The Treasurer has announced the most consequential changes to Australia's insolvency laws in 30 years.

The changes are styled on the Chapter 11 regime utilised in the United States. It represents a significant shift from the current 'creditor-in-possession' regime to a 'debtor-in-possession' system. Incorporated entities with liabilities of less than $1 million will be able to access the scheme.

Some of the key features of the proposed scheme are:

  • business owners remain in control of their companies and will work alongside a Small Business Restructuring Practitioner (SBRP) to develop a restructuring plan over 20 business days
  • the restructuring plan is then put to creditors and creditors will vote on whether it is to be accepted within 15 business days
  • if the plan is accepted by a simple majority of creditors, all unsecured creditors will be bound and the business is allowed to continue trading
  • if the plan is not approved, the company may enter into voluntary administration or a simplified liquidation pathway which is another facet of these reforms.

The measures will commence on 1 January 2021 but there is scope for early access for small businesses who declare an intention to access the scheme. The commencement of these provisions appears to coincide with the expiry of the temporary insolvency measures regarding the suspension of insolvent trading liability and modifications to statutory demands.

In anticipation of the demands on the insolvency profession, the Treasurer has also relaxed regulatory requirements relating to insolvency practitioners, including:

  • temporarily waiving fees for registered liquidators until 30 June 2022
  • establishing the SBRP category for professionals whose practice will be limited to this new regime
  • flexibility in the registration of insolvency practitioners.

There is still considerable detail missing from the current proposal and some areas of significant concern. For example, in the simplified liquidation pathway, there will be reduced circumstances in which a liquidator can seek recovery of unfair preference payments from a creditor that is not related to the company. But no further detail is provided. Also, within this process, it is noted that steps will be taken to 'simplify' the dividend and proof of debt process without any indication as to how this will be done. What does 'flexibility' in the registration of insolvency practitioners mean?

There is also concern that the safeguards proposed for the system, which include a prohibition on related creditors voting on a restructuring plan and a bar on the same company, or directors, from accessing the system more than once in seven years, will be insufficient to prevent illegal phoenix activity.

We will continue to closely monitor these changes and provide further guidance as it comes to hand.

The media release from Josh Frydenberg and the associated fact sheet can be accessed here.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.