Insolvency Reforms to Support Small Business

On 24 September 2020, the Government announced a simplified insolvency processes to reduce complexity, time and costs for small businesses who need to quickly restructure and survive the economic impact of COVID-19.  Where restructure is not possible, businesses will be able to wind up faster, enabling greater returns for creditors and employees.

How the reforms came about

In March 2020, temporary measures were introduced to support businesses to get through the Coronavirus outbreak including relief from insolvent trading and changes to creditor statutory demand amounts and response timeframes.  This saw a 46% decrease in external administrations to July 2020, compared with the same period in 2019.

The temporary relief expires on 31 December 2020 so the number of companies being put into external administration is expected to increase significantly.  This will put stress on the insolvency system which is already facing a number of challenges:

  • An increase in the number of businesses in financial distress because of COVID-19.
  • A ‘one-size-fits-all’ system with the same duties and obligations, regardless of size and complexity of the administration.
  • Cost and time barriers that prevent distressed small businesses from engaging with the insolvency system early, reducing their opportunity to restructure and survive.

The system as it stands does not work for small businesses – Australia Small Business and Family Enterprise Ombudsman, Insolvency Inquiry Report, July 2020

What are the reforms?

There are two new processes proposed and both can be accessed by incorporated businesses with liabilities of less than $1 million:

  1. Simplified Restructuring Process
  2. Simplified Liquidation Pathway

The Government is also looking at measures to expand the availability of insolvency practitioners to deal with the expected increase in the number of businesses seeking to restructure or liquidate.

Simplified Restructuring Process overview

This is where a business can keep trading under the control of its owners while a debt restructuring plan is developed and voted on by creditors.

Business owners will work with a Small Business Restructuring Practitioner to confirm eligibility, review the business affairs, support to develop a plan, certify the plan to creditors and manage disbursements once the plan is in place.

The new process is expected to take around 35 days to have a successful plan approved by creditors and it will be available from 1 January 2021 after the existing temporary insolvency protections expire.

Safeguards to prevent corporate misconduct include related creditors being prohibited from voting on a restructuring plan, a bar on the same company or directors using the process more than once within a prescribed period (proposed at 7 years) and a power for a practitioner to stop the process where misconduct is identified.

Simplified Liquidation Pathway overview

The liquidation process will be simplified and aligned to the size, complexity, and risk profile of eligible small businesses, which should reduce time and cost.

What is the same? As currently occurs, the small business appoints a liquidator who will take control of the company and realise the company’s assets for distribution to creditors. The liquidator will still investigate and report to creditors about the company’s affairs and inquire into the failure of the company.  The rights of secured creditors and priority creditors such as employees will also not be modified.

What is different? Key modifications are mainly to reduce time and costs and include changes to unfair preference payment claims, variations to misconduct reporting to ASIC, reduced creditor meeting and committee of inspection requirements, simplified dividend and proof of debt processes and maximising technology neutrality.

Safeguards to prevent corporate misconduct include allowing creditors to convert the liquidation back to a ‘full’ process, a bar on directors using the process more than once within a prescribed period (proposed at 7 years) and a directors declaration that they believe the company is eligible and has not engaged in illegal phoenixing.

Angela Haynes KPMG

Angela Haynes is a restructuring specialist at KPMG Greater Western Sydney and can be reached on ahaynes1@kpmg.com.au or 0419 444 010 for further information about the insolvency reforms or to discuss restructuring your business.