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How the New Insolvency Reforms will work?

02 October 2020
Read Time 3 mins reading time

New insolvency reforms give small businesses a viable pathway out of insolvency (liquidation and voluntary administration) dramatically reducing costs for distressed businesses seeking to avoid insolvency.

It will apply to those businesses owned by a sole trader or company with liabilities or debts under $1 million.

The laws would remove costly administrators and liquidators from the process unless the creditors voted down the debt restructure and forced the company into liquidation.

Creditors’ dividends will improve without administrator and liquidators fees.

The proposed new laws are likely to remove criminal penalties for directors from continuing to trade whilst insolvent in certain circumstances.

To date insolvency laws have put small business at a disadvantage; destroying value and unnecessarily forcing many to go under when they could have been saved.

Now a small business owner will get the ­opportunity to decide how to reorganise their business or whether to wind it down.

These reforms will give nearly 80 per cent of business owners the opportunity to consider their options in a more timely and cost-effective way.

When the pandemic has passed, for businesses to recover it will be critical that distressed businesses have the necessary flexibility to either restructure or to wind down their operations in an orderly manner.  For businesses that can’t recover, there will be a more efficient liquidation process.

But the new process will rely on small-business owners to make the first step by approaching a restructuring practitioner.  We have the carrot, but where is the stick if business owners don’t proactively seek out a restructuring plan?

Based on the Information Fact Sheet published by the Treasurer’s office, failed plans will leave the business open to another insolvency process.  Presumably, the current creditor-initiated processes will remain.  Even under the new process (if chosen) key creditor rights will be preserved, with no changes to the rights of secured creditors, and the restructure plan still requiring a majority creditor vote to be binding.

The stick remains after-all, meaning only the proactive will benefit from these reforms.

With COVID initiatives due to expire on December 31, the level of insolvencies is expected to rise dramatically.

The shake-up would replace the administration process with a Small Business Restructuring Practitioner (SBRP) who would help the company board restructure its business.

The new laws include complementary measures that would waive fees for practitioners to register as a liquidator, or SBRP, which would expand the pool of experts in this field and further reduce costs for small businesses needing restructuring.

For help with any business restructuring needs, please get in touch with us.

Stay up to date with our news & insights

How the New Insolvency Reforms will work?

02 October 2020

New insolvency reforms give small businesses a viable pathway out of insolvency (liquidation and voluntary administration) dramatically reducing costs for distressed businesses seeking to avoid insolvency.

It will apply to those businesses owned by a sole trader or company with liabilities or debts under $1 million.

The laws would remove costly administrators and liquidators from the process unless the creditors voted down the debt restructure and forced the company into liquidation.

Creditors’ dividends will improve without administrator and liquidators fees.

The proposed new laws are likely to remove criminal penalties for directors from continuing to trade whilst insolvent in certain circumstances.

To date insolvency laws have put small business at a disadvantage; destroying value and unnecessarily forcing many to go under when they could have been saved.

Now a small business owner will get the ­opportunity to decide how to reorganise their business or whether to wind it down.

These reforms will give nearly 80 per cent of business owners the opportunity to consider their options in a more timely and cost-effective way.

When the pandemic has passed, for businesses to recover it will be critical that distressed businesses have the necessary flexibility to either restructure or to wind down their operations in an orderly manner.  For businesses that can’t recover, there will be a more efficient liquidation process.

But the new process will rely on small-business owners to make the first step by approaching a restructuring practitioner.  We have the carrot, but where is the stick if business owners don’t proactively seek out a restructuring plan?

Based on the Information Fact Sheet published by the Treasurer’s office, failed plans will leave the business open to another insolvency process.  Presumably, the current creditor-initiated processes will remain.  Even under the new process (if chosen) key creditor rights will be preserved, with no changes to the rights of secured creditors, and the restructure plan still requiring a majority creditor vote to be binding.

The stick remains after-all, meaning only the proactive will benefit from these reforms.

With COVID initiatives due to expire on December 31, the level of insolvencies is expected to rise dramatically.

The shake-up would replace the administration process with a Small Business Restructuring Practitioner (SBRP) who would help the company board restructure its business.

The new laws include complementary measures that would waive fees for practitioners to register as a liquidator, or SBRP, which would expand the pool of experts in this field and further reduce costs for small businesses needing restructuring.

For help with any business restructuring needs, please get in touch with us.