Small Business Restructuring & Liquidation – A new avenue for small businesses

Earlier this year, the federal government introduced the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) (the Act) into legislation. The Act was introduced as part of legislation intended to soften the blow of the COVID-19 Pandemic and provide a simplified and cheaper avenue for small businesses to restructure, or should they close down and voluntarily liquidate the business, a simplified avenue to finalise the assets of the business.

Small Business Restructuring

To be eligible for a Small Business Restructure (SBR), a small business must determine that it is currently or is likely to be insolvent, and has a total outstanding liability of $1 million. If a small business has debts or other liabilities that exceed this amount, they are unable to access the SBR scheme.

Once a small business has entered into SBR, an SBR Practitioner (a registered liquidator who is not connected with the business) will be appointed over the company and will then create and finalise a restructuring plan. Once a restructuring plan is issued to creditors of a business in SBR, they have 15 days to accept or reject the plan. SBR’s are only finalised when all obligations under the restructuring plan are fulfilled and all admissible debts or claims within the restructuring plan are resolved.

SBR allows a small business to retain some control over the business, assisted by the SBR practitioner and to continue to operate and undertake transactions that are in the usual course of business.

If a secured creditor holds a security interest over an SBR, they have strict timeframes to enforce their security interest. If a secured creditor does not enforce the interest within 13 business days from receiving notice of the SBR, they may be restricted from enforcing their interest against the business.

Ipso facto clauses, or insolvency event clauses which end a contract due to insolvency are also unable to be enforced during an SBR.

Simplified Liquidation

Small businesses can now also access a simplified liquidation scheme to allow them to finalise their business through a cheaper and straightforward avenue.

Simplified liquidation (SL) is only available if a business meets the same threshold requirements as an SBR, have up to date tax lodgments, and if a business is voluntarily wound up and submits a report to a liquidator confirming eligibility for SL. A small business must also enter SL within 20 days of being wound up, and is also subject to the majority of creditors agreeing to the SL.

Some transactions are also treated differently when a business enters SL. Unfair preference payments, which are payments made by a business that are usually repayable to the liquidator are now treated differently. Payments that are made 3-6 months after SL are only void if they are payments made to a related entity, and payments made within 3 months of SL are only void if they are paid to a related entity and the value of the payment exceeds $30,000.

Future changes

Wheels are already in motion to expand the operation of the legislation, with further changes being proposed by the government, some of which include:

  • Guaranteeing employees access to the Fair Entitlements Guarantee (FEG) scheme if their employer enters SBR;
  • Excluding some regulated entities from access to the scheme; and
  • Allowing Aboriginal and Torres Strait Islander Corporations access to the scheme.

For more information on the rights of your business, contact SPM Law today on 5440 4800.

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