Emerging from COVID-19: Key insolvency reforms to commence in 2021 for small businesses

On 10 December 2020, the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) passed both houses of parliament (Insolvency Reform Act). The substantive provisions of the Bill commence from 1 January 2021, coinciding with the end of the current temporary insolvency protections which were put in place by the federal parliament in March 2020 to protect businesses facing financial distress caused by COVID-19.

Insolvency protections expiring on 31 December 2020

In March 2020, the federal government introduced the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Omnibus Act) providing temporary insolvency protections to financially distressed businesses. The protections were further extended until 31 December 2020,^[1] to reduce the threat of actions that could unnecessarily push these businesses into external administration.^[2]

The Omnibus Act made amendments to the Corporations Act 2001 to:

• increase the debt owing before a creditor can issue a statutory demand for payment from $2,000 to $20,000
• extend the time in which a debtor has to respond to a creditor’s demand for payment from 21 days to six months
• extend the time in which unsecured creditors can make a claim in circumstances of voluntary administration from 21 days to six months
• provide temporary relief for directors in relation to the duty to prevent insolvent trading.

New insolvency protections in place from January 2021

Insolvency reforms under the new Insolvency Reform Act commence on 1 January 2021. 

The Insolvency Reform Act recognises that, as a consequence of COVID-19, there is a need for an efficient external administration process that allows small businesses to remain viable, and where that is not possible, for a process that encourages a better deal for creditors and employees.^[3] The federal government anticipates the reforms will deliver significant regulatory savings for impacted businesses and individuals.^[4]

Key features of the insolvency reform package in the Insolvency Reform Act include:

• a new formal debt restructuring process for eligible small businesses – intended to reduce complexity and cost of administration and enable directors to remain in control of the business and its property to avoid being wound up. The new process involves a small business restructuring practitioner (SBRP) consulting in an advisory role to assist the company directors to develop an appropriate debt restructuring plan
• temporary relief for companies entering the new formal debt restructuring process –where the company has resolved that a SBRP should be appointed, it may become eligible for temporary restructuring relief between 1 January 2021 and 31 March 2021, including a continued safe harbour in relation to directors’ duties to prevent insolvent trading
• a new simplified liquidation process for companies with liabilities of less than $1 million that cannot be saved – the new process supplements the ‘one-size-fits-all’ liquidation regime where more appropriate pathways exist for less complex, smaller insolvencies. The new process provides for more streamlined reporting, meeting and investigative requirements to reduce time and cost.

Key takeaways

Now is the time for businesses to prepare for 2021 and understand how the new Insolvency Reform Act provisions may apply to your business.

For creditors, we recommend that you:

• assess the debts owing to you as at 1 January 2021 (including cumulative debts as at that date)
• ensure your bookkeeping is up to date so that proper demand for payment can be made from 1 January 2021
• understand your rights if a company you deal with appoints a SBRP and/or utilises the simplified liquidation process.

For debtors, we recommend that you:

• assess the debts owed by you as at 1 January 2021 (including cumulative debts as at that date)
• consider whether the new Insolvency Reform Act provisions may be of benefit to your business, including whether you are eligible to appoint a SBRP to administer the restructuring of a small business and/or receive temporary insolvency relief.

If you need any assistance, Holding Redlich can help navigate you and your business through these new changes.

^[1] Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 (Cth).
^[2] Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 (Cth) Explanatory Statement.
^[3] Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) Explanatory Memorandum.
^[4] Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) Explanatory Memorandum.

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Marguerite Xavier

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