The Federal Budget, set to be released on October 6, will introduce new rules allowing small businesses at the risk of collapse to trade whilst insolvent.
The insolvency measures will constitute one of the non-spending structural reforms to be contained in the October 6 Budget and will borrow from items contained in the United States’ Chapter 11 bankruptcy provisions.
The new measures will apply to incorporated small businesses with tax liabilities of up to $1 million.
Under the new policy, small businesses facing financial distress can seek advice from an insolvency practitioner to develop a restructuring plan.
The small business operator, working in collaboration with the adviser, will have a period of 20 days to develop a plan, which will need to include restructuring debt and preparing a case for creditors to consider.
The current policy in place, effectively removes owners from any control over their business. Thus, the new measures will ensure business operators in financial distress are able to maintain an added level of control over their business’s operations.
Once a plan is brought forward, creditors will then be given 15 days to vote on the plan, during which the business can continue to trade but must lodge any outstanding tax returns and pay out all employee entitlements.
From there, should 50 per cent of the creditors agree to the plan, it will then be approved and all unsecured creditors will be bound by the agreement.
The business will then be allowed to continue trading under what will be known as a “debtor in possession model”. This model effectively means that a business can continue trading under the control of its owners.
“By enabling owners to remain in control, businesses will be more open to enter into the insolvency process sooner, providing them with an opportunity to restructure and increasing their chances of surviving the COVID crisis,” wrote Mr Frydenberg.
“This process is in contrast to the current regime where owners effectively lose control of their business, with an administrator being placed in control and determining any restructuring plan to be put to creditors.”
The new scheme will start on January 1 next year.
The new measures will include increasing the threshold for statutory demands from creditors from $2000 to $20,000 and extending the time companies have to respond to statutory demands from 21 days to 6 months.
In order to prevent corporate misconduct such a phoenixing activities, the new provisions will prohibit creditors voting on a restructure plan, and a company or the directors will only be permitted to implement the process once every 7 years.
The process can be stopped at any time by the insolvency practitioner known as a ‘Small Business Restructuring Practitioner’, should misconduct be identified.
Mr Frydenberg will further disclose the policy as part of a pre-budget speech on Thursday.
Source: Treasury, date accessed: 28 September 2020.
Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.