all the needs of small businesses can be attended to by the restructuring and insolvency sector. 

New Small Business Restructuring

A new Part 5.3B supports this new restructuring process to help eligible small businesses. It helps financially strained, but viable small businesses to continue operating by restructuring its debts. 

The debt restructuring plan is developed by small businesses and the SBRP and then  proposed to the creditors. Once accepted, a ‘debtor-in-possession’ model will intervene rather than a ‘creditor in possession’, which means the directors of the company will maintain control while the restructuring plan is processed. 

Eligibility For The Debt Restructuring Process

Eligibility to appoint an SBRP:

  • The board of the company has reasonable grounds to suspect that insolvency will occur immediately or in the future; and 
  • Agrees that an SBRP should be appointed

Eligibility for Small Business Restructuring (under the Corporations Regulations): 

  • The company’s total liabilities must be less than $1 million in order to be eligible, including all debts with the exemption of employee entitlements
  • Has not previously utilised Small Business Restructuring 
  • Is not currently under other external administration or restructuring arrangements

What Happens Throughout The Process?

After the appointment of the SBRP, they and the company have 20 business days to develop a restructuring plan for the creditors. The SBRP will have the ability to investigate the business of the company, their property and transactions and receive the support of the directors if needed. This is to ensure that all employee entitlements are payable and tax lodgements are up to date, otherwise they will be unable to propose a plan to their creditors. 

During the process, the company is unable to enter any transactions which impacts the property of the company unless it is a part of their standard procedures or has been approved under Court order by the practitioner. 

The plan must cover:

  • The company’s property that is to be dealt with and how it be handled
  • Provide for the restructuring practitioner’s remuneration and the date it will be received
  • A proposal statement which features:
    • The debts and claims which are in the plan
    • A declaration that is signed by the practitioner, confirming that the company meets the eligibility requirements and will meet their debts accordingly
    • OR, if the practitioner does not believe that the company will be able to discharge its obligations, the plan must cover the reasons for that decision

Voting on the Proposed Plan

Once the plan is completed, the SBRP is required to provide it to all creditors with the exemption of those who are associated with the company or practitioner. Creditors will need to indicate in writing whether or not they accept this proposal. The outcome is determined on a majority rules basis and the plan will become binding on the company if accepted. 

Ending The Small Business Restructuring Process

Once the restructuring plan is accepted by the creditors, the restructuring process will end. 

However, the process can also be ended by:

  • The company’s directors
  • If the SBRP believes the company fails to meet the eligibility criteria
  • If it is in the best interest of the creditors to end the restructuring process
  • The company fails to propose a plan to its creditors
  • Relevant information that was omitted becomes available, forcing the SBRP to cancel their proposal as the company’s situation may have changed
  • The court orders that process should end

It is important to note that the ending of the restructuring process will force the company’s directors to deal with the creditors and their debts without the protection that is proposed in the restructuring process.

New Small Business Liquidation

The Small Business Liquidation will allow eligible companies a faster and cost-efficient liquidation process in comparison to the existing ones.

Eligibility For Small Business Liquidation

The criteria for a company to enter Small Business Liquidation includes:

  • The company must have resolved to be wound up voluntarily
  • A report must have been given to the liquidator by the directors about the company’s affairs and a declaration that the company is in fact eligible for the Small Business Liquidation
  • The total liabilities of the company must not exceed the $1 million limit
  • The company’s tax lodgements are up to date

In addition, the Small Business Liquidation is only available if the company is in a creditor’s voluntary liquidation (CVL). A CVL is when the directors of the company voluntarily choose to end their business and wind the company up. The liquidation process is not available in a member’s voluntary winding up or a winding up ordered by the Court. 

What Changes Are In The Small Business Liquidation Process? 

Certain provisions of the existing creditors’ voluntary winding up process do not apply, such as:

  • Reduced obligations on the liquidator to investigate the company’s affairs and make reports to ASIC
  • There will be no committees of inspection or reviewing liquidators
  • There are some limitations on the liquidators ability to recover voidable transactions

A transaction is not voidable under the Corporations Act in two cases:

  • For transactions that occurred more than three months before the relation back day, if a creditor related to the company was under the transaction, an unfair preference only then becomes voidable in the liquidation process
  • For transactions that occurred in the three months before the relation back day, an unfair preference becomes voidable in the liquidation process, if the transaction consisted of a creditor related to the company and the value of the transaction was more than $40,000

A report is required for creditors under section 533 of the Corporations Act, however, this is not a feature of the new and simplified liquidation process. This decision was implemented in an attempt to minimise costs and time periods. 

Select provisions of the Insolvency Practice Rules will not apply such as creditor meetings, which have been replaced, with all information to be provided electronically to the creditors and proposals are decided via electronic voting. 

Further Measures

The small business reforms will allow additional time to ensure that all company directors who plan on utilising these reforms receive adequate time to be able to do so. A large volume of businesses may turn towards the Small Business Restructuring, however, practitioners may be unavailable to meet all requests immediately. 

This also extends the decisions introduced as a result of the COVID pandemic; which is relief from debts incurred prior to the outbreak and creditor repayments.

To receive these temporary reliefs, companies will have to declare on ASIC’s insolvency notices website between 1 January 2021 and 31 March 2021 that there are:

  • Reasonable grounds to believe that the company is insolvent or will become insolvent and will meet the eligibility for the small business restructuring
  • The board has concluded that a SBRP should be appointed
  • No SBRP or other practitioner has been appointed. 

Electronic Communications

The Corporate Insolvency Reforms have permanently allowed for documents and signatures relating to external administration of a company to be received electronically. 

Electronic communications can be utilised for any document under:

  • Chapter 5 of the Corporations Act
  • The Insolvency Practice Schedule in Schedule 2 to the Corporations Act
  • Chapter 5 of the Corporations Regulations
  • The Insolvency Practice Rules
  • A transitional provision that relates to the external administration rules in Chapter 10 of the Corporations Act

This includes documents such as:

  • Register of Liquidators
  • Meetings
  • Transitional provision documents (Chapter 10 of the Corporations Act)
  • External administration documents

We’re Here to Help! 

COVID-19 has taken businesses on a journey that they least expected and all businesses deserve to return back to some form of normality. The usage of these Small Business Reforms will allow businesses to eliminate debts through the Small Business Restructuring or distribute their assets in a faster liquidation process.

If you would like a consultation on insolvency for small businesses, you can reach us at 1800 730 617 or for a free, no-obligations chat.

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