Corporate Insolvency Reforms for Small Business

Mar 14, 2021

On 31 December 2020, the extension of the temporary relief measures introduced by the Federal Government on 22 March 2020 came to an end.

In their place, the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) (Act) and corresponding Regulations took effect on 1 January 2021. The Act provides for a debt restructuring process which will allow:

  • eligible small businesses to restructure current and future debts incurred in the ordinary course of business based on new restructuring and liquidation processes; and
  • directors to remain in control of the business throughout the restructuring process, subject to some restrictions.

An outline of the provisions

There are three core components to the new provisions:

Small business restructuring

This includes the introduction of a small business restructuring practitioner (SBRP), a new type of insolvency practitioner. The SBRP and directors are to work together to develop a restructuring plan which will bind the company, the SBRP and affected creditors. The Plan must be accepted by a majority of creditors If creditors do not accept a restructuring plan, the company will likely be placed into administration or liquidation. The transition into either of those regimes, however, is not automatic.

Simplified liquidation for small business

The creditors’ voluntary winding up is simplified by streamlining the steps under standard winding up procedures. The liquidator of a company may determine whether the simplified process should apply.

Other reforms

Other reforms include further simplification of the process, including allowing for insolvency related notices and documents to be given and signed electronically.

Who is eligible?

Only eligible small businesses can rely on the Act. The eligibility criteria to appoint a SBRP include:

  • a test for relevant liabilities of the company, which requires the company’s outstanding debts to creditors to be under $1 million at the time they seek to appoint a SBRP;
  • the requirement that a current or former director of the company has not been a director of another company that has been under restructuring or the subject of a simplified liquidation process within 7 years; and
  • a requirement that the company has not been under restructuring or been the subject of a simplified liquidation process within 7 years.

To appoint a SRBP, the company must call a meeting of the board and resolve that:

  1. in the opinion of the directors voting, the company is insolvent or likely to become insolvent in the future; and
  2. a SBRP should be appointed.

What next?

In light of these changes, it is important for all directors to consider the best option for their company in the event of financial distress or possible insolvency.

If you have any concerns or require advice on how to navigate all of the restructuring options, please contact Kalus Kenny Intelex Lawyers to discuss further.