The Treasurer has announced changes to Australia’s insolvency framework from 1 January 2021, including:

• A new formal debt restructuring process for small business;
• A new liquidation pathway for small business; and
• A number of permanent and temporary measures to ensure the insolvency sector can respond effectively to potential increased demand and to the needs of small business.

Vince & Associates will monitor the introduction of the reforms closely and continue to provide updates when the legislation is released.

The following is a summary of the known information released to date for your information.

A new formal debt restructuring process for small business

The new process will be available to incorporated businesses with liabilities of less than $1 million. The business must pay any employee entitlements which are due and payable before a plan can be put to creditors.

The process has been outlined on a Treasury Fact Sheet as follows:

• A small business facing financial distress approaches a practitioner to discuss their options. The practitioner advises that the new reorganisation process is the most appropriate option in their circumstances, and the owners accept the advice. The practitioner proposes a flat fee for their work in helping the business develop a restructuring plan.
• Following a resolution of the board, the business signs up the practitioner as their small business restructuring practitioner. On commencement, unsecured and some secured creditors are prohibited from taking actions against the company, a personal guarantee cannot be enforced against a director or one of their relatives, and a protection from ipso facto clauses (that allow creditors to terminate contracts because of an insolvency event) apply (with the same protections applying as during voluntary administration).
• The business owner works alongside the practitioner over a 20 business-day period to develop a plan to restructure the business’s debts and provide supporting documents for creditor consideration. During this time, the owners continue to control the business and can trade in the ordinary course of business. The practitioner also develops a remuneration proposal to cover their management of the plan once in place, which will operate as a percentage fee of disbursements made under the plan.
• The practitioner sends the plan and supporting documents to creditors and certifies whether they consider the business can meet the proposed repayments and has properly disclosed its affairs. Creditors have 15 business days to vote on the plan, including the proposed remuneration for the practitioner. The business must pay any employee entitlements which are due and payable before a plan can be put to creditors.
• If more than 50 per cent of creditors by value endorse the plan, it is approved and binds all unsecured creditors. Creditors vote as one class. Secured creditors are bound by the plan only to the extent their debt exceeds the realisable value of their security interest. To support the integrity of the process, related-party creditors are not entitled to vote.
• If the plan is approved, the business continues and the practitioner administers the plan by making distributions to creditors according to the terms of the plan. If voted down, the process ends, and the company owners may opt to go into voluntary administration or to use the simplified liquidation pathway proposed in this paper.

Overview of the new restructuring process

A new liquidation pathway for small business

The simplified liquidation pathway would be accessible to incorporated businesses with liabilities of less than $1 million.

The key modifications have been summarised on the Treasury Fact Sheet