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Debt Restructuring legislation proposed for SMEs

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

The Treasury has today announced its Draft Bill designed to create a new, affordable restructuring mechanism for distressed small to medium businesses. The legislation seeks to resolve problems SMEs face in affording the costs of expensive Voluntary Administration processes. The Australian Government’s “Debt Restructuring” solution is a new process similar to a Part IX debt agreement available to insolvent individuals under bankruptcy legislation, as well as Chapter 11 arrangements available to companies in the US.

The Debt Restructuring process allows company directors to retain control of the company while putting a proposal to creditors for consideration, provided they meet the “eligibility criteria”, to be prescribed in regulations. Notably, the company’s total liabilities must be limited to a certain size in order to meet the eligibility criteria (as with Part IX debt agreements).

Whilst it is not a new proposal (ARITA has been advocating for such a mechanism since 2014), it has been picked up by the Government amidst the COVID-19 economic crisis in the hope of limiting fallout as a result of collapsing businesses once the faucet of stimulus is turned off and other temporary relief measures come to end, which is currently scheduled for the end of the year. As such, the new legislation will be effective from 1 January 2021.
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Model Behaviour: the Australian version of America’s Chapter 11 Bankruptcy Scheme – Key Points

By Jodie Rodrigues, solicitor at Matthews Folbigg in the Insolvency, Restructuring and Debt Recovery Group

Part 1: The Key Points

On 24 September 2020, the latest instalment in Australia’s insolvency reforms was announced. These reforms have been branded “the most significant reforms to Australia’s insolvency framework in 30 years”.

And yet the plan, apparently, is to have these reforms in place in 3 months.

Under the Morrison government’s proposal, Australia would adopt a framework modeled on parts of Chapter 11 of America’s Bankruptcy Code. The proposed system would provide two alternative forms of insolvency administration for small businesses with liabilities of up to $1,000,000:

  1. A ‘debtor in possession’ restructuring plan, allowing thirty-five business days to obtain creditor approval for a debt restructure; and
  2. A simplified form of corporate liquidation, is restructure is not possible.

Restructuring Process

From 21 January 2021, small businesses with liabilities of less than $1,000,000 will have access to a debtor-controlled restructuring process in which there will be:
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