In an extraordinarily unheralded development, it has been reported that overnight Treasury issued a press release to major publications – then retracted it until midnight. It has announced significant planned reforms, primarily a new SME restructuring mechanism to catch the wave of insolvencies projected to hit in 2021 when the current pandemic-linked protections end. It is a debtor-in-possession model which adopts aspects of the US Chapter 11 bankruptcy process. The laws are intended to be passed in the coming months so that they take effect from 1 January 2021.

Key elements include –

• To be eligible, companies must have liabilities of less than $1million
• They will be able to keep trading while they develop a debt restructuring plan
• They will engage a specialist “small business restructuring practitioner” (SBRP) to help them prepare the plan, certify the plan to creditors, and oversee disbursements once the plan is in place
• They will have 20 business days to develop the plan, during which there is a moratorium on unsecured and some secured creditors taking action against the company
• As noted above, the SBRP “certifies” whether she/he considers the business can meet the proposed repayments and has properly disclosed its affairs (Note: this element could be significantly problematic. It will only be an opinion, and one that relies upon the information provided to the SBRP by those running the business. But it may be understood by creditors to be akin to a guarantee)
• Creditors will then have 15 business days to vote on the plan, including the remuneration of the insolvency practitioner to deliver on the plan
• Employee entitlements that are due and payable will be required to be paid in full before the plan is voted on by creditors (Note: this may exclude many failing SME’s from using this model)
• It will require a vote of more than 50% of creditors by value to approve the plan
• Related party creditors will be prohibited from voting on the plan
• There will be a streamlined liquidation process for companies that cannot be revived

The announcement was made without consultation with industry (what could possibly go wrong?) It is hoped this will take place now. Whilst the aspirations are understandable, commentators are already pointing out the problems and risks with the proposed new model.

The Treasurer is expected to announce more detail later today.

In the meantime, Treasury has released a fact sheet with Q&A and case study – see here.