13 Oct 2020
1 min read
13 Oct 2020
The Federal Government announced that it will introduce reforms to Insolvency Laws to assist small business, which will be effective from 1 January 2021.
The reform to the insolvency laws will allow small businesses to restructure or wind up faster. The proposed new laws will be available to incorporated businesses with liabilities under $1 million. For those small businesses experiencing financial difficulty this new process will be welcomed.
It is important for all businesses in this rapidly changing environment, especially those in the supply of goods, to ensure that:
If your fundamental agreements are not effective, you can be left out in the cold trying to recoup funds and have difficulty repossessing goods.
It is important that small businesses and suppliers understand the ramifications that these proposed laws have on debt recovery. It would be wise for them to review their documentation and processes to ensure that they are as comprehensive as possible.
Currently, there are existing COVID-19 temporary insolvency protections, which allowed companies to trade whilst insolvent. These protections will end on 31 December 2020. The new laws will help businesses in financial difficulty to deal quickly with creditors with faster and cheaper options.
A quick overview of the how the new process will work is below:
The proposed debt restructuring process has three key elements:
One of the key aspects of the proposed new laws is that unlike voluntary administration the directors will remain in control of the running of the business. Quite often they are the most skilled at the running the business and know the business best.
This “debtor in possession” model means that the owners are able to trade whilst the plan to restructure the debts of the business is being developed and voted on by creditors.
Many of the ideas for these proposed insolvency laws have been adopted from the US Chapter 11 Bankruptcy process.
Some of the areas that the Government has attempted to address and rectify in the current processes are:
The new process seeks to streamline the role and powers of the small business restructuring practitioner compared to Administrators in voluntary administration.
They will help determine if a company is eligible for assistance; support the company to develop a plan and review its financial affairs; certify the plan to creditors; and manage disbursements once the plan is in place.
The practitioner will be independent and have obligations they must fulfil on behalf of creditors.
Key creditor rights will be preserved and secured creditor rights and similar debts are treated the same.
Creditors have the right to vote on the company’s proposed plan and the plan must achieve the requisite majority to be binding.
For more information you can read the Government’s fact sheet.
It is important that businesses understand the new changing landscape and what this means for them in restructuring and recovering debts. Businesses are both creditors and debtors; it is important to ensure that you act quickly to protect your business by reviewing agreements, trading terms and conditions and PPSR registrations.
If you require further advice on any of the issues regarding small business debt restructuring or how to ensure your business is protected please contact us on 1300 907 335.
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