Insolvency Reforms: for better or for worse?

On 24 September 2020, the Australian Federal Government announced what it called the most significant reforms to Australia's insolvency framework in over 30 years. "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 ",' says Treasurer Josh Frydenberg.^[1] Key elements of the proposed reforms include:

1. the introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million, drawing on some features of the Chapter 11 bankruptcy model in the United States;
2. moving from a one-size-fits-all "creditor in possession" model to a more flexible "debtor in possession" model which will allow eligible businesses to restructure their existing debts while remaining in control of their business;
3. a rapid twenty business day period for the development of a restructuring plan by a small business practitioner, followed by fifteen business days for creditors to vote on the plan;
4. a new, simplified liquidation pathway for small businesses to allow faster and lower cost liquidation;
5. 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 businesses.

The reforms are said to cover approximately 76% of businesses subject to insolvencies today. ^[2] Those within the insolvency industry will note that the proposed reforms are largely an adaptation of policies set out by the Australian Restructuring Insolvency & Turnaround Association (ARITA) in 2014. "It is disappointing that positions we outlined well before any recession occurred are only being adopted in the middle of a crisis", says ARITA CEO John Winter.^[3] Whilst a reform of the insolvency industry has been sought for some time, we await details of the entire regime to determine how much the proposed measures will differ from the current Deed of Company Arrangement (DOCA) regime. Of the proposed changes announced, we note the following differences:

• directors will retain control whilst developing a binding plan with the assistance of a small business insolvency practitioner (as opposed to an administrator being placed in control whilst a DOCA proposal is being negotiated);
• in order for the binding plan to be approved, it must be supported by more than 50% of the creditors by value (where the DOCA regime requires support of a majority of creditors both in number and in value);
• employee entitlements that are due and payable must be paid out in full before the plan is voted on by creditors (this is not presently the case);
• related creditors are prohibited from voting (which is a safeguard to prevent corporate misconduct, for example phoenix activity).

It is also presently unclear the extent to which a proposal is required to be investigated given the 'rapid' timeframe and whether there will be ultimate Court oversight, as is the case with the current s440A(2).^[4] The reforms are set to commence from 1 January 2021. As the industry waits to see how the Federal Government finalises these proposed changes in such a short period of time, we anticipate that the devil will be in the detail to determine whether this alters the approach for small businesses and insolvency professionals. If you have concerns about your business and the restructuring options currently available to you, please don't hesitate to get in touch!

Authors

Matt Gauci, Partner Jessica Egger, Lawyer   [1] 24 Sep 2020, The Hon Josh Frydenberg MP & The Hon Michael Sukkar MP joint media release, 'Insolvency reforms to support small business recovery' [2] Ibid [3] 24 Sep 2020, ARITA Media Release: 'Insolvency and restructuring profession welcomes Government's proposed reforms '€“ but careful review still requires' [4] Corporations Act 2001 (Cth)