The temporary insolvency relief measures that helped businesses stay afloat during the economic challenges brought on by COVID-19 in 2020 have now come to an end. However, new insolvency reforms rolled out on 1 January 2021 have reshaped the legal landscape for struggling businesses during the largest economic deficit since World War II. Attwood Marshall Lawyers Commercial Litigation Associate, Georgia Taylor, discusses what these reforms will mean for businesses facing insolvency.
There were no surprises in the predictions made last year by ABC News that 2021 could bring “tens of thousands” of corporations to an end as a result of the COVID-19 pandemic. The general consensus was that the economic stimulus schemes throughout 2020, and continuing into the new year, were simply putting off the inevitable.
As all Federal budgets are now bone dry and Australia has recorded its largest deficit since the end of World War II (soaring towards one trillion dollars), legislators have brought forward new provisions to assist companies through the inevitable downturn expected to come this year.
Prior to 1 January 2021, Australia had a ‘one size fits all’ insolvency regime. It didn’t matter if you were as big as retail clothing giant, Billabong, or a sole trader operating the local coffee stand, the insolvency legislation imposed the same duties and obligations upon all businesses when trying to access business restructuring or insolvency assistance.
This insolvency regime unfortunately stopped businesses from moving forward and successfully navigating their way through financial distress. The regime basically forced businesses to close their doors for good when they began to drown in debt, leaving creditors, employees and the business owner/s to face the consequences of the sudden foreclosure.
As of 1 January 2021, the largest insolvency reform in over 30 years has taken affect.
Made up in Part 5.3B of the Corporations Act 2001 (Cth) (the Act), the reform introduces a new way for eligible businesses to restructure quickly and inexpensively while leaving the control of the company in the hands of its directors. The amendment also sets out a simplified liquidation pathway for eligible small companies.
Small business restructuring
A small business is eligible to appoint a ‘Small Business Restructuring Practitioner’ (SBRP) if its board agrees that the business has reasonable grounds for insolvency and that the company’s liabilities are no more than $1 million as at the day of the commencement of the restructure. A company will be immediately ineligible to participate in the new scheme if the company had engaged a SBRP no less than seven years prior, or, if the company is currently subject to other forms of administration or restructure.
Australia has 633 registered liquidators who will be allowed to act as a SBRP. They must not be related to the company in which they have been appointed to oversee.
A SBRP will have the same and/or similar powers as an ordinary administrator would. That being, a SBRP may investigate the company’s business for the purpose of:
- preparing a certificate to certify the restructuring plan;
- deciding whether to terminate the restructuring of the company;
- resolving a disagreement relating to a creditor’s admissible debts or claims; or
- performing or exercising any other function, duty or power as the small business restructuring practitioner for the company.
The restructure process will allow a director to maintain ‘possession’ of the business and continue to trade while the director, with assistance from the SBRP, proposes its restructuring plan to creditors.
The company must present its plan to creditors within 20 business days, during this time being protected by a moratorium on security enforcement. This will inevitably help small business owners catch their breath, receive expert advice, and put forward the best possible plan to creditors, all whilst trading “in the ordinary course of business”.
In order to put forward a restructuring plan to creditors, the company must have first:
- Paid all employee entitlements (i.e. superannuation); and
- Have all tax lodgments up to date.
All creditors that are not related to the company, may vote within 15 business days to either accept or decline the restructuring plan. The plan is accepted when a majority in value of all creditors vote to accept the plan. If the plan fails, the directors of the company must then decide the next steps, keeping in mind their duties under the Corporations Act 2001 (Cth).
A simplified liquidation process
Unfortunately for some, the COVID-19 pandemic and flow on economic pressures will be too much to sustain their business. With little chance for survival and no further government support from the safe harbours for company directors, decisions must be made about the viability of the company and the business it runs.
Historically, liquidations have been arduous and expensive processes due to the extensive reporting and investigative obligations imposed by ASIC on its liquidators. These obligations have only served to cause the liquidators more work which in turn, costs more money for the company who needs the services. The Government’s new measures will mandate a less extensive regime for the following eligible companies that:
- have resolved to be wound up voluntarily;
- are insolvent;
- have total debts less than $1 million;
- have not been under a simplified liquidation process in the past 7 years;
- have directors (and former directors) that have not been involved in a simplified liquidation process in the past 7 years; and
- have all ATO lodgments up to date.
After a company has been placed into liquidation, the directors must give the chosen liquidator a declaration that the company is eligible for the simplified liquidation process. The onus then falls on the liquidator to make the necessary declarations and statements to both the creditors of the company, and ASIC, that the company will adopt the new procedure.
With creditors concerned about their monies owing, liquidators still have a duty to investigate and distribute, which will incur significantly lower costs when compared to the previous process. The below tasks are some of the key changes that have been made to the new simplified liquidation process:
- Providing a report to ASIC on offences is no longer required;
- No meetings of creditors;
- No committee of inspection;
- No option for creditors to appoint a reviewing liquidator;
- Proof of debt process simplified; and
- Reduction in claw back unfair preferences (capped sums).
All in all, this less onerous process is set to achieve two key goals:
- Reduce the workload on liquidators for the inevitable onslaught the economic downtown is predicted to bring;
- Reduce financial pressure on companies and directors when finances are tight.
It is the unavoidable nature of this health and economic crisis that will force many small businesses to fail. These measures are aimed to assist those under financial strain, to have a fighting chance to survive or to relieve some of the financial burden when it matters most.
Are you concerned about your business?
Our team have received a record number of enquiries in the new year from businesses now being issued with bankruptcy notices and statutory demands since the temporary relief measures expired. Creditors are taking full advantage of the ‘return to normal’ and pursuing debts once more. Our experienced Commercial Litigation team are geared up to help you on either side of the equation now that the restrictions have been lifted.
We take a tactical approach to assist businesses faced with these difficult matters. With a history spanning more than 7 decades assisting individuals and small to medium sized businesses since World War II, we have a deep understanding of the processes and ramifications associated with insolvent trading.
Conversely, in conjunction with insolvency practitioners who operate in line with our core values, our lawyers assist clients on the verge of liquidation or bankruptcy. Our Commercial Litigation team are driven to make the process as stress-free, affordable and as liberating as possible. If you have received a creditor’s statutory demand or a bankruptcy notice you should seek legal advice immediately.
Read more: How businesses can recover debts during COVID-19
Read more: Temporary relief has come to an end for businesses impacted by the economic effects of COVID-19
Read more: Are you facing bankruptcy or is your business facing liquidation? It doesn’t need to be a stressful process