Temporary changes to bankruptcy and insolvency legislation during the pandemic have led the Australian Government to enact permanent changes relevant to individuals and small businesses.

Selina Nutley explains the small business insolvency reforms and changes to bankruptcy laws and warn that strict criteria and time limits apply.

Changes to the bankruptcy laws

Last year the Australian Government temporarily increased the debt threshold for bankruptcy to assist individuals who may be dealing with financial difficulties due to the onset of the COVID-19 pandemic.

Those temporary changes ended on 31 December 2020. However, the Attorney-General has now announced a permanent increase to the debt threshold for personal bankruptcy from $5,000 to $10,000.

The Attorney-General said the increase reflects the changing value of money and levels of debt since 2010 when the last increase was made to the threshold.

Small business insolvency reforms

Insolvency law reforms for small businesses have also been announced. These reforms have in part passed through Parliament and commenced on 1 January 2021.

Eligibility

The reforms introduce a formal debt restructuring process for small business, as well as a simplified liquidation process. Both measures are available to businesses:

• with liabilities of less than $1 million, and
• which have paid all employee entitlements (including superannuation) and have their tax lodgements up to date.

Small business restructuring

This process allows businesses an opportunity to work with a small business restructuring practitioner (SBRP) to develop and propose a debt restructuring plan to creditors.

Whilst the restructuring plan is being developed, the directors of the company remain in control.

The process follows these steps:

1. The directors pass a resolution that the company is insolvent (or likely to become insolvent) and to appoint a SBRP.
2. Once appointed, the SBRP must present a restructuring plan to the company's creditors within 20 business days. There is limited scope to extend this timeframe.
3. The creditors are then given 15 business days to accept the restructuring plan. It is accepted if a majority in value of the company's creditors vote in favour.

Temporary relief is available until 31 March 2021 for company directors who wish to enter into the process, but can't due to the shortage of restructuring practitioners available.

Simplified liquidation process

The government has also introduced a simplified liquidation process which is intended to be more appropriate for small businesses with straightforward affairs.

To use the simplified process, directors who have resolved to wind up a company must give the appointed liquidator a declaration confirming the company meets the eligibility criteria within five business days of the winding up commencing.

The directors must be able to produce the necessary documents to satisfy the liquidator of the company's eligibility, so practically, it will be important directors have gathered these before resolving to wind the company up.

Upon confirming eligibility, the liquidator must give a notice to creditors explaining how the simplified process works. If 25 percent of creditors by value oppose the process, it cannot proceed.

The key differences from a regular liquidation include the following:

• Reduced obligation on the liquidator to investigate the company's affairs and report to ASIC.
• Information and voting are conducted electronically without creditors' meetings being held.
• No committees of inspection are allowed (although the court retains its supervisory powers).
• Limitations on the liquidator's ability to recover voidable transactions.
• There are some safeguards in place for creditors, particularly where the liquidator considers the company, or a director, has engaged in fraud or dishonest conduct which may have a material effect on creditors.

Increasing the statutory demand threshold

The Government is now consulting on whether the threshold at which creditors can issue a statutory demand to a company should remain at $2,000 or be increased. Submissions close 5 March 2021.

Conclusion

The new changes to both the bankruptcy and insolvency laws are aimed to assist those who are likely to be most vulnerable as the COVID-19 temporary relief comes to an end. Strict criteria and time limits apply to both processes, so it is important to seek advice in a timely manner.

If you have any questions about the changes to the bankruptcy or insolvency laws, our Litigation team can help and explain what steps you may need to take.