Christian Gorman

Christian Gorman

Insolvency Reforms

Australian Small Businesses Provided a Lifeline

A large number of Australian small businesses are under financial stress due to the Coronavirus (‘COVID-19′) outbreak. Many businesses have significantly increased their level of debt in order to remain in business as strict government restrictions have limited the ability to trade.  

On 22 March 2020, the Government announced temporary measures to support businesses to get through the COVID-19 outbreak. On 7 September 2020 the Government announced a further extension of this relief to 31 December 2020. These measures have had a positive impact on allowing businesses to survive, with a 46 percent decrease in the number of companies that have gone into external administration over the period of March to July 2020 compared with the same period last year. However, as the temporary relief comes to an end on 31 December 2020 it will likely increase the number of companies being put into external administration at the start of 2021. 

The Government in conjunction with The Commonwealth Treasurer Josh Frydenberg’s announcement on 24 September released a “Insolvency Reforms to Support Small Business” (‘Proposed Scheme’) fact sheet which provides detailed information on the new insolvency reforms proposed. 

The Proposed Scheme is aimed at helping eligible small businesses successfully to get to the other side of the COVID-19 pandemic by providing distressed businesses with the necessary flexibility to either restructure or to wind down their operations in a systemized manner. The announcement is set to cover 76 percent of businesses subject to insolvencies today, 98 percent of whom have less than 20 employees. A new simplified restructuring process, drawing on key features of the US Chapter 11 bankruptcy laws are set to be introduced to Parliament for eligible small businesses so that they can restructure their debts and maximize their opportunity to survive. 

The process outlined below would come into force from 1 January 2021 and would be available to incorporated businesses with liabilities of less than $1 million.  

 Overview of the Proposed Scheme: 

  1. The director(s) of a distressed company appoint a small business restructuring practitioner.  
    (a) The practitioner confirms the company is eligible to access the restructuring process; 
    (b) Following a resolution of the board, the practitioner signs up as their restructuring  
    (c) On commencement, unsecured and some secured creditors are prohibited from taking  
          actions against the company.  
  2. The business owner has 20 days to develop a plan to restructure the business’s debts and provide supporting documents for creditors consideration. During this time the owners continue to control the business and can trade in the ordinary course of the business. During this time, the practitioner develops a remuneration proposal to cover their management of the business, which will operate as a percentage fee of disbursements made under the plan. 
  3. The plan, accompanying information are made available to creditors who have up to 15 business days to vote on the plan.  
  4. The company’s unsecured creditors vote on whether to support the plan proposed.  
    (a) If at least 50% of unsecured creditors vote to support the plan the business continues and the practitioner administers the plan by making distributions to creditors accordingly the terms of the plan. 
     (b) If less than 50% of unsecured creditors vote to support the plan the process ends and the company directors may opt to go into voluntary administration or to use the simplified liquidation pathway.  
  5. Potential Issues for Small Business Seeking Access to the Proposed Scheme 

A critical component of the proposed new process is being able to appoint a new class of insolvency practitioner. This person’s practice will be limited to the new Small Business Restructuring process only. Ensuring that there are enough new class of practitioners who are adequately qualified and trained by a professional body before January 1 2021 may present issues for those eligible businesses seeking to access the proposed scheme after the current temporarily relief measures expire on 31 December 2020. Although the Government has addressed this issue for eligible small businesses by allowing them to declare an intention to access the program (with a 3 month expiry limit), this may not be enough time to allow access to a qualified practitioner especially due to the expected influx of businesses that will seek access to the proposed scheme. 

Another critical component of the proposed scheme is that eligible small businesses need to have liabilities of less than $1 million dollars. It is presently unclear how such liabilities are to be calculated. 

The Proposed Scheme remains silent on what the definition of who may be a “related creditor” and whether the small business insolvency practitioner is tasked with determining who is related to the debtor company.  

As with any new policy announcement these sorts of issues should be identified and clearly addressed in the draft bill that is presented to Parliament.  The Government’s Proposed Scheme does aim to ensure eligible small businesses have a clear pathway to quickly restructure and survive the COVID-19 pandemic. The insolvency reforms announced by Mr. Frydenberg are part of the governments overall economic recovery plan to keep businesses in business and Australians in jobs. 

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