Despite the various Government supports that have been implemented since March 2020, Covid-19 has had a devastating impact upon small businesses.

Now, more than ever, it is critically important for small businesses to have certainty and a lifeline to continue to operate through these difficult times, particularly when the current Covid-19 relief packages expire at the end of December 2020.

With this in mind, the Federal Parliament has introduced the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Bill), which, it is stated, is designed to increase efficiency with the following key aspects:

1. A formal debt restructuring process for eligible companies.
2. Extended temporary relief for eligible companies who declare their intention to undertake a formal debt restructuring process.
3. A simpler liquidation pathway for eligible companies in a creditors’ voluntary winding up.
4. Modifications to the requirements for registration as a liquidator.
5. Greater use of electronic documents and electronic signatures in an external administration.

The proposed formal debt restructuring process will have a fundamental impact upon insolvency laws as we currently know them.

The following is a brief summary of the proposed changes, how they can be implemented and the implementation process.

Please contact one of our specialist insolvency and restructuring lawyers to obtain further information about how this process may assist your business.

The Formal Debt Restructuring Process

The purpose of the formal debt restructuring process is to allow eligible companies to restructure their debt and maximise their chance to survive. It allows the company director to maintain control of the company and its affairs, whilst fostering a plan to restructure its debt with the assistance of a small business restructuring practitioner.

The company’s directors make the choice to begin the debt restructuring process. It cannot be forced on a company by creditors or third parties.

The key components of the formal debt restructuring proposal are as follows:

1. An independent practitioner will determine the company’s eligibility to access the restructuring process, develop the restructuring plan (with the director) and review the company’s financials. It is important to note that the restructuring plan only deals with debts the company incurred prior to entering the restructuring process.
2. The company has 20 business days to develop the restructuring plan and provide supporting documentation for creditor consideration. The independent practitioner certifies whether they consider the business capable of meeting the proposed repayments.
3. If the restructuring plan is rejected by creditors (or accepted but subsequently terminated), the current insolvency procedures will apply.
4. The practitioner will have reporting obligations to both the ASIC and creditors in relation to the company and its restructuring process.
5. A practitioner has the power to stop the restructuring process where misconduct is identified.
6. Interestingly, it is proposed that related creditors will be prohibited from voting on a restructuring plan.

Who will the new regime be available to:

For a company to access the formal debt restructuring regime:

1. The company must have liabilities less than $1 million.
2. The directors must have reasonable grounds for suspecting the company is insolvent, or likely to become insolvent in the future.
3. The same company or directors cannot use the process more than once within 7 years.

Who will the new regime not be available to:

The restructuring process is not available to businesses that are already under restructuring or administration, have executed a deed of company arrangement that has not yet terminated or where a liquidator (provisional or otherwise) has been appointed.

A company under the debt restructuring process must disclose on all public documents and negotiable instruments that it is under the restructuring process. The notice must remain for the duration of the restructure, failure to do so is an offence.

Commonly asked questions:

But what if my business cannot immediately access a business restructuring practitioner on 1 January 2021?

It will take time for practitioners to familiarise themselves with the process and to register as a small business restructuring practitioner. As a result, small businesses can declare an intention to access the simplified structuring process to its creditors. This can be done through ASIC’s published notices website and once the declaration is made, current temporary insolvency relief will apply.

This includes relief in relation to statutory demands from creditors, possessory security interests, and from insolvent trading liability. Court proceedings already commenced are stayed and cannot otherwise be initiated during the restructuring process without consent of the practitioner or with leave of the court. The ability to declare their intention to access the process is available to small businesses until 31 March 2021. Once a declaration is made the protections apply for a period of 3 months.

I am a creditor, are my rights protected?

The restructuring process will contain key protective measures to ensure creditors’ interests are represented and protected. They include:

1. There is no change to the current key rights of secured creditors.
2. Creditors retain the right to vote on the debtor company’s proposed restructuring plan, approval requires a majority of unrelated creditors by value for it to be binding. Creditors have 15 business days to vote on a plan.
3. The practitioner remains independent through the process and will have important obligations that must be fulfilled on behalf of the creditor.
4. If a majority of creditors vote against the restructuring plan, the process ends.

 Uncertainty remains, be prepared!

We remain in the thick of the Covid-19 pandemic, economic restructure and the steps to recovery are still uncertain. It is important for directors and businesses to ensure that they are obtaining appropriate legal advice and planning for the future.

If you have questions about the current government relief packages, or the proposed insolvency law reforms and how they may apply to you, please contact our office to discuss your options.  At Rose Litigation Lawyers, we have extensive experience in insolvency and restructuring. We work with experienced accountants and insolvency practitioners to achieve the remarkable outcomes for you and your business.