Insolvency Reforms to Support Small Business – More Options for SMEs

On 23 September 2020, the Federal Treasurer announced proposed reforms to the Australian insolvency regime with an implementation date of 1 January 2021. This Bill has now been passed both Houses of Parliament, effective 10 December.

The proposed reforms provide business owners in financial distress a simplified way to manage their affairs which will give them more control to operate their business, as they work with an insolvency practitioner to restructure their business and business debts and develop a plan that will be acceptable to their creditors and trade out of the crisis.

The Federal Treasurer confirmed he wants to implement a process that is simple and that will allow viable businesses, impacted by the global pandemic and economic crisis, to restructure their business and to remain in control of their business as they design a plan to repay their creditors.

Initial information from Government fact sheets confirm the following:

Further regulations governing the legislation will be required. We expect them to be announced shortly. It is intended that a two-tiered approach will separate companies into two groups, those with creditors exceeding one million and those with creditors of less than one million. 

Those companies with creditors of less than one million would benefit from a simplified system that would allow the following mechanisms to operate.

• The Directors of the business would remain in control of their company and assets, rather than appointing a Voluntary Administrator or Liquidator to take over control.
• The Directors would then be afforded 20 business days to formulate a proposal to restructure their business. 
• The directors of a distressed company appoint a small business restructuring practitioner who confirms the company is eligible to access the restructuring process.
•  Together they develop a plan where the practitioner certifies their assessment of the company’s financial affairs. The restructured plan is then circulated to creditors who would have 15 days to consider it and vote on the plan.
• Approval requires more than 50% of creditors and if successful the plan commences with the practitioner appointed to oversee the plan.
• If the majority of creditors vote against the reorganisation plan, the directors may choose an alternative insolvency option.

In summary, the proposed reforms offer the opportunity to preserve the value of the business, allow for a restructured business that is viable to continue to operate under the control of the owners, assisted by an insolvency specialist and trade out of the crisis, with clear plan to repay the creditors.

In addition, if the process is followed appropriately, the directors will avoid the risk and potential personal liability of trading whilst insolvent. The creditors may receive more under this process than if the directors had placed the company into liquidation.

Hamilton Murphy are Insolvency & Restructuring Specialists with offices across Australia who understand small business and have a proven record of asking good questions, listening carefully to your clients so they can provide practical advice and options that are tailored to your unique circumstances.

We will continue to monitor the detail within the proposed reforms and provide updates as more information becomes available. 

Should you have any queries regarding the above information or any related matters, please do not hesitate to contact our team via our website Hamilton Murphy or send us an email at info@hamiltonmurphy.com.au.