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Insolvency reforms to support small business

Changes to insolvency laws have commenced from 1 January 2021, find out how this can help small businesses.

Changes to insolvency laws to assist small businesses commenced from 1 January 2021.

Small businesses with total liabilities of less than $1 million in financial distress considering restructuring or winding up can now access faster and less complex processes.

Options available include:

  • A new debt restructuring process to allow businesses to keep trading under control of its owners while a debt restructuring plan is developed, increasing a business’ chance of survival.
  • A new simplified liquidation process for small businesses to enable a faster and less costly liquidation.

It is important that any business owner in financial distress seek expert financial and legal advice as soon as possible to understand their options and associated consequences before making a formal decision.

Builders should also be aware of requirements to report on their financial affairs/liquidation to the relevant building authority in their State or Territory and should seek professional advice on the impact this may have on builder’s registration/license.

Simplified debt restructuring process

The new simplified debt restructuring process allows eligible small businesses to work with a Small Business Restructuring Practitioner (SBRP) to develop a debt restructuring plan to be put forward to their creditors. The plan sets out information on how the business will pay its outstanding debts.

Under the process:

  • Company directors remain in control while working together with a SBRP to develop a debt restructuring plan. They have 20 days to do this from when a SBRP is appointed.
  • The SBRP must certify the plan before it is proposed. During this time, secured creditors cannot enforce their interests against the company.
  • Creditors may choose to accept or reject the plan (they generally have 15 days to do this).
  • If a plan is accepted the business continues and the SBRP administers the plan by making distributions to creditors in accordance to the terms of the plan.
  • If a majority of creditors (by value of their debts) vote against the plan then it is taken to have lapsed and the directors may choose another insolvency process.

More information on the new debt restructuring process. The Australian Government has also published a fact sheet on the process.

Which businesses are eligible to access the new process?

To be eligible, companies must:

  • Be incorporated under the Corporations Act (registered with ASIC as a company).
  • Have total liabilities of less than $1 million. Liabilities exclude employee entitlements.
  • Not been under restructuring or been the subject of a simplified liquidation process within the preceding 7 years.
  • Not have a director or a former director (within the 12 months preceding the day on which the restructuring practitioner is appointed) who has been a director of another company that has been under restructuring or subject to a simplified liquidation process within the preceding 7 years.
  • Have paid out all employee entitlements that are payable and ensure all tax lodgements are up to date.

How is the process commenced?

Company directors must pass a resolution that the company is insolvent or is likely to become insolvent in the future and a SBRP needs to be appointed. A SBRP must be a Registered Liquidator. ASIC has a register of Registered Liquidators.

Small businesses should seek advice from their accountant about whether or not their businesses is insolvent.

Temporary relief before a Small Business Restructuring Practitioner is appointed

Temporary relief is available for company directors who want to enter into a debt restructuring plan but cannot find a practitioner in early 2021.

To qualify for the relief, company directors must declare their intention to access the restructuring process between 1 January and 31 March 2021. Once the declaration is made, the company is relieved of any liability relating to trading while insolvent for up to 3 months and a possible further month where the directors have taken all reasonable steps but a SBRP still cannot be found.

More information on temporary relief.

Simplified liquidation process

The new simplified liquidation process is a streamlined winding up for companies that have liabilities less than $1 million.

The usual winding up process has been modified to have less reporting and investigative requirements by the liquidator to reduce time and cost for businesses already in financial trouble. A liquidator that has been appointed to wind up a company may choose to adopt the simplified liquidation process if certain criteria are met.

The simplified liquidation process:

  • Reduces reporting and investigation requirements on the liquidator.
  • Allows meetings to be held virtually and information to be shared electronically.
  • Reduces steps for creditors to prove debts owed.
  • Reduces stages where creditors are paid any dividends.
  • Puts obligations on the liquidator to report alleged misconduct to ASIC.

More information on the simplified liquidation process.

What criteria must be met to access the new simplified liquidation process?

To be eligible, companies must:

  • Be in a creditors' voluntary winding up where the event that triggers the start of the winding up occurs on or after 1 January 2021.
  • Have total liabilities less than $1 million.
  • Be unable to pay its debts in full within 12 months.
  • Not have been under restructuring or been the subject of a simplified liquidation process within the preceding 7 years.
  • Not have a director or a former director (within the 12 months before the day the restructuring practitioner is appointed) who has been a director of another company that has been under restructuring or subject to a simplified liquidation process within the preceding 7 years.
  • Have given returns, notices, statements, applications and other documents required under tax laws; and
  • Less than 20 business days have passed since a liquidator was appointed in the creditors’ voluntary winding up.

How is the process commenced?

Once the liquidator is satisfied that all the criteria have been met, a notice must be given to all creditors explaining the simplified liquidation process. The liquidator has to do this at least 10 business days before adopting the streamlined process. Liquidators cannot adopt the process if 25% of creditors (by value of their debts) do not want the process followed.

Further support

All states and territories:

National Debt Helpline offer free independent and confidential financial advice on managing debts and dealing with creditors.

To find out more, contact HIA's Workplace Services team

Email us

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