The Australian Federal Government has recently announced reforms to the current insolvency regime. One of the proposed reforms is aimed at simplifying the restructuring process for eligible small businesses. It allows for the directors to trade on the business while the restructuring process is in hand, thus allowing for less disruption to the business and a better prospect of recovery.
It is expected that the simplified process will be available to eligible businesses from January 2021.
The requirements to access the simplified process as announced are as follows:
- A company must have less than $1 million in liabilities, although it is not clear at present whether the threshold includes related party liabilities;
- There must be no outstanding overdue employee entitlements including superannuation; and
- The company’s tax lodgements must be up to date.
An insolvent business would first engage an insolvency practitioner to assist with the process. This will involve the payment of a fixed up-front fee. The insolvency practitioner will work together with the directors to formulate a restructuring plan, which will include a proposal to creditors to settle their debts.
Once a plan is in place, the company will officially appoint the insolvency practitioner as the small business restructuring practitioner (SBRP). Once appointed:
- Creditors are prohibited from taking recovery action against the company. This includes unsecured and certain secured creditors;
- There can be no enforcement of personal guarantees against directors and their relatives; and
- There is a protection from agreements with a clause that allows a creditor to terminate contracts due to an insolvency event. Such clause is commonly known as the ipso facto.
The SBRP also has 20 business days from the official appointment to present the business’ restructuring plan, and the formulated proposal to the company’s creditors for a vote. Creditors will then have 15 business days to vote on the proposal. The proposal will be accepted if at least half of the business’ unrelated creditors in value vote for it.
If the plan is approved, the company continues trading and the SBRP will administer the plan in accordance to the terms of the plan or proposal.
If the plan is not approved, the process ends, and the company’s directors can decide whether to place the company into voluntary administration or liquidation. In this regard, the Federal Government has also proposed a simplified liquidation process. Please contact us if you wish to find out more about the simplified liquidation process
As mentioned before, the directors or owners of the business retain control of the business and are allowed to continue trading until a vote has been taken on a proposal. This is entirely different from the usual formal appointments where directors’ powers are suspended once an insolvency practitioner is appointed.
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One of the benefits of the reformed scheme is that it allows businesses with unmanageable debts, including tax debts, to settle those debts in a cost-effective manner. Tax debts generally can’t be compromised, apart from penalties and interest imposed. It also avoids the costs usually associated with other formal processes like voluntary administration and liquidation.
We have been assisting clients for years, outside of the formal insolvency regime, including settlement of mortgage shortfall debts, settlement of commercial lease debts, and negotiating payment arrangements with the ATO. This, coupled with our decades of experience as registered liquidators and members of ARITA provides us with the expertise to assist your business with a restructuring plan and any proposals to creditors.
Whilst the new regime does not come into effect until January 2021, there is no reason why your business should not start planning now to better prepare the business for a restructuring exercise. So, please get in touch with us on 1300 906 966 or send us an email at email@example.com to arrange a free confidential initial discussion.