Will the upcoming proposed Insolvency law reforms be beneficial to small businesses?

On 25 March 2020, following on from the COVID-19 outbreak, the Federal Government passed temporary insolvency laws to help businesses navigate financial distress during the COVID-19 pandemic.

Fast-forward 6 months to 24 September 2020, the Federal Government announced a proposed new restructuring regime for small businesses with the release of the draft Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth). The introduction of the new insolvency legislation into Parliament is underway and the Federal Government is looking to commence the new regime on 1 January 2021, with the following two (2) main features:

  1. a new restructuring regime for small businesses that have total creditors less than $1 million dollars; and
  2. a simplified liquidation and insolvency procedure with an aim at helping viable small businesses with financial difficulties at a cheaper cost than the currently available options.

Many of the details of the new restructuring plan are yet to be provided and will be incorporated in regulations accompanying the bill. Some of these important details include the qualification and appointment of a Small Business Restructuring Practitioner, the conduct of electronic meetings of creditors and the directors’ control of the management of their companies during the process of restructuring.

The Federal Government is touting the proposed legislation as the most significant reform to the Australian insolvency framework in almost 30 years.

Why is this important?

Corporate insolvency arises when a company cannot pay its debts when they are due. Under the current corporate insolvency regime, the most common corporate insolvency procedures for insolvent small businesses are liquidation and voluntary administration. However, small businesses have been historically reluctant to seek help from registered insolvency practitioners at an early stage, given the perception that voluntary engagement of a registered insolvency practitioner is a lengthy legal process, is too expensive and represents an acceptance of failure. This is especially prevalent in the tentative re-emergence from COVID-19, with many small businesses still struggling to get their operations back to near normal.

The primary concern at this stage for the Federal Government is to take care of small businesses affected by the COVID-19 pandemic and protect jobs. Small businesses in Australia are fundamental to the emotional, financial and economic wellbeing of the community. The proposed measure certainly contains aspirational aims, but the eventual effectiveness, at this stage, can only be speculated. Without a doubt, a government-initiated insolvency reform is certainly a great initiative to do more to support small businesses and hopefully provide a more viable recovery plan for those small businesses suffering from the COVID-19 pandemic.

So, will the upcoming proposed insolvency law reforms be beneficial to small businesses?

Short answer: Time will tell.

What about a long answer?

The main intention of such reforms is to create a more economic and efficient solution for small businesses that seek to restructure their activities to avoid an insolvency event. The ultimate goal is to simplify the insolvency process and facilitate a viable restructuring alternative for small businesses.

However, small businesses may not find the proposals attractive if they are unable to find the purpose and value of entering into it. For example, if there are no or very few assets at risk the restructuring process is likely to deliver little benefit, they will not take part in the restructuring process. Also, if owners of small businesses have to inject additional personal funds for an outcome that may be considerably more expensive (in overall terms) than liquidation, what is the incentive for owners or directors of small businesses to engage in such a restructuring process? From a financial perspective, will there be any difference between the current insolvency system and the proposed alternative?

It has long been argued that reform of Australia’s insolvency regime is well past due, However, it remains to be seen whether the fruits of the proposed measures will be borne out in the uptake, or if simply adding complexity to the current insolvency legal system, without having any tangible benefits to stakeholders involved in the restructuring process, will be the fate of the measures.

What matters to small businesses?

Right now? Existence. Small businesses want to survive. Their owners want to make profits and keep making profits. When they encounter difficulty, they want to know how and where to get the best help. Whether or not there is a change to the insolvency system, we suspect that business owners, now more than ever before, want to know more about getting immediate help from trustworthy, qualified and regulated advisors who have deep skill and knowledge in the area.

That’s where we come in.

The insolvency directors and appointees at Vincents are members of ARITA and follow the ARITA Code of Professional Practice.

If you are running a small business and are currently encountering financial difficulties, do not let time and opportunity to engage early pass you by.  Take the very first step, by asking questions or seek help. You may find your situation is not nearly as bad as you had imagined. If it is, then early engagement will increase the options you have available to you, regardless of how the solution is eventually deployed. What we do know is that once it’s too late, it’s too late.

At Vincents, we provide straight-forward cost-effective insolvency and restructuring accounting services.

Our insolvency and restructuring services are delivered with clarity, transparency and accountability.

In addition to our insolvency services, we also provide professional services to small business for the following areas:

Want to know more?

If you have any further questions about the upcoming insolvency law reforms please contact Tony Lane, our Insolvency & Reconstruction Associate Director, for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

 

 

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