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COVID-19: Insolvency reforms to support businesses recovery- what options do they create to support business continuity?

COVID-19: Insolvency reforms to support businesses recovery- what options do they create to support business continuity?

Published on October 6, 2020 by Selwyn Black and Evatt StylesSelwyn Black and Evatt Styles

On 24 September 2020, the Federal Government announced proposed insolvency reforms to support small business recovery.  The announcement is timely because it coincides with  the scaling back of JobKeeper and JobSeeker, and businesses are becoming more conscious of the ticking credit crunch time bomb. Directors need to start preparing now to make more difficult decisions to ensure business continuity, avoid breaches of director duties (including personal liability for trading whilst insolvent) and promote business viability.

How do the proposed insolvency reforms impact my business?

This article identifies:

  1. How the proposed insolvency reforms may impact your business;
  2. Some considerations for debtors on their business dispute resolution options in the coming months; and
  3. How to forge a creditor mindset to tackle aged debt.

The Key Elements – verbatim

On 24 September 2020, Federal Treasurer, Hon Josh Frydenberg MP and the Hon Michael Sukkar MP Minister for Housing and Assistant Treasurer announced proposed insolvency reforms to support small business recovery to be available from 1 January 2021.These initiatives include:

  1. The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million, drawing on some key features of the Chapter 11 bankruptcy model in the United States.
  2. Moving from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model which will allow eligible small businesses to restructure their existing debts while remaining in control of their business.
  3. A rapid twenty (20) business day period for the development of a restructuring plan by a small business restructuring practitioner, followed by fifteen(15) business days for creditors to vote on the plan.
  4. A new, simplified liquidation pathway for small businesses to allow faster and lower cost liquidation.
  5. Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to meet the needs of small business.

The proposed new restructuring process[1]

What do the proposed insolvency reforms mean for my business?

Element Description Debtor Creditor
1 New debt restructuring process

<$1million in debt

You have more control of your business as a debtor in possession (instead of the creditor in possession model). Opportunity to negotiate with creditors who may be prepared to accept less and provide time to pay it.

Businesses that are over the $1million debt threshold miss out.

Businesses that are ineligible for the restructuring plan miss out.

Prepare for debts to be part paid (if at all) and do not prepare cash flow projections on the presumption that you will obtain a full recovery in the new year.

If want control over the issue of timing obtain your own independent advice to prepare your debt recovery strategy.

2 Moving from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” You have more control of your business as a debtor in possession (instead of the creditor in possession model). Debtors with a viable business, but existing cash flow issues may be able to maintain control of the business and satisfy creditors rather than bring the business to an end through liquidation. Based on the existing proposal, creditors with a smaller value debt have less voting power than larger creditors.
3 Rapid restructuring plan

·         20 business day period for the development of a restructuring plan by

·         Then 15 business days for creditors to vote on the plan.

·         The creditor voting may be conducted online or through various technology forums

 

There is a small window of time for breathing space for debtors.

If the business is not viable and there are no assets to pay creditors it may not be eligible for the restructuring plan.

The details on the eligibility requirements for a restructuring plan are not clear. Businesses should seek independent advice now regarding their insolvency options.

 

Upon eligibility for the restructuring plan there is a relatively short timeframe for creditors to vote, and to understand the debtor’s proposal to pay.

It will take time for the process to be set up and is unlikely to commence on 1 January 2021.

There are no details about at what stage a debtor could or must initiate this process.

There are no details as to what happens if debts over a million are undisclosed.

There are no details regarding the requirements to give notice to creditors.

This process may take up to two months with no satisfactory outcome.

4 New, simplified liquidation pathway May cost less to liquidate company. It is unclear how this may impact or effect a liquidator’s investigation in relation to any voidable transactions.
5 Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term Debtors get access to wind down the company’s affairs in an orderly manner if within the threshold.

This does not address businesses with more than $1 million debt.

Creditors still have control to deal with facilities in default or of outstanding debt.

Summary of Key Points

  1. Obtaining independent advice on restructuring, insolvency and business debt now is crucial because there are many variables to navigate given the proposed insolvency reforms. Most businesses do not have the benefit of time to work through these without expert, specialised advice.
  2. Unless informal or formal debt recovery processes are instigated by prospective creditors, it is not yet clear how long the proposed insolvency reforms will take to commence, or whose responsibility it will be to trigger. This may be because some directors may take the view that there is little risk in continuing to trade given temporary relief measures up until 31 December 2020.
  3. Until further details of the proposed insolvency reforms are released / brought into law, some tips for resolving disputes is set out in the COVID19: The Commercial Dispute Resolution Guide for Business.
  4. Creditors have the ability to start the process. Only certain dispute resolution options are only stayed until 31 December 2020 as proscribed by the extension of temporary relief for financially distressed businesses.
  5. Debtors and directors who are concerned about solvency should seek independent advice to minimise personal exposure, and to facilitate dispute resolution options with creditors.
  6. Creditors should be pragmatic and resourceful in preparing cash flow targets and seeking help to implementing a debt recovery strategy.

If you would like to arrange a no obligation discussion, please contact Carroll & O’Dea Business Lawyers to discuss legal aspects of your business, debt or contract dispute.

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