New restructuring reforms to ease economic pressure on small businesses

2020 has seen tens of thousands of jobs and companies on the brink of collapse. In response to a wave of insolvencies expected at the end of the year, the Federal Government has announced a new set of insolvency laws to help small businesses either restructure or fold. These reforms are reported as the most significant insolvency law reform in almost 30 years.

The proposed changes will see the introduction of a two-tiered system, where larger companies will remain subject to the existing insolvency regime, while smaller businesses will have access to a simpler more affordable system. This new system is the subject of the reform and is expected to grant small businesses more control over how they restructure their debts, in an attempt to avoid mass closures in the wake of major losses suffered during COVID-19.

The Government intends to simplify the liquidators' investigative process by drawing on key features of the American-style bankruptcy system. Based on the United States' Chapter 11 laws, small businesses with liabilities of less than $1 million are encouraged to stay in control while they renegotiate their debts with creditors. The features of the system are:

• A new formal debt restructuring process for small businesses to provide a faster and less complex mechanism for financially distressed but viable firms to restructure their existing debts, maximising the chance of them surviving and contributing to economic and jobs growth.
• A new, simplified liquidation pathway for small businesses to allow faster and lower-cost liquidation, increasing returns for creditors and employees.
• Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to the needs of small business.

Under the anticipated changes, an insolvent small business shall have 20 days to propose a restructuring plan which creditors will have 15 days to either accept or reject.

• If the plan is approved, the business continues and the practitioner administers the plan for making distributions to creditors according to the terms of the plan; and
• If voted down, the process ends and the company owners may opt to go into voluntary administration or another form of external administration.

The proposed reform has been illustrated in the following infographic published by Treasury:

The Federal Government has reported additional concern that there won't be enough insolvency practitioners to match the scope of business demand. To account for this, the Government has proposed incentives to commence from 1 January 2021 that would see waived registration fees and the introduction of a new class of insolvency practitioners known as a "small business restructuring practitioner". Mr Frydenberg has announced the qualifications required to register as a small business restructuring practitioner are to be in line with the streamlined requirements of the role, or alternatively Registered liquidators will also be able to manage the new process.

‍Key Takeaways

• The directors of a distressed company may appoint a small business restructuring practitioner, who confirms the company is eligible to access the restructuring process.
• A restructuring plan is developed by the company and sent to be either accepted or rejected by creditors.
• Incentive behind new proposal is to avoid having small businesses wound up as a result of economic pressure from the coronavirus pandemic if they have an underlying viable business.

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‍(Image Source: www.abc.net.au)