The Treasury has identified a need to improve creditor schemes of arrangement to help viable businesses in financial distress restructure. The Treasury is seeking input from companies on the proposed reform.
Insolvency law reform
Insolvency occurs when a business cannot continue to pay its debts on time. Previously, liquidation or voluntary administration was the most common course of action for insolvent small and medium enterprises.
The proposed reform aims to strengthen instead the ability for businesses to restructure rather than liquidate. The reform Treasury is considering would place an automatic moratorium on creditors while a company is claiming insolvency.
An automatic moratorium would place a legally binding hiatus on debt collection by creditors while a business restructures to avoid liquidation. The Treasury supposes this reform would function similarly to the moratorium applied to the process of voluntary administration.
The Treasury says an automatic moratorium would give companies and creditors “breathing space” and time to implement a company restructure. It said it is committed to “Further simplifying and streamlining insolvency law so that viable businesses that do encounter economic challenges have the opportunity to restructure and go on trading.”
These changes are part of a broader insolvency legislation change that the Treasury announced in September of 2020.
Donna Acioli, a representative of the Treasury, said, “The consultation follows on from the Government’s small business reforms to the insolvency framework, which came into effect on the 1st of January 2021, and introduced new insolvency processes to reduce complexity, time, and costs for small businesses. As part of the 2021 Budget, the Government also announced that it would consult on how trusts, which are commonly used by small businesses, are treated under insolvency law. The intent is to further reduce complexity and support business turnaround.”
Having effective insolvency legislation is imperative to keeping temporarily struggling businesses trading.
Ms. Acioli said, “Any further reform could support businesses, particularly larger businesses, to reorganise and survive. In turn, this could deliver benefits to employees, creditors, and suppliers (including small and medium enterprises), and make Australia a more attractive place to do business.”
What the Treasury wants to know
Ms Acioli said, “The consultation process is open to all stakeholders, including small business stakeholders. The perspectives of all stakeholders will be welcomed.”
Below are some examples of what the Treasury wants to know. The complete list and the report can be read here.
- Should an automatic moratorium apply from the time that a Company proposes a scheme of arrangement? Should the automatic moratorium apply to debt incurred by the Company in the automatic moratorium period?
- When should the automatic moratorium commence and terminate? Are complementary measures (for example, further requirements to notify creditors) necessary to support its commencement?
- Are additional protections against liability for insolvent trading required to support any automatic moratorium?
- What, if any, additional safeguards should be introduced to protect creditors who extend credit to the Company during the automatic moratorium period?
- Should rescue, or ‘debtor-in-possession, finance be considered in the Australian creditors’ scheme context?
- What other issues should be considered to improve creditors’ schemes?
The request for feedback is currently open and will remain open up until the 10th of September. To submit feedback:
Mail: Manager, Market Conduct Division, The Treasury, Langton Crescent PARKES ACT 2600
Address inquires to Matthew Bowd.