The much-awaited reforms in the Insolvency framework is now in place in what is perceived as a significant step in keeping Australian businesses and jobs in place, as the COVID relief measures ease out.
The purpose of the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 is to implement insolvency reforms to support small businesses.
The three key elements of the reforms are:
- Small business restructuring:
- Small business liquidation:
- Other measures: to provide temporary insolvency relief until 31 March 2021—to address the issue of eligible small businesses not being able to access the process immediately whilst insolvency practitioners become familiar with small business restructuring.
Small business restructuring and other measures:
The process allows financially distressed small businesses to access a single, streamlined process to restructure their debts while allowing the owners to remain in control of their business.
- Should be incorporated under the Corporations Act.
- Have total liabilities that do not exceed $1 million on the day the company enters the process, excluding employee entitlements.
- Pass a resolution that it is insolvent or likely to become insolvent at some future time and that a small business restructuring practitioner be appointed to oversee the restructuring process.
- Ensure Tax lodgements are up to date. All relevant tax returns and activity statements are lodged with the ATO.
The Government recognises it would take time to find a small business restructuring practitioner. Therefore, it has extended the temporary insolvency relief (including relief from liability for trading while insolvent) for up to three months.
In effect, business gets extra three months to access a practitioner from the day it declares intention to access the restructuring process
Steps to access temporary relief:
- Declare intention to access the restructuring process by publishing the declaration on the published notices website from 1 January 2021.
- Company’s period of temporary restructuring relief begins on the day the declaration is published.
- Notify ASIC within 5 business days of making the declaration in the form available on the ASIC website from 1 January 2021.
Simplified liquidation process:
- The company must be in a creditors’ voluntary winding-up where the event that triggers the start of the winding-up occurs on or after 1 January 2021.
- Liabilities of the company on the day a liquidator is first appointed in the creditors’ voluntary winding-up must not exceed $1 million.
- The company will not be able to pay its debts in full within 12 months.
- No person who is a director of the company, or who has been a director of the company within the 12 months before the date a liquidator was first appointed, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years.
- The company has not undergone restructuring or been the subject of a simplified liquidation process in the preceding seven years.
- The company has given returns, notices, statements, applications and other documents required under the Income Tax Assessment Act 1997.
- Can a liquidator adopt the simplified liquidation process for a creditors voluntary winding up?
Scenario where the liquidator in the creditors’ voluntary winding up may adopt the simplified liquidation process:
- They believe on reasonable grounds the eligibility criteria are met.
- Not more than 20 business days have passed since a liquidator was first appointed in the creditors’ voluntary winding up.
- The liquidator has given each member and creditor, at least 10 business days before adopting the simplified liquidation process, written notice of:
- A statement that they believe on reasonable grounds the eligibility criteria for the simplified liquidation process will be met.
- An outline of the simplified liquidation process
- A statement they will not adopt the simplified liquidation process if at least 25% in value of creditors direct the creditor in writing not to adopt the simplified liquidation process.
- Prescribed information, if any, on how the creditor may give the direction in writing not to adopt the simplified liquidation process.
If more than 25% in value of creditors provide a written statement to the liquidator against adopting this process, it cannot be proceeded with.