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As the Federal Government’s measures for temporary relief for financially distressed businesses expire on 31 December 2020, new insolvency procedures will come into effect on 1 January 2021.

The aim of these new procedures are to give small businesses a fighting chance. The new procedures will apply to companies with liabilities of less than $1 million.  The $1 million threshold covers about 76% of businesses.

The first procedure is a new restructuring process, which is a simplified version of the existing voluntary administration procedure.

The objective is to keep a business trading while a debt restructuring plan, which is ultimately voted on by creditors, is developed.

The proposal is considered to be a debtor-in-possession model, adopting some aspects of the US Chapter 11 bankruptcy process, rather than the creditor-in-possession model of the current voluntary administration procedure.

This process will involve a small business restructuring practitioner helping the business prepare the plan, certify the plan to creditors and oversee payments once the plan is in place.

A period of 20 business days is proposed to allow for development of the plan.

While the practitioner is engaged in the restructuring process, there would be a moratorium on unsecured and some secured creditors taking actions against the company.

Creditors will then have 15 business days to vote on the plan. Employee entitlements that are due and payable must be paid out in full before the plan is voted on by creditors.

There are also safeguards proposed to prevent corporate misconduct, including phoenix activity, with related creditors prohibited from voting on the restructure plan; and the same company or same directors not being able to use the insolvency process more than once every seven (7) years.

In the event the plan is not approved, the business can go into voluntary administration or enter a proposed new liquidation process with simplified obligations.

The new simplified liquidation process, which is also to be available to small businesses with less than $1 million in liabilities, aims to save time and money and thereby maximise the returns to creditors.

The proposed reforms for these simplified liquidations include:

  • reduced circumstances in which a Liquidator can seek to clawback unfair preferences, payments from unrelated creditors
  • only requiring the Liquidator to report to ASIC (under s. 533) on potential misconduct
  • removing requirements to call creditor meetings
  • simplifying the dividend process and the proof of debt process
  • maximising technology in voting and other communications
Dominic Cantone
Dominic Cantone Partner
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