The recently announced proposed insolvency reforms draw on key features from Chapter 11 of the Bankruptcy Code in the United States and aim to help more small businesses restructure and survive the economic impact of COVID-19.
The reforms will cover around 76% of businesses subject to insolvencies today, 98% of whom have less than 20 employees.
The reforms are to commence from 1 January 2021 (subject to the legislation passing), following the expiry of the temporary insolvency relief measures put in place by the Federal Government in March 2020.
The package of reforms features three key elements:
The ‘debtor in possession’ process will be available to incorporated businesses with liabilities of less than $1 million.
Under the process, it is proposed that a business can continue to trade in the ordinary course of business under the control of its owners, while a debt restructuring plan is developed over up to twenty business days (with the assistance of a small business restructuring practitioner). The plan is voted on by creditors within 15 business days (related creditors will be prohibited from voting). If more than 50% of creditors by value endorse the plan, it is approved and binds all unsecured creditors. Secured creditors are bound by the plan only to the extent of their debt which exceeds the realisable value of their security interest.
The small business restructuring practitioner will be involved in the process by:
To address any transitional issues as practitioners become familiar with the new process (including registering as small business restructuring practitioners), an eligible small business will be able to declare its intention to access the simplified restructuring process to its creditors. Following the declaration, the existing temporary insolvency relief (which otherwise expire at the end of December 2020) would then apply for a maximum period of three months, until the business is able to access a practitioner.
Figure 1 provides a visual overview of the proposed new restructuring process.
The simplified liquidation process will retain the general framework of the existing liquidation process, with modifications to reduce time and cost. The simplified process will be available to incorporated businesses with liabilities of less than $1 million.
Key modifications under the pathway include:
The rights of secured creditors and the statutory rules as to the payment of priority creditors such as employees will not be modified.
Creditors will also be entitled to convert the liquidation back to the ‘full’ process in certain circumstances and directors will not be entitled to use the ‘simplified’ process more than once within a prescribed period (proposed at seven years).
The Government is introducing a number of permanent and temporary measures to expand the availability of insolvency practitioners to deal with an expected increase in the number of businesses seeking to restructure or liquidate including:
The Federal Government also intends to engage in consultation on the appropriateness of permanently raising the minimum monetary threshold at which creditors can issue a statutory demand on a company.
We welcome the new process and its aim to better serve small businesses, creditors and employees. We will watch with interest how the process develops. Given the reforms are designed to assist small businesses to quickly and efficiently develop a restructuring plan to survive, buy-in from key stakeholders such as secured and unsecured creditors, suppliers and employees will be essential. As with any business facing solvency issues, early action to seek appropriate advice is important. We await with interest the draft legislation to give effect to the new process.
Scott Couper, Partner
Rachel Zagorskis, Associate
 The Hon Frydenberg MP and The Hon Michael Sukkar MP, ‘Insolvency reforms to support small businesses recovery’ (Joint Media Release, 24 September 2020).
 Australian Government, Fact Sheet: Insolvency reforms to support small business (24 September 2020).