Insolvency law proposed changes

Over the past few months, we have sent out a number of alerts about the changes that the Federal Government has introduced in relation to insolvency laws in response to the COVID-19 pandemic. These changes provide temporary relief to businesses and directors by introducing a moratorium on insolvent trading provisions to allow businesses to try and stay afloat during the pandemic.

The Federal Government are also planning further changes to insolvency laws which are specifically aimed at helping small businesses get through the eventual cessation of the Federal Government’s JobKeeper program and are influenced by the US style “Chapter 11” bankruptcy legislation. If the proposed changes are introduced it will mean that eligible businesses will adopt a ‘debtor in possession’ model, permitting the current business owner to continue operating the business (limited to making day to day decisions) while creditors develop and vote on a debt restructuring plan. This will give business owners a huge amount of autonomy when compared to Australia’s current insolvency models.

Under the proposed changes, incorporated businesses with liabilities of less than $1 million will be eligible to access the new restructuring model. Larger companies will still be required to operate under the existing model. While many critics may consider this liability threshold to be too low to provide effective relief to small businesses, the Treasurer reported that during FY 2018-19, 76% of companies that filed for administration, receivership and liquidation had liabilities of $1 million or less.

The effect of the proposed changes will be that owners of eligible businesses could engage a small business restructuring practitioner to liaise as an intermediary between the business owner and relevant creditors. This will hopefully maximise efficient and adequate decision making when developing and implementing the restructuring plan. 

Over a 20-business day period, the business owner and restructuring practitioner will develop and certify the restructuring plan to be provided to the creditors. The creditors will then be given 15 business days to vote on the viability of the proposed plan. The vote will be value based and requires a 50% majority to be accepted. Where the plan is not accepted, the business owner will be able to opt into voluntary administration or a simplified liquidation process. 

During this process, the business will be protected from insolvency proceedings being commenced as the new process prohibits the following:

  • unsecured and some secured creditors from commencing proceedings against the company undergoing a restructuring plan;
  • the enforcement of a personal guarantee owed by a director of the business; and 
  • the enforcement of ipso facto clauses. 

With the implementation of these proposed changes, businesses that engage in this process will be able to:

  • continue to contribute to the economy under ordinary circumstances;
  • keep employees employed; and 
  • potentially provide creditors with an increased return on debts when compared to liquidation. 

To date, these proposed changes have not been adopted by the Federal Government. We will keep you updated on any further developments in this space.

In the meantime, if you have any questions regarding the above or require assistance please contact our Commercial Team on (02) 4927 2900.