Australia’s New Small Business Insolvency Laws

Disclaimer: This publication contains comments of a general nature only, and is provided as an information service.
                          It is not intended to be relied upon as, nor is it a substitute for specific professional advice.

 

On 1 January 2021, the largest reforms to Australia’s corporate insolvency laws in 30 years took effect, following the end of the temporary insolvency relief measures that protected financially distressed businesses during the worst of the COVID pandemic in 2020.

The changes, which were outlined in the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth), comprise the following key elements:

  1. A small business restructuring process under Part 5.3B of the Corporations Act 2001; and 
  2. A simplified liquidation pathway under Subdivision B to Part 5.5 Division 3 of the Corporations Act 2001 

Small Business Restructuring Process 

The new Part 5.3B of the Corporations Act creates a simplified voluntary administration process for Small and Medium-sized Enterprises (SMEs). 

The process involves the directors or board of an SME appointing a Small Business Restructuring Practitioner (“SBRP”) to oversee the restricting of the company’s affairs.

In order an SME to appoint an SBRP and undergo the restructuring process, it must satisfy the following eligibility criteria:

  1. The company must be insolvent or likely to be insolvent; 
  2. The total liabilities owed by the company must be less than $1mil, excluding related party creditors;
  3. The company or the director of the company has not previously used the process or the simplified liquidation process in the previous 7 years; and
  4. The company is not currently subject to other forms of external administration or restructuring arrangements.

Once the SBRP has been appointed, they have 20 business days to submit a restructuring proposal to the company’s creditors. 

Those creditors then have 15 more business days to accept or reject the proposal. Once accepted, the SBRP must manage the distribution of funds to creditors, and in the meantime, no action can be taken against the company or its directors until the restructuring plan is completed. 

The directors of the company remain in control of the “ordinary course of business” for the company during the process.

Simplified Liquidations

The new simplified liquidation process under Subdivision B to Part 5.5 Division 3 of the Corporations Act creates an alternative pathway for creditors of voluntarily wind up a company. Key features of this new liquidation process to note are:

  1. The process is only available to creditors’ voluntary wind-ups. It does not apply to members’ voluntary wind-ups or wind-ups ordered by the Courts.
  2. The company must have resolved to be wound up voluntarily;
  3. The directors must have given the liquidator a report about the company’s affairs and a declaration that the company will be eligible for the simplified liquidation process;
  4. The total liabilities of the company must not exceed the $1 million limit on liabilities; and
  5. The company’s tax lodgements are up to date.

For further information and advice on how to take advantage of the new small business insolvency laws, feel free to contact us.