Insolvency Update – 24 September 2020

The Australian Government has now announced reforms to the insolvency regime applying to small businesses – similar to those that apply in the US and in some respects, the UK.

Summary of Changes

The reforms introduce a “debtor in possession” model for companies with liabilities of less than $1 million.

The directors of the business, assisted by a small business restructuring practitioner (“SBRP”) (working for a low fixed fee), will have an option where they have twenty (20) business days to develop a restructuring plan; non-related creditors will then have fifteen (15) business days to vote on the plan (such vote being based on a majority in value) and if the creditors accept the plan, the SBRP will then administer the plan and be entitled to further remuneration. At all times, the directors will remain in control of the company.

This is purportedly intended to be a simplified, faster and lower cost pathway for small businesses to obtain debt relief and to keep trading.

Criticisms

• It is not clear as to when creditors will be notified that a proposed “business plan” is being developed. In the meantime, creditors may be unwittingly exposed to insolvency risk and a SBRP will not be liable for the debts;
• Eligibility will be restricted to those businesses whom have paid up any and all employee entitlements which are due and payable. They will also need to have lodged all tax returns. In practice, this will mean that most small businesses will not be eligible;
• If the small business is advised that they are not eligible or cannot satisfy the eligibility test, they are likely to simply keep on trading – continuing to put creditors at risk;
• It is often difficult to determine the exact liabilities of a distressed business. As it stands there is minimal guidance as to exactly how the $1 million liability threshold will be calculated.

For these reasons and more, the industry is awaiting “the finer details”. Gavin Parsons and Associates will dispatch an updated article at that time.

Contact us

Are you interested in how these reforms might affect your situation? Contact Gavin Parsons and Associates on (02) 9262 4471 for a free no-obligation consultation today.