From 1 January 2021 new insolvency regimes will be introduced which will involve:
- a new insolvency process for small businesses whereby financially distressed but viable companies can restructure their existing debts and continue to trade; and
- a simplified liquidation process which will allow for faster and lower-cost liquidation.
The changes will impact incorporated businesses (i.e. Pty Ltd entities) with liabilities of less than $1 million and will enable a company to continue to trade under the control of its directors while a debt restructuring plan is developed and voted on by creditors.
Summarising the information set out in the Factsheet issued by the Treasury, the new process will involve the following:
- a company will appoint an insolvency practitioner as its 'small business restructuring practitioner';
- once appointed, unsecured and some secured creditors will be prohibited from taking actions against the company, and any personal guarantee/s cannot be enforced against either a director, or one of their relatives (i.e. a moratorium similar to the current situation involving voluntary administrations);
- the company and the 'small business restructuring practitioner' will work over a 20 business-day period to develop a plan to restructure the business's debts and provide supporting documents for creditor consideration. The plan will likely involve a proposal to pay $x in the dollar to unsecured creditors);
- during the 20 business-day period, the company will continue to trade;
- once a plan is developed, the 'small business restructuring practitioner' will circulate the plan and supporting documents to creditors for their approval;
- creditors will have 15 days to vote on the plan;
- if more than 50% of creditors by value endorse the plan, it will be approved and will bind all unsecured creditors;
- if approved, the business will continue to trade and the 'small business restructuring practitioner' will administer the plan;
- if the plan is not approved, the company may then be placed into liquidation or voluntary administration.
The above arrangement is in some ways similar to the Part X / PIA arrangements for individuals.
This is fundamentally different to the current situation involving companies, in which once a liquidator is appointed, the liquidator takes control of the company and the control is removed from the director.
The draft legislation has not yet been released and will need to be considered in more detail to advise on possible impacts to credit teams (including in particular, the impacts on secured creditors).
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.