Treasurer outlines proposed changes to insolvency laws

September 24, 2020 |

Yesterday and first thing this morning the media was abuzz, with coverage from the Guardian,  the Sydney Morning Herald, the ABC and the Financial Review (amongst many other news outlets) with news of proposed changes to the insolvency laws as embargoed releases were provided to them last night.

The Treasurer revealed the proposed changes to the insolvency laws.  That will significantly affect  professionals who practice insolvency law such as myself.

The Treasurers’ media release relevantly provides:

The Morrison Government will undertake the most significant reforms to Australia’s insolvency framework in 30 years as part of our economic recovery plan to keep businesses in business and Australians in jobs.

The reforms, which draw on key features from Chapter 11 of the Bankruptcy Code in the United States, will help more small businesses restructure and survive the economic impact of COVID-19. As the economy continues to recover, it will be critical that distressed businesses have the necessary flexibility to either restructure or to wind down their operations in an orderly manner.

Key elements of the reforms include:

    • The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million, drawing on some key features of the Chapter 11 bankruptcy model in the United States.
    • Moving from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model which will allow eligible small businesses to restructure their existing debts while remaining in control of their business.
    • A rapid twenty business day period for the development of a restructuring plan by a small business restructuring practitioner, followed by fifteen business days for creditors to vote on the plan.
    • A new, simplified liquidation pathway for small businesses to allow faster and lower cost liquidation.
    • Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to meet the needs of small business.

The reforms will cover around 76 per cent of businesses subject to insolvencies today, 98 per cent of whom who have less than 20 employees.

Together, these measures will reposition our insolvency system to reduce costs for small businesses, reduce the time they spend during the insolvency process, ensure greater economic dynamism, and ultimately help more small businesses get to the other side of the crisis.

On 22 March 2020, the Government announced temporary regulatory measures to help financially distressed businesses get to the other side of COVID-19. On 7 September 2020 the Government announced a further extension of this relief to 31 December 2020.  The new processes will be available for small businesses from 1 January 2021.

The 10 page fact sheet is found here and in the briefest of summaries provides:

  • The process will be available to incorporated businesses with liabilities of less than $1 million.  Subject to the legislation that will require a necessary step to establish the liabilities at a certain date.
  • The proposal adopts a ‘debtor in possession’ model. That means that the business can keep trading under the control of its owners, who know the business best, while a debt restructuring plan is developed and voted on by creditors.
  • prior approval of the small business restructuring practitioner (the practitioner) will be required for trading that is outside the ordinary course of business.
  • business owners will be required to work with the practitioner to develop and put forward a restructuring plan and to provide information about the business’s financial affairs to the practitioner to assist with identifying creditors and to assist creditors in making an informed decision on the restructuring plan.
  • The practitioner will:
    • help determine if a company is eligible; support the company to develop a plan and review its financial affairs;
    • certify the plan to creditors; and manage disbursements once the plan is in place.
    • not be required to take on personal liability for a company or manage its day to day affairs.
  • Qualifications required to register as a small business restructuring practitioner only will be in line with the streamlined requirements of the role.
  • Registered liquidators will also be able to manage the new process
  • an eligible small business will be able to declare its intention to access the simplified restructuring process to its creditors, including through ASIC’s published notices website. Following the declaration, the existing temporary insolvency relief applies to the business for a maximum period of 3 months, until they are able to access a small business restructuring practitioner or other insolvency practitioner.
  • as a transitional measure, the ability to declare such an intention will be available until 31 March 2020.
  • creditor’s rights are protected by:
    • the practitioner’sobligations on behalf of creditors (such as certifying the plan).•
    • creditor rights will be preserved such as:
      • no changes to the rights of secured creditors,
      • similar types of debts are treated consistently.•
      • Creditors retaining the right to vote on the debtor company’s proposed plan with the plan requiring the requisite majority to be binding.
  • the practitioners will be entitled to an initial flat fee ;
  • following a resolution of the board, the business signs up the practitioner as its small business restructuring practitioner. On commencement:
    • unsecured and some secured creditors are prohibited from taking actions against the company,
    • a personal guarantee cannot be enforced against a director or one of their relatives,
    • there is protection from ipso facto clauses (that allow creditors to terminate contracts because of an insolvency event)
  • the business owner & the practitioner have 20 business-days to develop a plan to restructure the business’s debts and provide supporting documents for creditor consideration during which time:
    • the owners continue to control the business and can trade in the ordinary course of business.
  • the practitioner  develops a remuneration proposal to cover its management of the plan once in place, which will operate as a percentage fee of disbursements made under the plan;
  • once the practitioner sends the plan and supporting documents to creditors and certifies that the business can meet the proposed repayments and has properly disclosed its affairs the creditors have 15 business days to vote on the plan, including the proposed remuneration for the practitioner.
  • the business must pay any employee entitlements which are due and payable before a plan can be put to creditors
  • if more than 50 per cent of creditors by value endorse the plan, it is approved and binds all unsecured creditors.
  • creditors vote as one class.
  • secured creditors are bound by the plan only to the extent their debt exceeds the realisable value of their security interest.
  • if the plan is approved, the business continues and the practitioner administers the plan by making distributions to creditors according to the terms of the plan.
  • if the plan is not approved the process ends, and the company owners may opt to go into voluntary administration or to use a simplified liquidation pathway

The liquidation process will be modified for companies with liabilities of less than $1million by:

  • reducing the circumstances in which a liquidator can seek to clawback an unfair preference payment from a creditor that is not related to the company
  • only requiring the liquidator to report to ASIC, under section 533, on potential misconduct where there are reasonable grounds to believe that misconduct has occurred
  • removing requirements to call creditor meetings and the ability to form committees of inspection;
  • simplifying the dividend process  and the proof of debt process
  • maximising technology neutrality in voting and other communications.

The rights of secured creditors and the statutory rules as to the payment of priority creditors such as employees will not be modified.

In the main the proposals are quite reasonable and long overdue.  Proposals are one thing, the legislation is the key.  The exposure draft of the Bill can’t come quickly enough.

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