By Stefan Chelper

4 December 2020

Whilst many are looking forward to putting 2020 behind them, the end of 2020 will also mark the expiry of the current COVID-19 temporary support measures and with that comes the potential for a sharp rise in insolvencies in 2021.

With this in mind, it is imperative that small businesses are aware of the incoming legislation said to be Australia’s largest corporate insolvency reform of the last 30 years.

Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) (‘Bill’)

Provided that Parliament passes the Bill, it is anticipated that the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Act) will commence on 1 January 2021.

It is important to note that the Act will not be of assistance to unincorporated small businesses or sole traders, meaning bankruptcy is also likely to be on the rise next year (that is an article for another day). Rather, the changes will impact incorporated businesses (Pty Ltd) with liabilities of less than $1 million (see below for eligible companies).

What is being proposed will result in eligible companies, who have creditors breathing down their neck, being allowed to continue to trade under the control of its directors while a debt restructuring plan is developed.

Treasurer Josh Frydenberg, who introduced the proposed legislation to the Australian Parliament and Assistant Treasurer Michael Sukkar have said “Together, these measures will reduce costs for small businesses, reduce the time they spend during the insolvency process, ensure greater economic dynamism, and ultimately help more small businesses through the recovery phase of the COVID-19 crisis.”

What is an eligible company?

The eligibility criteria will be stipulated by the Corporations Regulations, however what know is that the company:

  1. Must have liabilities of less than $1 million
  1. The company’s board must have resolved that:
    • it has reasonable grounds for suspecting current, or a likelihood of future insolvency; and
    • a small business restructuring practitioner (Restructuring Practitioner) should be appointed
  1. Must not:
    • have previously appointed a Restructuring Practitioner; or
    • be under Administration or a restructuring arrangement.

What will the restructuring plan look like?

In what looks to essentially be somewhat of a handholding exercise whereby an insolvency practitioner is appointed as the company’s Restructuring Practitioner, the restructuring process will be as follows:

  1. Restructuring Practitioner is appointed;
  2. unsecured and some secured creditors are prohibited from taking action against the Company or enforcing personal guarantees;
  3. a 20-business day period for the Restructuring Practitioner and the company to develop a restructuring plan and to provide supporting documents (and proposal) to creditors;
  4. creditors have 15 days to vote on the plan;
  5. if the plan is endorsed (more than 50% approval rate by creditors required), it will be approved and bind unsecured creditors;
  6. if not approved, the company will be placed into liquidation.

Benefits and aims of the changes

The overall aim of the changes is to facilitate the quick restructure or otherwise windup of the company.

The obvious benefit to eligible small businesses is that, directors maintain control (as opposed to losing it to the liquidator which happens in the usual course) and the business can continue to trade and attempt to right the ship throughout relevant period, free from creditors taking adverse action against it.

Need our help?

In what is going to hopefully be a brighter 2021, there is no doubt that struggles will nevertheless continue to be faced by many in the wake of the pandemic. For this reason, it is of vital importance that eligible small businesses are aware of their rights and maximise their chances of saving an ailing business that but for this unprecedented year, would be in a much stronger position.

If you are an eligible small business seeking to restructure, or a creditor wanting to know your options, the lawyers at Tisher Liner FC Law together with our network of insolvency, accounting and restructuring firms can provide you with the clear and concise advice that you need.

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