Changes to Insolvency Laws for Small Businesses in Australia

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The Federal Government has recently announced that it intends to change insolvency laws with a focus on helping Australian small businesses that are struggling in the wake of the COVID-19 pandemic.[i]

The new laws would form a simplified system that would apply to businesses with less than $1 million in liabilities.

The proposed changes relate to two aspects of insolvency:
– Restructuring of company assets; and
– The liquidation process.

The Federal Government previously announced and enacted protections under the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) shortly after the COVID-19 pandemic began. There are three relevant changes that this Act made. Firstly, the monetary threshold for a statutory demand was increased from $2,000 to $20,000. Secondly, the time allowed for a response to a statutory demand was lengthened from 21 days to six months. Finally, there is a form of temporary relief from personal liability that would normally arise from a breach of the directors’ duty to present insolvent trading under section 588G of the Corporations Act 2001 (Cth). These changes were valid through 13 September 2020 and were recently extended to now expire on 31 December 2020.

The new changes are suggested to be implemented at the beginning of 2021, which could be commenced immediately after the previous changes cease to operate on 31 December 2020. Given the impact that the removal of the previous rules would have, it is not surprising to see that significant changes to the insolvency rules are being proposed. This article intends to discuss the nature of the proposed changes as well as potential issues that may arise during the period of transition to the new rules.

The Nature of the Proposed Changes
The first relevant aspect of the changes considers the way in which companies would restructure in the face of insolvency. Under the new rules, company owners would maintain control of their assets through the restructuring process, such that they would become a ‘debtor in possession’.[ii] This reflects the system that is currently used in the United States.[iii] This proposes a fundamental change to insolvency in Australia.

The process would operate to provide greater control to company owners, allowing them to find an arrangement that can be accepted by creditors. The new rules would give a company 20 business days to create and propose a new restructuring plan before it is presented to creditors. The creditors of the company must then vote on the restructuring plan within 15 business days. A restructuring plan will begin to operate if it is accepted, otherwise, a different insolvency process will be used.[iv]

The second area for proposed change concerns a simplified process for the liquidation of companies. It is anticipated that this will be enacted through reduced procedural aspects such as mandatory meetings and reporting requirements. When considered alongside the new rules for restructuring companies, this simplified process may assist in reducing the stress faced by company owners in the event of insolvency.

It is very important for businesses to be proactive and ready to engage with debtors and creditors given the short time frames.

The Potential Impact of the New Insolvency Rules
The current protections and temporary relief relating to statutory demands and the directors’ duty to prevent insolvent trading are set to expire on 31 December 2020. The importance of the new insolvency rules must be considered in light of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth), which is not likely to overlap with the new rules. However, no bill has been proposed to the Federal Parliament at this time, but the changes could provide company owners and directors with substantially increased freedom to manage the way in which they approach insolvency.

Conclusion
Whilst the proposed changes are applicable to small businesses with less than $1 million in liabilities only, given creditors of all sizes will have outstanding debts with small business and small businesses in Australia accounts for up to 35% of GDP,[v] the rules will have an extensive impact across the Australian economy.

It is likely that many small businesses are already insolvent and after the pandemic, the impact of their inability to pay their debts as and when they fall due will become apparent and relevant to the new rules. The new rules will offer an opportunity for small businesses to manage their assets in a new way, allowing them to survive the current pandemic and return to business as usual.

 

Authors

Corey Johnstone – Brockhill & Usherwood Lawyers

Blair McNamara – Brockhill & Usherwood Lawyers

This article is a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

 

[i] Melissa Clarke, ‘Federal Government to Adopt US-Style Insolvency Rules to Help with Expected Wave of Business Closures, Says Treasurer Josh Frydenberg’, ABC News (Web Page, 24 September 2020) <https://www.abc.net.au/news/2020-09-23/government-to-boost-support-for-businesses-facing-closure/12694904>.

[ii] See Josh Frydenberg, ‘Fighting Chance for Small Business’, Financial Review (Web Page, 24 September 2020) <https://www.afr.com/policy/economy/fighting-chance-for-small-business-20200923-p55yi8>.

[iii] See ‘Chapter 11 – Bankruptcy Code’, United States Courts (Web Page) <https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics>.

[iv] See Michelle Grattan, ‘Government Will Reform Insolvency System to Improve Distressed Small Businesses’ Survival Chances’, The Conversation (Web Page, 23 September 2020) <https://theconversation.com/government-will-reform-insolvency-system-to-improve-distressed-small-businesses-survival-chances-146774>.

[v] Australian Small Business and Family Enterprise Ombudsman, Small Business Counts — Small Business in the Australian Economy (Report, July 2019) 5 <https://www.asbfeo.gov.au/sites/default/files/documents/ASBFEO-small-business-counts2019.pdf>.

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