New insolvency regime

On 23 September 2020 at 4:27pm Josh Frydenberg announced “that the Morrison government is embarking on the most significant reforms of insolvency law in almost 30 years”.

The government intends to introduce what it claims will be a single, simpler, faster, more cost-effective insolvency recovery process for small business.

The new insolvency regime is a “debtor in possession” model and a new liquidation process.

The new insolvency regime is to start when the temporary COVID-19 insolvency measures are lifted, and the stated aim is to give small business a better chance of surviving the COVID crisis.

The broad outline of the process announced is:

  • To start on 1 January 2021.
  • For incorporated businesses with less than $1 million liabilities.
  • Owners (directors) will remain in control of their businesses during the process.
  • A debt restructuring plan is developed and voted on by creditors.
  • The plan must be approved by 50% of creditors by value.
  • A “small business restructuring practitioner” will help the business prepare the plan, certify the plan to creditors, and oversee disbursements once the plan is in place.
  • The process lasts 35 business days (20 days to develop the plan, with creditors having 15 days to vote on the plan).
  • There is a moratorium on unsecured and some secured creditors taking actions against the company.
  • Employee entitlements that are due and payable must be paid out in full before the plan is voted on by creditors.
  • Related creditors will be prohibited from voting on the restructure plan.
  • If the plan is not approved, the business can go into voluntary administration or a new liquidation process with simplified obligations.

So, in addition to the new “debtor in possession” regime, there will be a new liquidation process for small business, with streamlined meetings and reporting requirements.

With only an outline at the moment, and no draft legislation with the detail, there are many immediate questions:

  • Who will/can be “a small business restructuring practitioner”? A new class of insolvency practitioner?
  • What responsibilities, liabilities and protection will the practitioner have?
  • How many small businesses in financial difficulty can immediately pay out all due and payable employee entitlements?
  • Will creditors “buy into” the new regime?
  • Will all creditors be bound by the majority?
  • Definition of liabilities?
  • What will the new liquidation process look like?

I am actually quite excited about the announcement. Not sure if I’m pleased: it could be really good, really bad or just a fizzer. It’s impossible to judge on the broad outline alone. The initiative appears to have been derived with little, if any, industry collaboration, done on the run and will be road-tested at an extreme time.

But as a long-term advocate for a better insolvency system for small to medium sized business, I think it is interesting.

Yes, I’m excited.