The Federal Government recently announced its intention to overhaul Australia’s insolvency laws in relation to small businesses. The intention is to reduce time and cost and better serve businesses, creditors and employees to survive in difficult times, but what is expected to be implemented and what should businesses or creditors do to prepare?
As with much of the recent COVID response legislation, the plans have been announced to the public by Treasurer Josh Frydenberg, though we shall have to wait for the draft legislation to be released to see the finer details.
The treasury has released a paper which allows some insight into the new measures including changes to debt restructuring and liquidation for certain small businesses.
Debt Restructuring for Small Business
Incorporated businesses (unfortunately sole traders are excluded) with liabilities of less than $1 million dollars may be eligible for the proposed new debt restructuring model.
The goal of the model is to allow businesses to continue to trade under the control of its existing owners / directors, as opposed to having creditors appoint an outside party to take control of the business away from the owners.
External oversight would still be provided by two distinct parties or groups. The business owner must work with an independent small business structuring practitioner to determine if the business is eligible for the model, to develop a debt restructuring plan, to identify creditors and to then present the debt restructuring plan to the creditors.
It is important to note as JobKeeper winds down that the plan cannot be brought to creditors until such time as all employee entitlements that are due have been paid.
Businesses experiencing hardship that are considering engaging with the proposed process should therefore be mindful when juggling liabilities to keep up with employee payments to ensure eligibility.
Once the debt restructure plan has been prepared and brought to the creditors, the creditors then have the right to vote on the proposed debt restructure plan, where a majority of creditors must agree before the plan can be implemented.
Simplified small business liquidation processes.
Where the creditors do not approve the plan, the business may elect to proceed with a new simplified, less costly liquidation process.
The treasury paper notes that the rights of secured creditors and the existing order of priority for creditors shall be retained under the new proposals. While the details shall become clearer once the draft legislation is released, now may be a crucial time for any person loaning or considering loaning money to ensure that any debts are secured and perfected.
When are the new processes expected to be available?
It is anticipated that the new model shall commence following expiry of the current temporary insolvency protections expire on 31 December 2020, however not all businesses will be able to commence the process immediately on New Years Day 2021.
To allow for the adjustment to the new processes and introduction of small business structuring practitioners, small businesses will need to declare an intention to access the model on the ASIC website, which shall afford the business up to 3 months of temporary insolvency Hrelief.
If you need insolvency advice to help keep your business afloat, or to protect money that you are owed, contact Baker Love Lawyers.