The Government has extended temporary insolvency relief until 31 December 2020 and the Treasurer has announced the Government’s intention to introduce a new insolvency process under which incorporated businesses with liabilities of less than $1 million will be able to keep trading without an administrator while they develop a debt restructuring plan which will be voted on by creditors.
The intention is for this new insolvency regime to start from 1 January 2021, following on from the expiry of the temporary insolvency measures.
Temporary Insolvency Relief extended
The Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 extend the application of temporarily increased thresholds until 31 December 2020.
The original relief was due to expire on 24 September 2020.
The Regulations extend the temporary increase in the threshold at which creditors can issue a statutory demand on a company (from $2,000 to $20,000) and the time companies have to respond to statutory demands they receive (from 21 days to six months).
The threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings against a debtor will temporarily increase from $5,000 to $20,000.
The changes also extend the temporary relief for directors from any personal liability for trading while insolvent.
New small business insolvency process
The Treasurer has announced the Government’s intention to introduce a new insolvency process under which incorporated businesses with liabilities of less than $1 million will be able to keep trading without an administrator while they develop a debt restructuring plan, which will be voted on by creditors.
The Treasurer describes the process as follows:
“The new process will involve a small business restructuring practitioner helping the business prepare the plan, certify the plan to creditors, and oversee disbursements once the plan is in place.
A period of 20 business days is allowed for the development of the plan.
While the practitioner is engaged in the restructuring process, there is a moratorium on unsecured and some secured creditors taking actions against the company.
Creditors will then have 15 business days to vote on the plan, including the remuneration of the practitioner to deliver on the plan.
In order for the binding plan to be approved, it must be supported by more than 50 per cent of the creditors by value.
Employee entitlements that are due and payable must be paid out in full before the plan is voted on by creditors.
There will also be safeguards in place to prevent corporate misconduct, including phoenix activity, with related creditors prohibited from voting on the restructure plan, and the same company or same directors not being able to use the insolvency process more than once every seven years.
In the event the plan is not approved, the business can go into voluntary administration or a new liquidation process with simplified obligations…
This new streamlined restructuring process is in contrast to the current regime where owners effectively lose control of their business, with an administrator being placed in control and determining any restructuring plan to be put to creditors…
The intention is for this new insolvency regime to start from January 1 next year, following on from the lifting of the temporary insolvency measures introduced during COVID-19.”
If you found this article helpful, then subscribe to our news emails to keep up to date and look at our video courses for in-depth training. Use the search box at the top right of this page or the categories list on the right hand side of this page to check for other articles on the same or related matters.
Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.