Debt Restructuring & Simplified Liquidation for Small Businesses
In a previous article, we briefly looked at the Corporations Amendment (Corporate Insolvency Reforms) Act 2020, which introduced changes to Australia’s bankruptcy & insolvency regime to aid small businesses, their creditors, and employees.
You can revisit our previous discussion by scrolling to the end of this article here: https://www.cmigroup.com.au/post/bankruptcy-and-insolvency-the-omnibus-act-and-what-remains.
The new, simplified liquidation and debt restructuring process allows insolvent small entities to continue business while engaging in debt restricting. This will give small businesses a higher chance of survival, resulting in better outcomes for their creditors, employees and the Australian economy.
Eligibility for Restructuring
To be eligible for this new regime, your company must:
Be incorporated under the Corporations Act;
Not have more than $1 million in liabilities (excluding employee entitlements) on the start date of the restructuring process;
Resolve that it is insolvent or likely to become insolvent and that a restructuring practitioner should be appointed; and
Appoint a small business restructuring practitioner to manage the restructuring process, which includes assisting your company in developing a debt restructuring plan and proposal statement.
During the debt restructuring process, you will remain in control of your company and continue trading in the ordinary course of business. While a restructuring practitioner will be appointed for your assistance, you will still be responsible for drafting the debt restructuring plan and proposal statement.
Debt Restructuring Plan and Proposal Statement
The debt restructuring plan sets out how your company will repay its creditors and the proposal plan sets out who the creditors are and how much is owed to them. For example, the plan could specify the percentage of debt to be repaid. The plan and proposal statement will then be submitted to the creditors, who will vote on the best option for restructuring and repayment.
The submission to creditors must be made within 20 business days of entering the restructuring process, with an allowance of 10 additional business days where an extension is reasonable. The creditors will then have 15 business days to accept or reject the plan.
All unsecured debts incurred by the company prior to its restructuring, excluding employee entitlements, will be included in the plan. Any debt incurred after entry into restructuring will not be included in the plan and must be repaid outside of the plan.
What can Creditors Do
A moratorium is applied on unsecured creditor claims and certain secured creditor claims during a restructuring process. This means that during restructuring:
Unsecured creditors cannot enforce their claims;
Owners of property used or occupied by the company (e.g. in circumstance of a lease) cannot recover their property; and
Secured creditors cannot enforce their security interests in the company’s assets; and
A creditor with a personal guarantee from the company director(s) cannot enforce the personal guarantee without a court order; and
Any ipso facto clause (i.e. clause restricting termination or enforcement of contractual obligations) are stayed in some contracts.