Government’s small business insolvency reforms

In late September, the government announced potential changes to Australia’s insolvency framework and subsequent amendments to the Corporations Act 2001.

Now the legislation has passed, the measures will come into effect on 1 January 2021 – the day after temporary relief measures put in place due to COVID-19 coming to an end.

For Australian small businesses facing financial hardship, the reforms could present a viable lifeline. If the business can’t be saved, the reforms promise to make the liquidation process faster and easier.  

Debt restructuring for businesses facing hardship

One of the potential reforms is the introduction of a Streamlined Debt Restructuring Process (Streamlined DRP).

Directors of an eligible struggling business would be able to appoint a small business restructuring practitioner (SBRP, which can be a registered liquidator) to assist with restructuring the company’s debts.

According to the draft bill, to be eligible your business must:

• be incorporated with less than $1 million in liabilities
• not be under restructuring or administration
• not have an executed deed of company arrangement
• not already have a liquidator or administrator appointed

The business would be ineligible if the director (or any former director within the past 12 months) was the director of another company that has been through restructuring or liquidation.

If your business is eligible, the Streamlined DRP process would generally follow these steps:

1. Directors agree the company is insolvent or may soon be insolvent
2. Board meeting to confirm the appointment of an SBRP
3. Work with the SBRP to prepare a restructuring plan within 20 days
4. Pay all employee entitlements
5. Propose the restructuring plan to creditors
6. Creditors have 15 days to vote to approve or disapprove the plan

If the plan is approved, the directors remain in control of the business and can continue trading. However, they must be very transparent with the SBRP and make the company’s books openly available to them.

Once the restructuring plan is in place, the business will be afforded some protections provided it complies with certain rules. There are exceptions to this though, such as where the business is heavily indebted to a secured creditor.

If the creditors don’t approve the restructuring plan, directors may consider other options including voluntary liquidation.

Liquidation for businesses beyond repair

If a small business cannot be revived with a Streamlined DRP or other potential recovery options, it may be eligible for the proposed new “simplified liquidation process”.

This only applies if the directors choose to enter voluntary liquidation, but it does aim to make the process faster and cheaper – ultimately allowing more funds to be returned to creditors and employees.

Businesses that are eligible for the simplified liquidation process (with liabilities less than $1 million) should follow the normal process by appointing a registered liquidator. The liquidator will then be able to confirm if the business is eligible, and therefore exempt from certain reporting requirements and other aspects of the current liquidation process.

Don’t leave it to the last minute

At face value, it seems the proposed legislative changes could offer distressed businesses a second chance while creating an easier pathway for directors of an unsalvageable business to close the door on a difficult chapter and start afresh.

Whatever the outcome, it’s important for directors to remember that the requirement to act with due diligence and care has never changed throughout COVID-19.

If your business is struggling financially, get trusted advice from a third-party early on. Our insolvency experts are on standby to assist you in making confident and informed decisions about the future of your business and can help you determine whether it is eligible for a Streamlined DRP or simplified liquidation process if they come into effect in 2021.

HOW CAN RSM HELP?

To book a free initial consultation, simply contact your local RSM office today.