Important changes to Australia’s insolvency laws commenced on 1 January 2021. The Assistant Treasurer has said that they are the most important changes to Australia’s insolvency framework in 30 years.
The changes introduce a new, simplified debt restructuring process for eligible small businesses. The process allows financially distressed small businesses to access a single, streamlined process to restructure their debts, while allowing the owners to remain in control of their business. According to a Treasury fact sheet, this will support more small businesses to survive, meaning better outcomes for businesses, creditors, employees and the economy.
Link to fact sheet
Simplified debt restructuring process
To be eligible to access this new process, your company must:
- be incorporated under the Corporations Act (so the new rules do not apply to partnerships and sole traders);
- have total liabilities (excluding employee entitlements) that do not exceed $1 million on the day the company enters the process;
- resolve that it is insolvent or likely to become insolvent at some future time and that a small business restructuring practitioner should be appointed; and
- appoint a small business restructuring practitioner to oversee the restructuring process, including working with you to develop your debt restructuring plan.
A list of restructuring practitioners that can undertake this work is available on ASIC’s website.
The debt restructuring plan
The debt restructuring plan sets out how a company’s creditors are to be repaid. For example, the plan could specify how creditors will be repaid as a proportion of the debt owing to them, or what “cents in the dollar” they will receive.
The company must put the debt restructuring plan to its creditors for a vote within 20 business days of entering the process (an extension of up to 10 business days may be allowed if reasonable). Once the plan is put to creditors, they have 15 business days to vote to accept or reject the plan.
A plan is accepted if more than 50% of the creditors by value that vote, vote to accept the plan. Once a plan is made, payments must be disbursed to a company’s creditors in accordance with the terms set out in the plan.
All admissible debts and claims rank equally upon repayment of the plan. That means that all creditors are paid the same “cents in the dollar” and all are paid at the same time.
If the restructuring plan is not accepted, the restructuring process ends.
Giving you time
The Government recognises you may need some time to find a small business restructuring practitioner and has therefore extended the temporary insolvency relief (including relief from liability for trading while insolvent) for up to 3 months.
To access this relief, you can declare your intention to access the restructuring process by publishing the declaration on the published notices website from 1 January 2021. Your company’s period of temporary restructuring relief begins on the day the declaration is published.
You also need to notify ASIC within 5 business days that you’ve made this declaration. The appropriate form is available on the ASIC website.
Staying in control
Once your company enters the restructuring process, it remains in control of the process and may undertake transactions that are in the ordinary course of business.
Ref: TaxWise Business News February 2021