Small Business Insolvency Reforms Update – Draft Legislation Released

Draft legislation for the Small Business Insolvency Reforms was released on 7 October 2020 – access it here:

Key takeaways

  • Submissions on the draft legislation due by 12 October 2020

  • Much of the key detail remains unknown – the draft legislation provides a framework for the reforms but key aspects will be subject to further legislation through regulations

  • A number of threshold issues suggests the New Debt Restructuring Pathway will not be accessible by many of the distressed small businesses it has been designed to assist

  • Some of the key issues with the New Debt Restructuring Pathway which remain to be resolved are:

    • Eligibility – what companies are actually eligible? What liabilities are included in the $1M

    • ATO – what impact a company’s ATO status actually has on eligibility

    • How the Debt Restructuring Pathway will intersect with the new streamlined liquidation process

    • The extent of limitations on voidable transactions

    • What secured creditors can and can’t do

We are reviewing the draft legislation and will provide further analysis and practical guidance soon

What you need to know

  • On 24 September 2020 the Federal Government announced reforms to insolvency laws targeting small business – see our earlier article here:

  • The proposed reforms have three aspects:

    • A new restructuring pathway for companies (not sole traders) with less than $1M in liabilities as an alternative to external administration where the company puts a restructure plan to its creditors under the supervision of a ‘Small Business Restructuring Practitioner’ (SBRP), but remains under the control of its directors.

    • A new, simplified liquidation process for companies with less than $1M in liabilities –  ‘liquidation lite’ – designed to significantly reduce the costs of liquidation and improve returns to creditors.

    • Introduction of a suite of measures aimed at improving efficiencies within small business liquidations and external administration, including greater use of technology, and some relaxation of the registration requirements for insolvency practitioners.

  • On 7 October 2020 Treasury released the draft legislation (Exposure Draft Bill).  The legislation provides a framework for the reforms with much of the detail left to regulations which are to follow.

  • We are working through the draft legislation and Exposure Draft Explanatory Materials.  On first blush, there are a number of key issues that remain either subject to regulations or to be resolved.

  • These issues will have a significant effect on which companies can access the new processes.

  • Directors, guarantors, shareholder and creditors need to get clarity on these issues and the  the new process as soon as possible.

  • There is limited time before the changes are intended to take effect

  • Further, the changes will intersect with the lifting of temporary relief in respect of insolvent trading and debt recovery and enforcement proceedings thresholds

What you need to do

Speak to an expert about how the reforms may impact you and/or how they can be used to your advantage.

Ask them about, the process and options, and:

  • Your company, its liabilities, any guarantees and personal asset exposure

  • Your debtor, the protection afforded by guarantees or security, and any steps to take to investigate this or strengthen it.

Keep monitoring our site as we will post practical guidance and more detail as it comes to hand

Published by Michael Chapman