Insolvency Regulations 2021

Temporary debt relief measures ended on 1 January 2021

In March 2020, as part of the wider economic response to the COVID-19 pandemic the Australian Federal Government announced a series of changes to bankruptcy law under the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Omnibus Act) providing temporary insolvency protections to financially distressed businesses. The protections were further extended until 31 December 2020 which included:

  • an increase in the debt threshold before a creditor can issue a statutory demand for payment from $2,000 to $20,000
  • extend the time in which a debtor has to respond to a creditor’s demand for payment from 21 days to six months
  • extend the time in which unsecured creditors can make a claim in circumstances of voluntary administration from 21 days to six months
  • provide temporary relief for directors in relation to their duty to prevent insolvent trading.

As of 1 January 2021, these temporary changes have ceased, resulting in:

  • a decrease in the debt threshold before a creditor can issue a statutory demand for payment from $20,000 to $10,000
  • extend the time in which a debtor has to respond to a creditor’s demand for payment from 21 days to six months
  • reduce the amount of time an individual has to respond to a bankruptcy notice from 6 months to 21 days
  • reduce the temporary debt protection from 6 months for 21 days relief from creditors

The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) (Act)

On 24 September 2020, the Federal Government announced changes to Australia’s insolvency framework to better serve Australian small businesses, their creditors and their employees.  Following a period of consultation, the legislation to enact the reform was introduced to Parliament on 12 November 2020 and the Act commenced on 1 January 2021, following the conclusion of the above temporary insolvency laws.

The Federal Government anticipates that the Act will allow small businesses to avoid being wound up as a result of economic pressure from the coronavirus pandemic if they have an underlying viable business. To achieve this the Act delivers regulatory savings for impacted businesses and individuals through the following key changes:

  1. Debt restructuring process for eligible small companies to allow a less complex and less costly process to restructure existing debts and maximise the companies’ chances of survival. The process involves a small business restructuring practitioner (SBRP) consulting in an advisory role to assist the company directors to develop a plan to restructure their debts.

Is your company eligible?

A company is eligible to enter the restructuring process if the total liabilities of the company on the day that restructuring begins does not exceed $1 million. The board of the company must also have resolved that:

  • it has reasonable grounds for suspecting current, or a likelihood of future, insolvency; and
  • a SBRP should be appointed.

A company will be ineligible for Small Business Restructuring if:

  • the company has previously utilised Small Business Restructuring, or any of its current, and some former, directors have utilised Small Business Restructuring for another company of which they are a director within the period of 7 years preceding the desired appointment of a SBRP (this is designed to target illegal phoenixing and other high risk behaviours); or
  • it is currently subject to other forms of external administration or restructuring arrangements.

2. Temporary relief for companies seeking SBPR

The Act has considered that insolvency practitioners will require some time to familiarise themselves with all aspects of the SBR and has allowed for eligible companies to receive a temporary restructuring relief between 1 January 2021 and 31 March 2021, including a continued safe harbour in relation to directors’ duties to prevent insolvent trading given that they declare their intention to access the Small Business Restructuring process to their creditors, including through ASIC’s published notices website.

3. A new Liquidation process for eligible small companies which aims to simplify he liquidation process and reduce the high costs of liquidation. A company is eligible for this process if the total liabilities of the company on the day that restructuring begins does not exceed $1 million.

The main differences between the current liquidation process and new simplified process are:

  • Removing requirements to call creditors meetings and the ability to form committees of inspection
  • Reduced circumstances in which a liquidator can seek to clawback an unfair preference payment from a creditor that is not related to the company
  • Reduced obligations to convene meetings
  • Only requiring the liquidator to report to ASIC on potential misconduct where there are reasonable grounds to believe that misconduct has occurred
  • Simplifying the dividend proof of debt process

Key takeaways for small business:

  • Be aware of the eligibility requirements for SBR including the requirement that all employee entitlements are paid and all tax lodgements are up to date
  • Be aware of the continuing rights of the creditors
  • Bear in mind the outcome of a SBR may be rejected by creditors irrespective of the SBPR’s recommendations
  • Do not leave it till last minute to seek professional advice and remember that the requirement to act with due diligence and care has never changed throughout COVID-19

Key takeaways for creditors:

  • ensure your bookkeeping is up to date so that proper demand for payment can be made now that temporary relief measures have ended
  • understand your rights if a company you deal with appoints a SBRP and/or utilises the simplified liquidation process.

Artile written by Nina Hosseini of our Sydney Office.

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