Small Business Insolvency Reforms
On 1 January 2021, the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) (“the Act”) came into force following the conclusion of the temporary insolvency law relief measures implemented during the COVID-19 pandemic in March 2020.
These reforms establish a new regime for (eligible) small businesses with liabilities of less than $1 million.
They also include:
- restructuring relief for incorporated small businesses;
- simplified liquidation process for incorporated small businesses; and
- ‘class’ of registered liquidator who can only undertake the debt-restructuring process.
Eligibility Criteria
These reforms apply to your small business if it:
- is incorporated (structured as a company); and
- has liabilities of less than $1 million.
The board of the eligible company must have resolved that it has reasonable grounds for suspecting current, or a likelihood of future insolvency and that a Small Business Restructuring Practitioner (SBRP) should be appointed.
Unfortunately, these reforms do not apply to other business structures such as sole traders or partnerships.
Moreover, a company will be ineligible if they have previously utilised the scheme and/or if some directors have utilised the scheme in a different company within the period of 7 years.
Main Elements of the Act
- New formal debt restructuring process for eligible small companies. This has effect of implementing a faster and less complex process for small businesses to restructure existing debts to maximise their chances of survival; and
- New simplified liquidation pathway to allow eligible small companies a faster and lower cost liquidation process.
Creditor’s rights under the Act
While a company is under restructuring, property rights cannot be exercised by third parties unless the SBRP has provided written consent or leave is granted by the Court. This procedure is akin to voluntary administrations.
Any ongoing Court/enforcement proceedings will be stayed except with the abovementioned written consent of the SBRP.
Secured creditors will maintain the right to enforce their security interest if they act before or during the 13 business day decision period which begins when the secured party receives notice of the debt restructuring process.
Importantly, the Act states that debts incurred when a company is under restructuring are provable if the company is subsequently wound up.
Fact Sheet
The Australian Government has released a helpful fact sheet which provides an in-depth and detailed analysis of the changes which came into force on 1 January 2021.
Should you wish to explore your options under the new scheme or wish to understand your rights as a creditor, please do not hesitate to contact our office.