Overnight, Treasurer Josh Frydenberg proposed significant changes to insolvency laws in an attempt to help small businesses recover from the COVID-19 crisis. The reform comes as a substantial number of businesses are due to lose access to the Government’s $101 billion JobKeeper Scheme.

The changes to insolvency laws will in some way reflect the United States’ Chapter 11 Bankruptcy laws, allowing businesses with liabilities under $1 million to remain in control while dealing with their creditors.

A summary of the anticipated major changes to come into effect on 1 January 2021 are:

• Companies will need to engage a Small Business Restructuring Practitioner (“SBRP”);
• Businesses will be able to continue trading whilst developing a debt restructuring plan;
• Businesses will have twenty (20) business days to complete the debt restructuring plan. However, before the plan can be put to creditors, all employee entitlements must be paid and all outstanding tax returns must be lodged;
• Upon the debt restructuring plan being finalised, creditors have fifteen (15) business days to vote on the proposed plan and remuneration of the SBRP; and
• In order for the plan to take effect, more than fifty percent (50%) of creditors by value need to vote in favour, noting that related creditors are prohibited from voting. Should creditors not vote in favour of the debt restructuring plan, the company will automatically go into voluntary administration or a new simplified liquidation process.

However, what is not clear is:

• Who will be able to act as a SBRP other than registered liquidators;
• Whether this will encourage directors to accumulate further debt and see an increase in illegal phoenix activity, despite the various intended safeguards;
• Whether there will be sufficient assets to support this process considering that the majority of small businesses have limited assets and the proposed reduced circumstances in which a liquidator can pursue an unfair preference claim; or
• If these measures are simply delaying the inevitable?
• The Treasurer has stated that by introducing the new insolvency laws, it allows for a simpler, quicker and more cost-effective insolvency process for small businesses and is crucial in the recovery of our economy, however, it is evident that there are key issues which need to be addressed.

If you are experiencing difficulty, need advice about your business’s way out of the COVID-19 crisis, or would like to know more about how these changes might impact you, please contact us.