Welcome to the latest edition of Insolvency Sound Bites, which is intended to be a quick refresher on current developments in the Insolvency and Reconstruction space.
On 3 May 2021, the Government announced further reforms to the insolvency framework intended to assist with the post Covid-19 economic recovery.
The Government will consult on how trusts are treated under insolvency law.
Presumably, this will include some alignment with the Corporations Act provisions with respect to corporate liquidation to avoid some of the complications and expense that have arisen in the winding up of trading trusts as a result of recent superior court decisions.
The Government will review whether the safe harbour provisions introduced in 2017 remain fit for purpose. Interestingly the original legislation provided for a review two years after its introduction.
Schemes of Arrangement
The Government propose to consult on improving the existing scheme of arrangement process to better support business which could include a moratorium on creditor enforcement whilst schemes are being negotiated.
Schemes of arrangement pre date the voluntary administration regime introduced in 1993 and have largely fallen into sporadic use since then.
Schemes of arrangement are generally only applicable to large complicated corporate group transactions.
Schemes of arrangement are generally out of the financial capacity of SME’s involving as they do the expense of at least two court applications.
The threshold at which creditors can issue a statutory demand will be raised to $4,000 from $2,000.
The temporary Covid-19 relief measures in place last year raised this threshold to $20,000.
These proposed reforms are in the main debtor centric and are designed to assist with the transition through to the post Covid-19 economy.
ATO SME Debt Recovery
As part of the measures introduced in the recent federal budget, the Administrative Appeals Tribunal will have the power to stay or modify ATO debt recovery actions where the debt is being disputed by a business with a turnover of less than $10 million.
Under the current framework the disputed assessment has to be paid and then disputed unless a stay on enforcement is secured from the court.
Accordingly the cost of challenging an ATO assessment can be cost prohibitive to SME’s.
This measure would only apply to genuine disputes.
Consumer Debt Management Services
From 1 July 2021 providers of consumer debt management services must hold a credit license though ASIC with a debt management authorization.
A debt management service broadly covers services such as ‘credit repair’ and ‘debt negotiation’ provided.
- The activity is in relation to consumer credit contracts; and
- A fee, charge or other amount is paid or payable by or on behalf of the consumer in relation to the service.
Some debt management services such as debts under utilities contracts, business loans and consumer leases do not relate to consumer credit contracts and are not treated as credit activities and a credit license is not required to provide these services.
These measures are limited to consumer debt management services and do not appear to extend to providers of equivalent services in the commercial space.
This implements changes to the consumer credit laws announced by the government on 25 September 2020