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Common Questions

Insolvency Regime

The COVID impact is still continuing, but this time in a somewhat unexpected manner.

The Federal Government has recently released draft details of a new ‘insolvency regime’ aimed at allowing viable businesses to trade their way out of their financial problems.

New Regime

Whilst the details are still in very basic form (and have yet to pass Parliament, so the regime may not even come through), the criteria for eligibility are as follows:

  1. First and foremost, businesses with debts greater than $1,000,000 are excluded. (General commentary suggests this threshold may be significantly reduced by the time it passes Parliament, with some suggesting the limit may reduce to $250,000).
  2. The business owner will need to consult an Insolvency Practitioner to determine eligibility and a flat fee for their work.
  3. Once agreed, the business signs up the Insolvency Practitioner as their ‘Small Business Restructuring Professional’ (SBRP).
  4. Upon engagement, unsecured creditors and some secured creditors will be prohibited from taking action to recover their debts, personal guarantees provided by the Director(s) and their family cannot be pursued, and ‘ipso-facto’ clauses ( clauses that all creditors to terminate contracts because of an insolvency event) are not valid during the period of restructure.
  5. The business owner and the SBRP work together over a 20 business day period to develop a plan to restructure the business’ debts and provide supporting documents for creditor control. During this period, the business owner retains control of the business and continues to trade. The SBRP also develops a remuneration proposal for the ongoing management of the plan once accepted by creditors. The remuneration will be a percentage of the disbursements made under the plan.
  6. The SBRP sends the plan to creditors and certifies whether the SBRP considers the business can meet the plan repayments and has properly disclosed its affairs. Creditors have 15 business days to vote on the plan and the proposed remuneration of the SBRP.
  7. To be eligible to submit the plan, the business must lodge all outstanding tax returns and pay all outstanding employee entitlements.
  8. If at least 50% of the creditors by value endorse the plan, it is approved and binds all creditors. Creditors vote as one class, with secured creditors only voting for the shortfall owing on the contract, and related party creditors cannot vote.
  9. If the plan is accepted, the business continues and the SBRP administers the plan by making distributions to creditors in accordance with the plan. If rejected, the business owner may opt to go into Voluntary Administration or use the simplified liquidation process.

Simplified Liquidation Process

  • Under this system, the regulatory obligations will be simplified so that they are commensurate to the asset base, complexity and risk profile of eligible small businesses.
  • The simplified process will retain the basic framework of a ‘normal’ liquidation but will have reduced investigative requirements and reduced meeting and reporting functions. There will also be reduced clawback provisions, a simplified dividend process.
  • Where companies are unable to access the new system (presumably because they can not engage a Liquidator due to that Liquidators workload), they can declare their intention and receive a 3 month relief.
  • What this suggests is that companies in trouble should seek help now to enable the Liquidator sufficient time to assess your options – this will always provide the best possible outcome.

For further details, contact Bankruptcy Advisory Centre.

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