How Have Insolvency Laws Changed Since 1 January 2021?

Background

For the first time in 30 years, new Australian insolvency laws came into effect this year, on 1 January 2021 as part of the Government’s JobMaker plan. The ‘Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth)‘ followed the government’s temporary debt relief measures during the COVID-19 pandemic. These protection measures aimed to support vulnerable and distressed businesses from 22 March 2020 to 31 December 2020. Keep reading if you want to know what these changes are and how it affects you.

Temporary Debt Relief Measures from March 2020 to December 2020

The temporary changes in 2020 involved increasing the minimum debt threshold for bankruptcy. This increased from the amount of $5, 000 to $20, 000. It also allowed creditors to apply for a bankruptcy or insolvency notice. Additionally, the timeframe for individuals to respond to a bankruptcy notice expanded from 21 days to 6 months. A significant change that also occurred was the increase to the temporary debt protection period. This allowed individuals to apply for 6 months of relief from their creditors, originally being only 21 days. Now that these temporary measures have ceased, it’s important to be aware of the new insolvency laws from 1 January 2021 which we’ll jump into now.

New Corporate Insolvency Laws

Insolvency laws have changed under the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth). On 24 September 2020, the national Treasurer announced the changes to insolvency laws for small businesses. These new provisions are for small businesses particularly important and focus on effective business restructuring.

Here’s a breakdown of what this means for small businesses:

  1. The new minimum amount of debt that can render a company bankrupt has increased from $5,000 to $20,000 (adopted from the temporary debt relief measures).
  2. Individuals must respond to a bankruptcy notice within 21 days.
  3. Temporary debt protection from creditors has also been reduced back to 21 days, rather than the 6 months permitted under the temporary debt measures.

Small Business Restructuring

Another key change to emerge from the Corporate Insolvency Reforms Act is Small Business Restructuring (SBR). The goal of this is to reduce the costs of going into administration. Moreover, it allows directors to stay in control of the business. This is to prevent the company from going under. In the new SBR process, a Small Business Restructuring Practitioner (SBRP) assists and advises the company directors to come up with a debt restructuring plan for the business. The goal of this is to help businesses survive and overcome the economic impacts of COVID-19.

Temporary Restructuring Relief

Once a company has chosen to have a Small Business Restructuring Practitioner (SBRP), they may also be eligible to receive ‘temporary restructuring relief’. This is available to eligible small businesses between the period of 1 January 2021 to 31 March 2021. Be sure to check whether your company meets the eligibility criteria for temporary restructuring relief.

A Simpler Liquidation Process

The last significant change to insolvency laws is: a simplified liquidation process for smaller companies. Now, companies with liabilities of less than $1 million dollars, have a more streamlined process that’s tailored to smaller insolvent matters. We’re seeing a shift away from a ‘one size fits all’ approach, providing appropriate pathways for small companies that can’t survive in today’s climate. Key features of this liquidation process include streamlined reporting, meetings and investigation. Bear in mind, however, that this only applies to events triggering liquidation on or after 1 January 2021.

Conclusion

There’s never been a more critical time for businesses to be prepared for the worst in 2021. So it’s best to ensure you’re across these new insolvency laws under the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth). We saw businesses at high levels of vulnerability throughout 2020 and even the continuation of this trend today. It should be your business’ priority to avoid the worst case scenario. If you would like further advice on this particular matter, don’t hesitate to get in touch with Lawpath today.

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