Overhaul of Insolvency Laws: How will it work?
As reported in several media articles, the Government will shortly introduce wholesale changes to insolvency laws. The Treasurer has described these as ‘the biggest changes to insolvency laws in 30 years’. The aim of these laws is to keep as many businesses as possible in operation and avoid a flood of insolvencies post 31 December 2020, when Covid-related temporary insolvency relief measures are scheduled to end.
In this article, we summarise the key changes and outline various material issues that require further clarification.
Presently, when the insolvency process commences, an external administrator (eg liquidator or voluntary administrator) will take control of the business. The proposed changes resemble the ‘Chapter 11’ bankruptcy laws applicable in the United States, and will allow a company’s directors to remain in control of the business and trade while insolvent. Business will have 20 business days to develop a restructuring plan with a ‘small business restructuring practitioner’ (SBRP). It is reported that the SBRP will only charge a flat fee plus any approved disbursements.
Once the proposed restructuring plan is finalised:
- creditors will have 15 business days to vote on the plan and any disbursements that would be paid to the SBRP (in addition to the flat fee);
- more than 50% of creditors in value need to approve it to proceed; and
- employee entitlements must be paid in full before the plan can be voted on, and related–party creditors cannot vote.
Only companies with liabilities of less than $1 million can take advantage of the proposed changes, though it is said this threshold will cover 76 per cent of businesses subject to insolvencies today.
If the restructuring plan is approved by creditors, the business can continue trading subject to oversight by the SBRP as to the distribution of funds to creditors.
If the plan is rejected by the majority of creditors, the company would go into liquidation under a modified version of the existing laws.
There will also be safeguards in place designed to prevent corporate misconduct, including illegal phoenix activity, and the same company or same directors cannot use the insolvency process more than once every seven years.
Further, the indication from Treasury is that the statutory demand regime will return to normal from 1 January 2021. In other words, post 1 January 2021, creditors may issue statutory demands for debts of $2,000 or more and the debtor company will have 21 days to comply.
More to come
The proposed changes, which will likely take effect from 1 January 2021, are groundbreaking and intend to provide business with a more commercial and expeditious restructuring process.
Some aspects of the proposed changes must still be clarified. For instance:
- The Chapter 11 laws in the United States provide a blanket moratorium on enforcement, which prevents secured creditors from taking possession or otherwise enforcing their security. It is unclear whether the proposed changes will also provide a blanket moratorium to prevent some or all secured creditors from taking enforcement action.
- It is unclear whether a separate licensing regime will exist for an SBRP, as distinct from registered liquidators.
- It is unclear whether the rules for bankruptcy notices will also return to normal post 1 January 2021.
The Treasurer is expected to announce more details today. Cornwalls will provide another update as soon as further information comes to light.
For more information please contact an author or any member of our Restructuring, Turnaround & Insolvency team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.