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A photo of three people reviewing paperwork with the caption 'New insolvency laws. Changes to help small business owners in financial distress'

Insolvency reforms in place for new year

On 1 January 2021, new insolvency reforms for Australian small businesses became law. The reforms include important measures to allow incorporated small businesses (companies) to work with a specialist Small Business Restructuring Practitioner (SBRP) to put together a plan to turn around their business, while also providing greater protections to those needing to exit their company.

The introduction of the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) (Insolvency Reform Act) follows the temporary measures introduced in March 2020 as part of the Australian Government’s response to the economic impact of the COVID-19 pandemic.

The temporary measures increased the threshold at which creditors could take action against a company for insolvency from $2,000 to $20,000 and increased the mandatory response time from 21 days to 6 months. Directors were also temporarily absolved from any personal liability for trading while insolvent during this period. These temporary measures concluded on 31 December 2020.

The new laws are designed to create greater flexibility for companies to either restructure their operations to survive, or liquidate their company in a more orderly and less costly way.

Features of the Insolvency Reform Act

The important features of the new laws are:

  • The introduction of a new formal debt restructuring process for eligible small companies which involves a SBRP working with company directors to restructure their debts and maximise their opportunity for survival. The SBRP is a new class of registered liquidator who can only undertake the debt-restructuring process.
  • A simplified liquidation process for companies with liabilities of less than $1 million that cannot be turned around, providing for more streamlined reporting, meeting and investigative requirements to reduce the time and cost of liquidation.
  • Possible eligibility for companies appointing a SBRP to access temporary restructuring relief until 31 March 2021, including continued protection (safe harbour provisions) in relation to directors' duties to prevent insolvent trading.

The Australian Securities and Investments Commission (ASIC) defines insolvency as “when a company or person can't pay debts when they are due”. There are several options available to an insolvent company or person, with the most common procedures for an insolvent company being liquidation, voluntary administration and receivership.

Are you eligible?

The new insolvency reforms apply to your small business if it:

  • is incorporated (a Pty Ltd company)
  • has liabilities of less than $1 million.

If your business structure is that of a sole trader or a partnership these reforms do not apply to your business as you are governed by the state industrial relations system.

The Australian Government estimates that the reforms will apply to more than three quarters (76 per cent) of businesses that experience insolvencies, almost all of which are small businesses with fewer than 20 employees.

New debt restructuring process

The changes to the debt restructuring process will allow eligible companies to retain control of their business, property, and affairs while they develop a plan to restructure the company with the assistance of a SBRP. Importantly, the changes mean that insolvent companies can continue trading while restructuring debts within a 20 day timeframe.

During this time, creditors (including some secured creditors) will be unable to take action against the company and personal guarantees can’t be enforced against company directors.

Following the development of a restructuring plan for the distressed company, the SBRP will submit it to creditors who have 15 days to vote on whether to accept the plan. If more than half the creditors accept the plan, it can be implemented. If more than half the creditors vote against the plan, the company can enter voluntary administration or liquidation using existing processes.

If the plan is approved, the SBRP will continue to work with the business to administer the plan.

To access the new debt restructuring measures, companies will be required to make a declaration that they are eligible to access the new process and publish it on ASIC’s Published Notices Website and provide a copy of the declaration to ASIC.

Safeguards in place

Safeguards in place to prevent the new laws from being misused include:

  • employee entitlements are to be paid out in full before the restructuring plan is voted on
  • creditors related to directors may not vote on restructuring plans, to protect against illegal phoenixing activity
  • a director or company will only be able to use the small business insolvency process once every seven years.

Eligibility criteria apply to companies to access the provisions. Consider seeking advice from your accountant or lawyer about the new debt restructuring process and whether it could help you.

Simplified liquidation process

The second main element of the new laws is access to a simplified liquidation process for companies that cannot be saved and have liabilities under $1 million. The simplified liquidation process is only available in a creditor’s voluntary liquidation of a company and if its tax lodgements are up to date, among other eligibility criteria. In addition, the event that triggers the start of the winding up must occur on or after 1 January 2021.

Temporary restructuring relief

The temporary restructuring relief provisions introduced in response to COVID-19 extends the following measures to eligible companies that have declared their eligibility for the relief and published a notice on ASIC’s website:

  • an increase in the amount that must be owed to a creditor from $2,000 to $20,000, before the creditor can issue a statutory demand for payment
  • an increase in the time a company has to respond to a statutory demand from 21 days to 6 months
  • providing a company director with temporary protection from personal liability for insolvent trading for debts incurred in the ordinary course of business before the appointment of an administrator or liquidator during the period of safe harbour protection.

The temporary restructuring relief, which must be applied for before 31 March 2021, lasts for an initial period of three months after a declaration is made and notice of the declaration is first published on ASIC’s Published Notices Website. It may be eligible for extension on application by the company.

More information

ASIC has published the following fact sheets on the new laws:

If you need general advice on how to turn your business around or deal with challenges, you can call our business advisers on 133 140.

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