COVID-19: Proposed changes to insolvency laws to support small business recovery

Tuesday November 17, 2020

COVID-19: Proposed changes to insolvency laws to support small business recovery

On 22 March 2020, the Federal Government announced temporary regulatory measures to help financially distressed businesses get through the COVID-19 pandemic and come out the other side. On 7 September 2020 an extension to that relief was announced, set to expire on 31 December 2020. 

The Government also announced a proposal for major reforms to corporate insolvency laws for incorporated businesses, with liabilities of less than $1 million, which are facing financial distress. The proposed major reforms are to support small business recovery after the expiry of the temporary COVID-19 insolvency law relief at the end of this year.

The proposed changes draw on aspects from the Bankruptcy Code in the United States and embody a significant shift from the current creditor-in-possession regime to a more debtor-in-possession system.  These changes are designed to give necessary flexibility to distressed businesses for an orderly restructure or winding down of their operations.

Proposed reforms

The three key elements of the new proposed scheme are:

1.   Small business restructuring

A new ‘formal debt restructuring process’ for eligible incorporated small businesses.  This will allow a faster and less complex process for the restructure of existing debts in order maximise the businesses’ chance of survival.

Moving from a a rigid one-size-fits all “creditor in possession” model to a more adaptable and flexible “debtor in possession” model will allow those eligible small businesses to stay in control of their business whilst restructuring their existing debts.

The scheme allows a rapid 20 business day period for the development of a restructuring plan by a small business restructuring practitioner, followed by 15 business days for creditors to vote on the plan.

2.   Small business liquidation

A new ‘simplified liquidation pathway’ for eligible incorporated small businesses with liabilities of less than $1 million, to allow for a faster and lower cost liquidation process.

3.   Further measures

Further measures will ensure that the restructuring and insolvency sector can respond to the measures in the proposal and the needs of small businesses.

Additional key elements of the reform include

  • the temporary waiving of fees for registered liquidators until 30 June 2022;
  • establishing the Small Business Restructuring Practitioner category for professionals whose practice will be limited to only this new regime; and
  • flexibility in the registration of insolvency practitioners.

The measures are set to commence on 1 January 2021, however there is scope for early access in some circumstances. There are many details that will need to be worked out over the next few weeks.

For more information please contact Matthew Hicks, Director & Principal Lawyer, Accredited Specialist - Commercial Litigation, on 03 9629 7411.

This article was written by Charlotte Brancatisano, Trainee Lawyer