Coronavirus update: insolvency reforms to support small business – getting paid, getting harder
If your business is owed money by a company, the proposed insolvency reforms which are expected to come into effect at the beginning of 2021 may mean that getting paid just got that little bit harder.
The Federal Government has announced significant reforms to the insolvency framework as part of its’ economic recovery plan to keep businesses trading post covid-19. The key elements include:
- A new debt restructuring process for incorporated businesses with liabilities of less than $1 million.
- Moving to a more flexible “debtor in possession” model which will allow eligible small businesses to restructure their existing debts while remaining in control of their business.
- A 20-business day period to develop a restructuring plan by a small business restructuring practitioner.
- A 15-business day period for creditors to vote on any restructuring plan.
- A simplified liquidation pathway for small businesses to allow faster and lower cost liquidations to occur.
It is forecast that the reforms will apply to about 76% of businesses subject to insolvencies today.
The Federal Government expects that the reforms will come into effect on 1 January 2021 (subject to legislation being passed by that time).
Given the very short time available for the reforms to come into effect, and for “small business restructuring practitioners” to become registered, there will be a transition period as follows:
- an eligible small business will be able to declare its’ intention to access the new restructuring process to its creditors for a period of 3 months (until 31 March 2021); and
- the existing temporary insolvency relief (relief from insolvent trading liability and the temporary measures that apply to statutory demands issued by creditors) will continue to apply to the business for a maximum period of 3 months.
The justification for the transition period of 3 months is so that the eligible small business is able to access a small business restructuring practitioner or other insolvency practitioner.
THE IMPACTS ON STATUTORY DEMANDS
Since 25 March 2020, the following temporary changes have applied in relation to the issue of creditor’s statutory demands:
- The minimum amount of the debt must be $20,000 (increased from $2,000).
- The company debtor has six (6) months to respond (increased from 21 days).
The temporary measures were due to end on 25 September 2020, but were extended to apply to 31 December 2020.
The newly announced proposed insolvency reforms have the practical effect of further extending the temporary measures that apply to statutory demands until the end of the first quarter or potentially until mid-2021.
This further extension is possible because an eligible small business will be able to declare its’ intention to access the new restructuring process to its creditors until 31 March 2021. Even once this declaration has been made, it is possible that there will be more delay in trying to access a “small business restructuring practitioner” (a role which is to be created as part of these new insolvency reforms) and for the restructuring process to then take its’ course.
Ultimately, until the legislation has been passed, the detail around the operation of the new insolvency reforms and the impacts on the issue of creditor’s statutory demands will not be known with any certainty.
WE’RE HERE TO ASSIST
If your business is owed money by a company, and it cannot afford to wait until the end of the first quarter or potentially until mid-2021, we can help.
We regularly assist to recover outstanding debts owed to businesses. Unlike debt recovery agents, we do not charge a commission based on a percentage of the debt that is recovered. For most debt recovery matters, we offer fixed fees for certainty and peace of mind.
Disclaimer: This article is current as at 28 September 2020 and is intended to provide general information in summary form only. The contents do not constitute legal advice. Formal legal advice should be obtained for your specific matter.