Insolvency Reforms: What Does This Mean For Your Business?

It has been extremely difficult for many business owners to keep their business afloat amid the COVID-19 crisis. Throwing a lifeline to small businesses, the government has overhauled insolvency laws to save thousands of jobs and companies on the verge of collapse.

What Are The Changes?

From the current ‘creditor-in-possession’ regime, Australia’s insolvency laws will shift to a ‘debtor-in-possession system’. Entities with liabilities below $1 million will be able to access the scheme.

The key features of this temporary insolvency law include:

  • The business owner will remain in control of their company and will work with a Small Business Restructuring Practitioner (SBRP) to craft a restructuring plan in 20 business days
  • The restructuring plan will be presented to creditors and they will vote if it is to be accepted in 15 business days.
  • If the plan is approved, all unsecured creditors will be bound and the business will be allowed to resume trading.
  • If the plan is rejected, the entity may enter into voluntary administration or access the new liquidation pathway which is simplified.

You can download the full fact sheet here: Insolvency_Reform_Factsheet

These reforms will commence on 1 January 2021.

Overview Of Restructuring Process
Overview Of Restructuring Process

What Does This Mean for My Business?

With these changes, the financial pressure on businesses will be significantly reduced, providing more breathing room for business owners to work out their next steps.

If your business is struggling to stay afloat and you are finding it increasingly difficult to repay ongoing debts, these changes to insolvency laws may be a welcome relief.

On 22 March 2020, the Government announced temporary relief for financially distressed companies, to provide the opportunity for as many businesses as possible to survive. On 7 September 2020, the Government announced a further extension of this relief to 31 December 2020.

The extended relief includes reforms to insolvency laws to provide:

  • A temporary increase in the threshold at which creditors can issue a statutory demand on a
    a company from $2,000 to $20,000 and a temporary increase in the time companies have to respond
    to statutory demands, they receive from 21 days to 6 months.
  • Temporary relief for directors from any personal liability for trading while insolvent, with respect to
    any debts incurred in the ordinary course of the company’s business.

As this temporary relief ends, there will be an increase in the number of businesses entering external
administration or seeking to use the new small business debt restructuring and liquidation processes.. So now is the perfect time to make a realistic assessment of your business’ financial situation and its viability.

If shutting down your business is inevitable after careful assessment, it will pay to have these conversations sooner.

Need Help Assessing Your Business?

Closing your business is a huge decision to make. We understand how difficult this can be for you, so we are here to help you make the best decision for you. We’ll help you carefully assess if you have exhausted all possible solutions or work out a plan with you for your business recovery.

If you need expert advice, feel free to book a consultation with us.

Contact us

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