Insolvency changes to help businesses

In what has been touted as the most significant changes to Australia’s insolvency framework in 30 years, the government has implemented changes aimed at reducing costs and cutting red-tape which are designed to help small businesses recover from the impacts of COVID-19 on the economy. This includes access a debt restructuring process with temporary relief from director’s duties and a simplified liquidation process. Creditors needn’t fret as their rights in these insolvency changes have been largely retained.

While the government continues to help businesses through the current pandemic-related recovery with various revenue measures, it is inevitable that some businesses may not make the journey back. To assist those businesses with dealing with insolvency issues, the government has made significant changes to the framework to introduce a new, simplified debt restructuring process.

“[It is the] most significant changes to Australia’s insolvency framework in 30 years, reducing costs, cutting red tape and helping more small businesses recover from the pandemic…drawing on key features of the Chapter 11 bankruptcy model in the United States.” – Treasurer, Josh Frydenberg

The current insolvency system is a one-size-fits-all system that lacks flexibility to accommodate small businesses by imposing the same duties and obligations, regardless of the size and complexity of administration. As the costs incurred under external administration are paid for by the assets of the distressed companies, this could place undue pressure on some small companies with less assets, potentially forcing it into liquidation at the end of voluntary administration.

Reforms which apply from 1 January 2021 contains a debt restructuring process which allows eligible companies to restructure their debts and maximise the opportunity of the business continuing. Specifically, the debt restructuring process will allow company directors to retain control of their businesses, and its properties and affairs, while a plan is developed to restructure their debt with the assistance of professionals.

Eligible companies waiting to access the debt restructuring process will be provided with temporary relief from director’s duties to prevent insolvent trading. The company will also be provided relief in relation to responding to statutory demands from creditors. If you’re a creditor, don’t worry, your rights have not been subjugated. At the end of the restructuring process, creditors will still be required to vote to accept or reject the restructuring plan put forward by the business. Where the plan is rejected, the restructuring process ends and the company will need to use alternative formal insolvency processes such as liquidation or voluntary administration.

In addition to the debt restructuring processes, the changes that came into effect on 1 January 2021 also includes a simplified liquidation process for eligible companies in a creditors’ voluntary winding up. The new process is intended to provide a faster liquidation at a lower cost which will increase returns for both creditors and employees.

However, safeguards will apply to companies using these rules to conduct illegal phoenixing activity or other forms of corporate misconduct. For example, a company will not be eligible to use the debt restructuring process if a director of the company or the company itself has previously been through the debt structuring process or the simplified liquidation process.

In addition, to use the simplified liquidation process, the company must have complied with taxation laws and directors must make a declaration in relation to previous use and compliance. Again, creditors are not disadvantaged, they have to power to opt-out of the simplified liquidation process by providing a request to the liquidator to not follow the simplified process.