On 24 September 2020, Treasurer Josh Frydenberg announced significant insolvency reforms to commence on 1 January 2021 (subject to legislation).
The reforms are focussed upon the restructure or liquidation of companies with less than $1m in debt and include:
- A new debtor in possession process – to restructure the debt on the balance sheet of the business to help it survive and thrive; and
- A new simplified liquidation process where it cannot survive.
Whilst full details of the reforms have not been finalised, they are designed to be simpler and more cost-effective restructuring and liquidation solutions for directors and their advisers to consider for small businesses.
The new debtor in possession / restructure process explained
A broad outline of the critical aspects of the process announced is:
- For companies with less than $1m in debts
- Directors will remain in control of the business during the restructuring process
- A debt restructuring plan is developed by the Directors with the assistance of an insolvency practitioner – A small business restructuring professional
- The restructuring process can take 35 business days (20 business days to develop the plan and creditors given 15 business days to vote on the plan).
- Unsecured and some secured creditors are prohibited from taking any action against the company
- Personal guarantees cannot be enforced during the restructuring phase
- Creditors cannot terminate contracts (ipso facto provisions)
- Employee entitlements (including superannuation) that are due and payable must be paid out in full before the restructure plan is voted on by creditors
- Tax reporting obligations must be up to date
- Related creditors will be prohibited from voting on the restructure plan
- The restructuring plan must be approved by 50% of creditors in value
- If approved, the restructuring plan binds all unsecured creditors
- If the plan is not approved, the business is able to proceed into voluntary administration or a new liquidation process with simplified obligations
The proposed debtor in possession/restructuring process provides a timely and necessary opportunity for companies with liquidity or cashflow issues to reduce their liabilities via a restructure and creditor agreement.
With assessment and critical planning, companies will be able to obtain more certainty to survive and then thrive in the new post COVID-19 economy.
Don’t wait until the New Year for assessment and planning – do this NOW.
A new simplified liquidation process where the company cannot survive
The new proposed liquidation process aims to limit costs and improve efficiencies for companies with less than $1m in debts, with reduced investigative requirements and streamlined meetings and reporting requirements.
HOW CAN RSM HELP?
Please contact our restructuring and recovery team to discuss what options are available and suitable for your client’s situation. Our team are experienced and professional restructuring experts and are readily available to assist you and/or your clients.