In March and September 2020, we wrote about the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (COVID Act), which came into force on 25 March 2020 and has provided temporary relief to financially distressed individuals and businesses over the last nine months.
What will happen after 31 December 2020?
From 1 January 2021, the COVID Act measures will no longer apply and the usual pre-COVID-19 timeframes and thresholds will be reinstated, namely:
- there will no longer be relief to directors from personal liability for insolvent trading. However, other provisions, which introduced a 'safe harbour' from such liability in certain circumstances in 2017, remain;
- the minimum debt for creditor's statutory demands will return to $2,000;
- the minimum judgment debt for bankruptcy notices will return to $5,000; and
- debtors will again only have 21 days to respond to a creditor's statutory demand or bankruptcy notice.
New insolvency law provides additional options for struggling small businesses
The Federal Government recently announced new legislation, which includes some of the most significant changes to the insolvency space in three decades.
Subject to the new law passing, the new measures will commence on 1 January 2021.
The first change is the introduction of a simplified liquidation process, which aims to reduce the cost of liquidation for smaller businesses by reducing what the liquidator has to do, including:
- no reports to ASIC;
- no meetings of creditors;
- varied requirements as to preference payments; and
- ASIC or creditors cannot appoint or involve a reviewing/provisional liquidator.
To be eligible for simplified liquidation, a company must have total liabilities of less than $1 million.
Small business restructuring
The second change has been commonly described by lawyers and insolvency practitioners as the introduction of a debtor-in-possession model akin to US Chapter 11 Bankruptcy arrangements or Part IX Agreements under our Bankruptcy Act 1966 (Cth).
These descriptions reflect the nature of the changes, namely that they allow an eligible business, which is facing external administration, to restructure its existing debts while continuing to trade under the control of its directors.
The aim is for small businesses to put a plan in place to pay off their existing debts over time while continuing to operate as normal and avoiding liquidation.
To be eligible for this option, a company must:
- have total debts of less than $1 million;
- be up to date with all ATO lodgements;
- be up to date with payment of all employee entitlements; and
- not have had any of its directors or former directors previously involved with a Small Business Debt Restructuring (SBDR) process in the last 7 years.
The best way to describe and consider the SBDR process is by comparison to the traditional Voluntary Administration (VA) process as follows:
As to the proposal to pay creditors:
- it must be made within 20 business days of appointing the SBRP (can be extended by 10 days, if necessary);
- creditors must vote on it within 15 business days;
- more than 50% of creditors in value must agree to it before it can be passed. Creditors related to the company are ineligible to vote; and
- if approved, it binds all unsecured creditors of the company.
Temporary relief for directors
The third change is further temporary relief from personal liability for insolvent trading for directors of companies who seek to appoint a SBRP. Such relief is until 31 March 2021, but only applies in the following circumstances:
- the director has contacted a SBRP and given notice to ASIC of their intention to restructure; and
- the safe harbour period is 35 business days, but directors are only safe from personal liability for debts incurred by their insolvent company in the ordinary course of business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.