25 September 2020
The Treasurer has announced the most consequential changes to Australia’s insolvency laws in 30 years.
The changes are styled on the Chapter 11 regime utilised in the United States. It represents a significant shift from the current ‘creditor-in-possession’ regime to a ‘debtor-in-possession’ system. Incorporated entities with liabilities of less than $1 million will be able to access the scheme.
Some of the key features of the proposed scheme are:
The measures will commence on 1 January 2021 but there is scope for early access for small businesses who declare an intention to access the scheme. The commencement of these provisions appears to coincide with the expiry of the temporary insolvency measures regarding the suspension of insolvent trading liability and modifications to statutory demands.
In anticipation of the demands on the insolvency profession, the Treasurer has also relaxed regulatory requirements relating to insolvency practitioners, including:
There is still considerable detail missing from the current proposal and some areas of significant concern. For example, in the simplified liquidation pathway, there will be reduced circumstances in which a liquidator can seek recovery of unfair preference payments from a creditor that is not related to the company. But no further detail is provided. Also, within this process, it is noted that steps will be taken to ‘simplify’ the dividend and proof of debt process without any indication as to how this will be done. What does ‘flexibility’ in the registration of insolvency practitioners mean?
There is also concern that the safeguards proposed for the system, which include a prohibition on related creditors voting on a restructuring plan and a bar on the same company, or directors, from accessing the system more than once in seven years, will be insufficient to prevent illegal phoenix activity.
We will continue to closely monitor these changes and provide further guidance as it comes to hand.
The media release from Josh Frydenberg and the associated fact sheet can be accessed here.
Author: Mitchell Waters
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.