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Small Business Insolvency Reforms 

Small Business Insolvency Reforms 

As discussed in our previous newsletter, Covid-19 has seen an unprecedented amount of Government stimulus and legislation.

This includes the new Small Business Insolvency Reforms which commenced from 1 January 2021 which have continued from the insolvent trading “Covid-19 Safe Harbour” provisions which ceased on 31 December 2020. These provisions provided company directors with temporary relief from the potential liability of insolvent trading.

These Small Business Insolvency Reforms are designed to help small business remain viable and, in the event they have to be wound up, provide a better return to creditors, while reducing the cost and burden of external administration.

External administration of a small business can be expensive and onerous. As a result, small business owners are often reluctant to consult a restructuring adviser.  This means when they finally engage in a restructuring adviser, it’s often too late and are left with the only option but to liquidate the company.

The Small business Insolvency Reforms aim to assist eligible small businesses to transition from the temporary relief of personal liability for insolvent trading to a formal debt restructure plan (discussed below) and/or a simplified liquidation process (beyond the scope of this article).

Eligibility:

  • Total liabilities must be less than $1,000,000 (including related party loans, but excluding employee entitlements)
  • The company or any director must not have used these restructuring or simplified liquidation rules within the last 7 years (for this company or any other company they are a director of)

Restructuring Practitioner (RP)

  • If a company is eligible for the Small Business Restructuring Process (SBR) the directors would resolve that the company is insolvent, or is likely to become insolvent, and that a RP (who is registered with ASIC) should be appointed.
  • The RP cannot be revoked or removed or changed by creditors
  • The RP will advise the company, assist in the preparation of the restructuring plan, make a declaration to creditors, will NOT deal with day to day trading, but will have to authorise transactions that are outside the day to day trading (eg. sale of business or payment of a dividend).
  • Once the RP is appointed, creditors cannot begin, continue or enforce claims against the company and cannot enforce personal guarantees (during the “proposal period”)
  • Once the RP is appointed the company has 20 days to prepare their restructuring plan and send it to creditors (this is the “proposal period”). This period can be extended by up to 10 days.
  • The restructuring plan must identify the company debts and property to be dealt with under the plan, include a declaration by the RP (that the company will meet its obligations under the plan as and when they become due and payable), must last less than 3 years and treat all creditors equally
  • The creditors then have 15 days to advise the RP of their acceptance (this is the “acceptance period”). The plan is accepted at the end of the acceptance period if a majority of creditors, in value, agree.

When does the Restructuring Process end?

  • If the restructuring plan is accepted by creditors
  • If the directors resolve to end it
  • If the RP does not believe the company is eligible
  • If the RP believes it is in the best interest of creditors
  • If the company fails to prepare a restructuring plan
  • If the creditors vote against the plan
  • If an administrator or liquidator is appointed

When does the Restructuring Plan end?

  • If the company pays all the debts under the plan
  • If a specified event does not occur with a specified period
  • If there is a contravention of the plan that is not rectified within 30 business days
  • If an administrator or liquidator is appointed

If you are in any doubt about the viability and solvency of your company, please contact us ASAP.  Leaving it too late may result in the restructuring plan option not being available for your company.

Correct as of 26 February 2021

DISCLAIMER

THIS NEWSLETTER HAS BEEN PRODUCED BY KRESTON STANLEY WILLIAMSON AS A SERVICE TO ITS CLIENTS AND ASSOCIATES. THE INFORMATION CONTAINED IN THE NEWSLETTER IS OF GENERAL COMMENT ONLY AND IS NOT INTENDED TO BE ADVICE ON ANY PARTICULAR MATTER. BEFORE ACTING ON ANY AREAS CONTAINED IN THIS NEWSLETTER, IT IS IMPERATIVE YOU SEEK SPECIFIC ADVICE RELATING TO YOUR PARTICULAR CIRCUMSTANCES.

LIABILITY LIMITED BY A SCHEME APPROVED UNDER PROFESSIONAL STANDARDS LEGISLATION.

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