On 24 September 2020, the Australian Government announced the introduction of two new restructuring and insolvency processes for small businesses (having liabilities of less than AU$1 million). It is proposed that these measures will be introduced from 1 January 2021 with a view to reducing the cost, time and complexity burden imposed on small businesses by the existing insolvency processes. The Australian Government has described the changes as “the most significant changes to the Australian insolvency framework in almost 30 years.”

The changes represent the latest in a series of measures introduced in Australia this year in response to the economic impact of the COVID-19 pandemic and have been introduced to address the anticipated increase in the number of corporate insolvencies next year. The new measures comprise:

  • a simplified “debtor in possession” restructuring process;
  • a simplified liquidation pathway; and
  • additional “complementary measures” aimed at increasing the number of insolvency practitioners available to regulate the new processes.

Restructuring process

The “restructuring” process is derived from Chapter 11 of the US Bankruptcy Code. It is intended to provide “financially distressed but viable” small businesses with a “simple, cheap and faster” method of restructuring their debt than the existing regime(s).

The new process sees the introduction of the “debtor in possession” model into Australian insolvency law, with business owners continuing to trade the business under a moratorium whilst they develop a restructuring plan with the assistance of (and, ultimately, certification by) an independent “small business restructuring practitioner”. The restructuring plan is then put to the company’s creditors (within 20 business days) and voted on by them (within a further 15 business days). The company must pay its employee entitlements before the creditor vote.

To address the time needed for practitioners to become familiar with the new process and register, the reforms will also include a transitional process. This will enable a company to declare its intention to access the process, which will act to extend the existing insolvency relief to that company for up to 3 months to enable a practitioner to be engaged.

Simplified liquidation pathway

The “simplified liquidation pathway” is a streamlined version of the existing Australian liquidation process. The key differential is the reduction of the statutory obligations imposed upon the liquidator for “straightforward” liquidations of small businesses without evidence of director misconduct.

These include:

  • reducing the circumstances in which a liquidator can recover unfair preferences from unrelated creditors;
  • removing the obligation to report on misconduct unless there are reasonable grounds to believe misconduct has occurred;
  • removing requirements to call creditor meetings; and
  • simplifying the dividend and proof of debt procedures.

The measures are intended to reduce the costs associated with the administration of the liquidation process for small companies (which can impose an administrative burden without commensurate benefit to creditors). The Australian Government hopes the new process will increase the dividends paid to creditors of small businesses.

In recognition of the potential for misuse, each of the processes will include “safeguards”, which include:

  • in both processes:
    • administration by an independent practitioner;
    • the preservation of the rights of key creditors, e.g. secured creditors with ‘all asset’ security; and
    • a bar on the same company or directors using the process in a 7 year period;
  • in the restructuring process:
    • a power for the practitioner to stop the process if misconduct is identified;
    • the right of creditors to vote on the proposed restructuring plan; and
  • in the liquidation process:
    • the power for creditors to convert the liquidation to a “full” process; and
    • the obligation for company directors seeking to use the process to declare the company is eligible and has not engaged in illegal ‘phoenixing’ activity.

Complementary measures

To deal with the expected increase in the numbers of businesses that may seek to use the new processes, the legislation will also include incentives designed to increases the availability of practitioners to take appointments.

These include:

  • temporarily waiving registration fees for registered liquidators until 30 June 2022 to encourage practitioners to enter or re-enter the market;
  • changes designed to allow greater flexibility in the registration of insolvency practitioners;
  • introducing a new class of practitioner who will be limited to the new restructuring process only.

Overall, the new processes identified by the legislation are promising. However, there are numerous areas where further information is required in order to fully understand the impact of the new legislation and the way it will intersect with the existing insolvency regime. At the time of publication, the Australian Government has yet to release a draft of the proposed legislation, and a further update – and comparative analysis of the equivalent reforms recently enacted in the United Kingdom and the United States – will be provided once the legislation is made available.