COVID -19 INSOLVENCY UPDATE – JANUARY’S 2021 NEW REFORMS TO SUPPORT SMALL TO MEDIUM ENTERPRISES
On Thursday, 24 September 2020, the Federal Government announced new insolvency rules that would allow small businesses to continue trading whilst restructuring their debts.
These changes would see the current Australian Bankruptcy Laws shift towards a “debtor in possession” model. This means that Directors/Business Owners would now have control over restructuring their debts as opposed to leaving such control to the Administrators.
These new Reforms in Insolvency are proposed to take effect from 1 January 2021. It would relate to incorporated businesses with liabilities less than $1milion. Larger companies will continue to remain bound by existing insolvency rules.
It would appear that Australia is moving towards a United States Bankruptcy Code. Under Chapter 11 of the United States Bankruptcy Code, businesses can restructure debts whilst continuing to operate. This has been seen in US liquidations such as General Motors, United Airlines and K-mart.
Treasurer Josh Frydenberg stated that:
“By adopting key aspects of the US Chapter 11 bankruptcy process, it will introduce a single, simpler, faster, more cost-effective insolvency process for small businesses.
It will see our system move from a rigid, one size fits all “creditor in possession” model to a more flexible “debtor in possession” model.
This will enable small business owners to remain in control, provide them with an opportunity to restructure and ultimately increase their chances of surviving this COVID crises”.
Aside from the new bankruptcy “rescue process”, the Australian Government will also look to introduce a more simplistic liquidation process to piggyback off the new insolvency reforms. Small to medium sized enterprises with outstanding debts of less than $1million will be able to go through a much more cost effective and quicker process. This would leave liquidators to not require submitting Section 533 reports, unless there are reasonable grounds to believe there has been corporate misconduct.
Overall, it can be said that these changes are being considered to protect against threats of opportunistic class actions for companies allegedly falling foul of their continuous obligation disclosures due to the current COVID-19 pandemic.
However, it cannot be denied that these changes may see arise in phoenix activity where companies will deliberately be liquidated to avoid paying their own debts.
Whilst it is suggested that there will be safeguards in place to prevent corporate misconduct, including phoenix activity, (with related creditors prohibiting from voting on the restructuring plan) the real question is whether these new reforms will be respected by Directors/Business Owners. Alternatively, there should be consideration in providing insolvency petitioners with increased funding under the Assetless Administration Fund to be used for upcoming investigations and enforcement proceedings towards corporate misconduct.
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