Insolvency Law Reform

On 10 September 2020, we published an article discussing the need for reform in the insolvency industry.

The Commonwealth Government yesterday announced proposed: “Insolvency reforms to support small businesses recovery”.

The Treasurer said in his media release:

“The reforms, which draw on key features from Chapter 11 of the Bankruptcy Code in the United States, will help more small businesses restructure and survive the economic impact of COVID-19. As the economy continues to recover, it will be critical that distressed businesses have the necessary flexibility to either restructure or to wind down their operations in an orderly manner.”

That media release can be found here.

The draft proposed legislation that would give effect to the reforms is not available.  However, the main elements of the proposed reform are:

  • “incorporated businesses” with liabilities of less than $1,000,000, will be able to “invoke” debt restructuring process;
  • eligible small businesses will be able to restructure their existing debts while remaining in control. This will be a change from our current “creditor in possession” model to a “debtor in possession” model;
  • eligible small businesses will have 20 business days to develop a “restructuring plan” with a “small business restructuring practitioner” (a new type of practitioner).  Creditors will have 15 business days to vote on the plan;
  • if the “restructure” is not “successful” businesses will have access to a simplified liquidation pathway. Intended to be faster and lower cost than the current liquidation model.

An interesting comment contained in the Treasurer’s media release is:

“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.”

There is no elaboration on what the “complementary measures” will be.

There is little explanation from the Commonwealth Government about how it will ensure the new regime is not manipulated and exploited.

There is a reference to “safeguards” in the Commonwealth Government’s “fact sheet” titled “Insolvency Reforms to Support Small Business”.  Available here.

Those “safeguards” are said to include:

  • allowing creditors to “convert” the liquidation back to a “full” process;
  • preventing directors using the process more than once in a certain period; and
  • requiring directors seeking to use the process to declare their belief that “their” company is “eligible” and has not engaged in illegal phoenix activity.

We are not convinced that requiring a director to declare that “their” company (essentially them) has not engaged in illegal phoenix activity will have the effect of preventing it occurring.

We wait in anticipation for the draft legislation to quell our concerns.

Kott Gunning will continue to provide updates about the proposed reforms.

Considering the new regime is expected to operate from 1 January 2021, draft legislation should be available before 31 October 2020.

Kott Gunning

We can help:

  • directors of financially distressed companies understand their obligations and the “temporary” protections afforded to them;
  • directors navigate the “temporary protections” landscape, including giving advice about the safe harbour regime and how it interacts with the “temporary protections”; and
  • creditors determine the best course of action available to them to recover a debt owed to them, in the shortest possible period.

We look forward to helping you.

Emma Leys – Partner –

Peter Mariotto – Special Counsel –

The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.