5 Things Small Business Needs to Know about the Insolvency Law Reform
Please note that this is general advice only and anyone with specific queries can contact us directly for further discussion.
There’s been a lot happening in the insolvency world since the start of COVID19, and this has really culminated in some big changes for small businesses that may be struggling.
A lot of businesses in Australia are operated through a company and what we are talking about here relates to businesses traded through companies.
It is important for company directors to understand that, in the usual course, if a company incurs a debt whilst it is insolvent, the company director may be personally liable for that debt. That means that if the company goes into liquidation, the liquidator can make a claim against the director personally for some of the company’s debts.
When we talk about a company being insolvent, we mean when it can’t pay its debts as and when they fall due.
Back in March, the Federal Government introduced some insolvency relief measures and as part of this, provided an amnesty of sorts against insolvent trading for directors of companies for a period of time. This basically meant that the personal liability mentioned above wouldn’t exist in certain circumstances.
These insolvency relief measures are due to finish at the end of the year and the Government is introducing some changes to the insolvency law that will come into being instead.
These changes include the introduction of a Small Business Restructuring Regime and a Simplified Liquidation Process.
Until now, directors of a distressed company could opt to deal with their insolvent company through a formal appointment by:-
Putting the Company in Voluntary Administration; or
Putting the Company into Liquidation.
In both of these options, a Registered Liquidator, (like the Partners at SMB) would then take control of the company and facilitate either a proposal for a Deed of Company Arrangement or the winding up of the company.
The Small Business Restructuring Process which will be introduced on 1 January 2021 will allow for directors to put a formal proposal to creditors whilst still remaining in control of the company, even though a Registered Liquidator will be appointed to facilitate the process.
It is understood that this will only be available for companies with total liabilities of less than $1M.
Creditors will need to approve the plan for it to be successful and 50% of the value of creditors voting will need to vote for the plan for it to succeed.
Related Party creditors will not be entitled to vote.
We understand that in order to be eligible, the company’s tax lodgements will need to be Up-to-date and that Employee Entitlements will need to be accounted for in full before the plan can be proposed.
As part of this law reform the government is also introducing a “simplified liquidation process”. Basically, the Government thinks that for many small businesses, the current liquidation process isn’t really appropriate, so from 1 January 2021 it will introduce a new streamlined version.
It is thought that this will be a liquidation-lite as it were and require less obligations on the liquidator which should lead it to being a less costly more streamlined process.
So what are the 5 things Small Business Needs to know about these reforms?
- They only apply to financially distressed businesses being run through companies. Not to Sole Traders or Partnerships – there are other options available to businesses operating outside of a company but that’s not what we are discussing in this piece.
- In order for the Small Business Restructuring Plan to be commenced, a Registered Liquidator will need to be appointed to facilitate the process.
- Tax lodgements will most likely need to be up to date before being able to enter into a Small Business Restructuring Plan and a Simplified Liquidation Process so companies should be looking to get their house in order now.
- The Small Business Restructuring Plan and Simplified Liquidation Process look likely to apply to companies that owe less than $1M to creditors
- The earlier financially distressed business owners consult with a qualified and regulated Restructuring Insolvency and Turnaround Professional, the more options may be available for dealing with the business into the future.
Check out this link for more details and to register for the SMB Small Business Insolvency Reform Webinar on 18 November.