Federal government announces changes to insolvency
Yesterday, Treasurer Josh Frydenberg announced changes to insolvency rules to support small business during the COVID-19 recession. In anticipation for when government protections for business owners finish at the end of the year, the Federal government has announced changes to insolvency legalisation to make the process more streamlined, efficient and cost-effective.
Rapsey Griffiths will be keeping a close eye on how this legislation rolls out and the impact it can have on small to medium businesses. We have extensive experience working through insolvency in a variety of sectors and we can help you make sense of how these changes may effect your client’s business.
Key changes to the insolvency process:
1. Business owner’s remaining in control of business whilst re-structing debt
Adopting key aspects of the US Chapter 11 bankruptcy process, the insolvency process will move to a more flexible ‘debtor in possession’ model (from the current ‘creditor in possession model). This will enabling business owners to remain in control of their business while they work through business issues.
2. Two-tiered system
Under the new process, incorporated businesses with liabilities of less than $1 million will be able to keep trading while they develop a debt restructuring plan, which is ultimately voted on by creditors. Larger businesses with liabilities of more than $1 million will continue to work under the existing rules of insolvency.
3. Practitioner role in process
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. While the practitioner is engaged in the restructuring process, there is a moratorium on unsecured and some secured creditors taking actions against the company.
- An insolvent small business would have 20 days to come up with a restructuring plan, and creditors would have to vote on whether to accept it within 15 days after that.
- 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.
- For small businesses that can’t be revived, liquidation would be changed also in an effort to make it quicker and easier. The new liquidation process, which will also be available to small businesses with less than $1 million in liabilities, will save time and money by streamlining meetings and reporting requirements.
Rapsey Griffiths will continue to advise of updates as the government releases further policy detail.