Will the Small Business Insolvency Law Reforms really protect Company Directors?

Upcoming changes to insolvency laws could have a significant impact on companies that have faced challenging circumstances during the COVID-19 pandemic. Temporary protections from claims of insolvent trading that were put in place to assist businesses during COVID–19 are coming to an end on 31 December 2020. However, a new regime for restructuring small businesses is commencing on 1 January 2021 .

Any director of a company that has experienced difficulty or incurred debts since the start of the COVID-19 pandemic should carefully consider their position as their personal assets may be at risk. Steps should be taken prior to 31 December 2020 to ensure that companies and directors are able to take advantage of the new regime and of the protections available.

If you have any concerns, you should be speaking to an experienced insolvency solicitor to obtain an analysis of your business and advice on steps that can be taken to protect both business, and personal assets.

The Federal Government is expecting a flood of liquidations to occur in 2021. In anticipation of this, the Government intends to introduce the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 which includes reforms to:

  • encourage companies to restructure and trade out of financial difficulty; and
  • make the liquidation process easier where it is not possible to restructure.

The full details of the reforms are yet to be released. However, if navigated properly they may provide protections for companies and their directors that have experienced financial difficulty during the COVID-19 pandemic.

Insolvent Trading

Company Directors have a duty to prevent a company from trading while it is insolvent. If a director allows an insolvent company to incur a debt while insolvent, that director may face personal liability.

Amendments to the Corporations Act 2001 (Cth) introduced in March 2020 provide for a protection from insolvent trading claims if the debt is incurred:

  • in the ordinary course of the company’s business; and
  • between 25 March 2020 and 31 December 2020; and
  • before any appointment during that period of an administrator, or liquidator, of the company.

If the conditions above are not met, the protection from insolvent trading may not apply. Directors of companies that persevered through COVID-19 may face a claim of insolvent trading which, if successful, could see them personally liable for company debts placing their personal assets at risk.

The Government has indicated that, provided the company makes a necessary declaration, the insolvent trading protection will continue for businesses that intend to use the restructuring or simplified liquidation process discussed below. However, not all companies will be eligible or able to access the debt restructuring or simplified liquidation process. Accordingly, it is crucial that directors are considering these issues now and, where appropriate, taking action.

Reforms

On 24 September 2020 the Federal Government announced changes to the insolvency regime in Australia. Two of the key proposed changes provide for:

  • A debt restructuring process; and
  • A simplified liquidation process.

The proposed changes are expected to come into effect on 1 January 2021. The key eligibility criteria for the new processes is expected to be:

  • Liabilities of less than $1 million;
  • Fully paid employee entitlements; and
  • Up to date tax lodgments.

Debt Restructuring

The small business restructuring process would see the directors of a company retain control of the assets and affairs of the company during the restructuring process under the supervision of a small business restructuring practitioner (“Restructuring Practitioner”). There would be a moratorium on enforcement action, similar to that currently in place under the voluntary administration process.

During the restructuring of a company a creditor cannot enforce any guarantee given by a director or a director’s spouse in relation to a company debt.

The directors would work with the Restructuring Practitioner for 20 business days to create a plan to restructure the company. The Restructuring Practitioner must certify the plan and creditors then have 15 business days to vote on the plan. If 50% of the creditors by value vote in favour of the plan, it will become binding. In that case, the Restructuring Practitioner will administer the plan.

Simplified Liquidation

The simplified liquidation process would see simplification to the regulatory obligations of the liquidator and a limitation on the circumstances in which unfair preferences can be clawed back.

As the applicable Regulations have not been released at the time of writing, it is not clear precisely what the limitations on unfair preferences will be or how this new process will interact with secured debt.

How Can We Help

If your business is experiencing financial difficulty, commencing a restructure or liquidation prior to 31 December 2020 may avoid liability for insolvent trading and protect the family home.

If entities intend to utilise either the debt restructuring or simplified liquidation, they should be engaging an experienced insolvency solicitor and taking appropriate action now to ensure they meet the eligibility criteria. Contact Roberts Legal to speak directly with Tony for a free case evaluation.

By Tony Peterson,
Senior Associate Solicitor