Insolvency Landscape 2021 (and beyond?)

In the wake of COVID-19, as part of its economic recovery plan to keep businesses afloat, the federal government is making changes to the insolvency landscape in 2021.

These reforms draw on key features of insolvency legislation as found in the United States.  In short, they are an attempt to ensure distressed businesses have the flexibility to either restructure or to wind down their operations in an orderly manner.

As per the government’s recent press release on 24 September 2020, the key elements of the reforms include:

  • The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million;
  • Moving from a “creditor in possession” model to a “debtor in possession” model which will allow eligible small businesses to restructure their existing debts while remaining in control of their business;
  • A twenty business day period for the development of a restructuring plan by a small business restructuring practitioner, followed by fifteen business days for creditors to vote on the plan;
  • A new, simplified liquidation pathway for small businesses to allow faster and lower cost liquidation; and
  • Measures to ensure the insolvency sector can respond both in the short and long term to increased demand and to meet the needs of small business.

The federal government considers the reforms will cover around 76 per cent of businesses subject to insolvencies today, 98 per cent of whom who have less than 20 employees.

The new processes will be available for small businesses from 1 January 2021 and the commencement of these provisions coincides with the expiry of the current temporary insolvency measures (regarding the suspension of insolvent trading liability and modifications to creditor statutory demands for the payment of debts).  It is important that practitioners and business owners alike are familiar with the process and to consider how the reforms apply to them.

Will my rights as a creditor be affected?

If you are a creditor there are proposed safeguards to ensure your interests are protected.  Relevantly:

  1. Your rights are preserved.  For example, there are no changes to the rights of secured creditors, and similar types of debts are treated consistently;
  2. You retain the right to vote on the debtor company’s proposed plan and the plan must achieve the requisite majority to be binding;
  3. The role of the practitioner who administers the process remains independent and they have obligations they must fulfil on behalf of creditors.

There is still detail missing from the current proposal and some areas of significant concern. Most alarming for insolvency practitioners are that there will be reduced circumstances in which a liquidator can seek recovery of unfair preference payments from a creditor that is not related to the company. No further detail is provided in this regard.

We will monitor government’s proposal and provide further updates as they come to hand.

If you have any questions regarding the operation of the government’s proposal and how it affects you/your business, do not hesitate to contact us for further advice in that regard.

Article written by Anthony Cocolas of our Brisbane office.

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