Insolvency reforms to support small businesses recovery

1 October 2020

With temporary insolvency and bankruptcy protections for business expiring at the end of December, the number of small businesses expected to be put into external administration could increase significantly in the new year.

To support small businesses through this period, the Government has announced the most significant reforms to Australia’s insolvency framework in 30 years. The changes are designed to help more small businesses quickly restructure to survive the economic impact of COVID-19 and, where restructure is not possible, enable businesses to wind up faster.

The package of reforms features three key elements:

  1. A new formal debt restructuring process for small businesses to provide a faster and less complex mechanism to restructure existing debts.
  2. A new, simplified liquidation pathway for small businesses to allow faster and lower-cost liquidation.
  3. Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to the needs of small business.

To provide companies with the confidence to continue trading through COVID-19 so they can return to viability when the crisis has passed, directors were temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business.

From 1 January 2021, directors will again start to become liable for insolvent trading. Under the simplified restructuring process, which draws on key features of the US Chapter 11 bankruptcy process, eligible small businesses with liabilities of less than $1 million will be allowed to continue trading while they develop a debt restructuring plan within 20 business days.

At the same time, directors will be able to appoint a small business restructuring practitioner to certify their turnaround plan or issue notice with ASIC that they intend to do so, which provides them with three months to act.

After the restructuring plan is developed with the support of the practitioner, creditors will have up to 15 business days to vote on the plan. If the plan gains majority support of 50 percent or more, the plan is put into action and the practitioner appointed to oversee the execution of the plan. If the plan does not gain majority support from the creditors, the business may choose to enter another insolvency process such as the simplified liquidation process.

The government says it expects the ‘reforms will cover around 76 percent of businesses subject to insolvencies today, 98 per cent of whom have less than 20 employees.’

The key for small business owners to successfully emerge from the disruption of COVID-19 will be getting the advice you need early. Start working with your adviser and accountant now to prepare a cashflow forecast and avail yourself of this process.

For more information on the insolvency reforms or for advice on how to access the reforms please talk to your adviser or get in contact with the Findex Corporate Finance team.