Insolvency reforms to support small business
The government recognises that despite various support measures enacted to help get through the COVID-19 pandemic, not all businesses are going to remain viable.
Many small businesses will have significantly increased levels of debt in order to remain in business during the COVID-19 pandemic. The government is introducing a number of permanent and temporary measures to expand the availability of insolvency practitioners to deal with this expected increase in the number of businesses seeking to restructure or liquidate.
The package of reforms features three key elements:
1) Debt Restructuring
Currently, requirements around voluntary administration in Australia are more suited to larger or more complex company insolvencies. The new debt restructuring process will adopt a "debtor possession model" where the business can continue to trade under the control of its owners, while a debt restructuring plan is developed and voted on by creditors.
2) Liquidation Pathway
The costs of liquidation can consume much of the value of a small business, leaving little for creditors. Under the government's new process, regulatory obligations will be simplified, so that they are commensurate to the asset base, complexity and risk profile of an eligible small business.
3) Temporary Relief Measures Extended
The government announced a further extension of relief measures to 31 December 2020. The temporary increase in the threshold at which creditors can issue a statutory demand on 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. In addition, there is 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.
The temporary relief measures give businesses needed breathing space and highlight the importance of working with financial professionals as soon as required, ensuring that your small business has the best chance of success.
If your business is going through tough financial times, please contact your Lowe Lippmann Relationship Partner if you wish to discuss these issues. We can also introduce you to Gideon Rathner, our Insolvency & Restructuring Partner, who specialises in corporate insolvency and all aspects of business restructuring.