Insolvency Implications in 2020/21 Federal Budget

On Tuesday night, Treasurer Josh Frydenberg announced the 2020/2021 Federal Budget including proposed changes to Australia’s Insolvency Framework to further support small business.

Insolvency Implications in 2020/21 Federal Budget

On Tuesday night, Treasurer Josh Frydenberg announced the 2020/2021 Federal Budget. In the Budget, new reforms were proposed to Australia’s Insolvency Framework to further support small business from 1 January 2021. These reforms are considered to be the most significant in several decades and are designed to help the Australian economy emerge from the Coronavirus pandemic.

The full details of these proposed changes can be found in the Government factsheet available at:
https://budget.gov.au/2020-21/content/factsheets/download/insolvency-reforms-factsheet.pdf

Simplified Restructuring Process

One of these reforms is a new simplified restructuring process for small businesses, which is available to business with liabilities of less than $1 million. The initial details were outlined in our recent article Proposed Lifeline for Small Business.

We now have further information on this simplified restructuring process notably:

  • In addition to Registered Liquidators, this process appears to be open to further practitioners whom will be able to register as a small business restructuring practitioner (SBRP) only.
  • Existing temporary insolvency protections (relief from insolvent trading liability and around responding to statutory demands from creditors) expire on 31 December 2020. Accordingly, to assist with the transition eligible small businesses will have until 31 March 2021 to declare their intention to access the simplified restructuring process to its creditors and via the ASIC Published Notices website. Following the declaration, the existing temporary insolvency relief would then apply to the business for a maximum period of 3 months, until they are able to access a SBRP or other insolvency practitioner; and
  • Safeguards will be included to prevent the process from being used to facilitate corporate misconduct, such as illegal phoenix activity. They include a prohibition on related creditors voting on a restructuring plan, a bar on the same company or directors using the process more than once within a prescribed period (proposed at 7 years), and the provision of a power for the SBRP to stop the process where misconduct is identified.

The qualifications required to register as a SBRP remain unclear, it is vital that appropriate requirements are set by the Government to make certain that education and experience criteria are met by new SBRP practitioners to ensure the integrity of this new restructuring process.

There are also uncertainties as to how the debts incurred by ongoing trading during the restructuring process will be dealt with. In particular, whether the debts incurred form part of the restructuring plan, or whether they have to be paid in the ordinary course.

Simplified Liquidation

In addition to the new restructuring process, a new simplified liquidation pathway was announced for small businesses for the purpose of allowing for a faster and lower cost liquidation, which will be available to businesses with liabilities of less than $1 million (same as the new simplified restructuring process). The key differences of the simplified liquidation compared to the traditional liquidation process can be summarised as follows:

  • Reduced circumstances in which a liquidator can seek to claw back an unfair preference payment from a creditor that is not related to the company;
  • Only requiring the liquidator to report to ASIC (under section 533 of the Corporations Act 2001) on potential misconduct 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
  • Maximising technology neutrality in voting and other communications.

Similar safeguards have been proposed (similar to the simplified restructuring process) to prevent corporate misconduct, such as illegal phoenix activity. This includes allowing creditors to convert the liquidation back to a ‘full’ process, and preventing directors from using the process more than once within a prescribed period (proposed at 7 years).

There is no proposed modification to the rights of secured creditors and the statutory rules as to the payment of priority creditors such as employees.

At this stage there is limited information available as to the specifics of the simplified liquidation process and we will be closely monitoring the status of this new proposed legislation. 

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