Proposed insolvency reforms for small businesses

Proposed insolvency reforms for small businesses

On 24 September 2020, the Federal Government announced the most significant reforms to the Australian insolvency framework in 30 years as part of Australia’s economic recovery plan following the COVID-19 pandemic.

The proposed amendments relate to amending the current insolvency framework to better serve small businesses, their creditors and their employees. The changes are intended to reduce the complexity, time and costs of insolvency processes for small businesses. Subject to Parliament passing the Bill, the new measures will commence on 1 January 2021.

On 7 October 2020, the Federal Government published an Exposure Draft of the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (the Bill) and Explanatory Materials for public consultation, which ended on 12 October 2020.

The details of the supporting regulations are yet to be finalised. However, it is important for companies to understand the proposed changes that could potentially impact their businesses in the near future.

The key elements of the Bill include:

  1. a new formal debt restructuring process for eligible companies to provide a faster and less complex mechanism for financially distressed businesses to restructure their existing debts, maximising their chances of continuing and contributing to the economy;
  2. extended temporary relief for eligible companies intending to undertake a formal debt restructuring process;
  3. a simplified liquidation process for eligible companies in a creditors’ voluntary winding up;
  4. refinements to the requirements for registration as a liquidator; and
  5. greater use of electronic documents and electronic signatures in an external administration.

We set out each of these elements below in further detail.

1. A new formal debt restructuring process

The Bill proposes to insert a new Part 5.3B in the Corporations Act 2001 (Cth), which will establish a new formal debt restructuring process for eligible companies. This process will allow company directors to retain control of their business, its property and financial affairs, while developing a plan to restructure their debt with the assistance of a small business restructuring practitioner.

In short, the steps of this process will include:

a) Appointing a small business restructuring practitioner (SBRP):
An eligible companies’ debt restructuring process will begin with the appointment of a SBRP (or multiple SBRPs).

A SBRP is a registered liquidator who will provide advice to the company to ensure that it meets the requirements of the debt restructuring process. This includes assisting the company in preparing its restructuring plan, making a declaration to the creditors of the proposed plan and any other relevant functions prescribed under the Act.

A company may appoint a SBRP if:

i. it meets the eligibility criteria;
ii. the board of the company has resolved that:
a) the directors have reasonable grounds for suspecting that the company is insolvent, or is likely to become insolvent in the future; and
b) a SBRP should be appointed. 

The eligibility criteria will be prescribed by amendments to the Corporations Regulations 2001 (Cth) and will include:

i. criteria in relation to the liabilities of a company on the day the SBRP is appointed. The Government announced that this will likely apply to companies with liabilities of less than $1 million; and
ii. that no director of the company has been a director of a company that has been subject to a debt restructuring process of a simplified liquidation process during a prescribed period.

The debt restructuring process will not be available to a company if:

i. it is already under restructuring or administration;
ii. it has executed a deed of company arrangement (that has not yet terminated); or
iii. a liquidator or provisional liquidator has been appointed to the company.

When a company enters into the debt restructuring process, it must give notice on all public documents and negotiable instruments that it is under the restructuring process by adding (“restructuring practitioner appointed”) after the company’s name. This requirement exists for the duration of the restructuring process

b) Developing a restructuring plan:
The company directors will be responsible for preparing a restructuring plan and supporting documents and providing them to the SBRP. The SBRP then certifies the plan based on their assessment of the company’s financial affairs.

A company may then propose a restructuring plan to its creditors. The plan must provide sufficient information for the creditors to decide on whether to accept or reject the plan. The regulations may provide for matters relevant to developing a restructuring plan.

Once a company proposes a restructuring plan to its creditors, it is taken to be insolvent. The regulations may prescribe the process by which creditors may accept and reject a restructuring plan.

If the majority of creditors accept a restructuring plan, the plan commences and the SBRP is appointed to oversee the plan. However, if the majority of creditors vote against the plan, the process ends and the directors may choose to enter into another insolvency process.

c) Conducting a business during the restructuring process:
Generally, while the company is under restructuring, directors must not enter into, or purport to enter into, a transaction or dealing affecting the property of the company. The exceptions to this prohibition include:

i. entering into the transaction or dealing was in the ordinary course of the company’s business;
ii. the SBRP has consented to the transaction or dealing, and, if any conditions are imposed on that consent, those conditions are met;
iii. the transaction or dealing was entered into under an order of the Court. 

A payment made, a transaction entered into, or any other act or thing done in good faith, or with the consent of, the SBRP of a company under restructuring is valid and effectual for the purpose of the Corporations Act and is not liable to be set aside in a winding up of the company.

d) Stay on enforcement rights
A right that arises by express provisions of a contract, agreement or arrangement for any of the following reasons cannot be enforced during the “stay period”:

  1. the company is under restructuring;
  2. the financial position of the company while under restructuring;
  3. a reason prescribed by the regulations, if the company later comes under restructuring; or
  4. a reason that, in substance, is contrary to this provision.

The “stay period” starts when the debt restructuring process begins and ends when:

  1. the restructuring ends; or
  2. if one or more orders are made as a result of applications before restructuring ends, then when the last order ceases to be in force; or
  3. if an extension is granted by the Court, then when that extension ends; or
  4. if the company ceases to be under restructuring because of a resolution or order for the company to be wound up, then when the company is fully wound up.

The Court may order that the “stay period” be extended if it is in the interests of justice to do so.

e) Terminating a debt restructuring process:
The circumstances under which the debt restructuring process can end may be prescribed by the regulations.

The SBRP may terminate the debt restructuring process, at any time, if they believe on reasonable grounds that:

i. the company does not meet the eligibility criteria for restructuring;
ii. it would be in the interests of the creditors for the restructuring to end;
iii. it would be in the interests of creditors for the company to be wound up;
iv. any other grounds prescribed by the regulations.

The SBRP must give notice of the termination in writing to the company and as many of its creditors as reasonably practicable. Termination takes effect on the day on which the notice is given to the company. 

2. Extended temporary relief for eligible companies intending to undertake a formal debt restructuring process

The Government proposed to provide temporary insolvency relief for eligible companies waiting to access the new restructuring process, where a company can announce its intention to access the restructuring process, then benefit from the existing temporary insolvency relief for up to 3 months until the process commences (i.e. from 1 January 2021 to 31 March 2021).

These temporary relief amendments were not available as an exposure draft for consultation.

3. A simplified liquidation process

This process is only available in a creditors’ voluntary liquidation.

The simplified liquidation process for a creditors’ voluntary winding up does not create a new liquidation process. Instead, it adopts small changes to the existing framework for a more fit-for-purpose and efficient process.

Entry into the simplified liquidation process
Where a liquidator believes on reasonable grounds that a company in a creditors’ voluntary winding up meets certain eligibility criteria, the liquidator may adopt the simplified liquidation proves instead of the regular liquidation process.

The eligibility criteria will be met by a company if:

  1. the company has passed, or is taken to have passed, a special resolution that the company be wound up voluntarily;
  2. the directors have given the liquidator a report about the company’s affairs and a declaration that the company will be eligible for the simplified liquidation process;
  3. the company is insolvent;
  4. the total liabilities of the company do not exceed the amount to be prescribed in the regulations. This will likely be the amount of $1 million;
  5. no director has been a director of a company that has previously used the simplified liquidation process or a debt restructuring process;
  6. the company’s tax lodgements are up to date.

However, the liquidator must not adopt the process if any one of the following exclusions apply:

  1. more than 20 days have passed since the relevant triggering event that brought the company into liquidation;
  2. the liquidator has not notified members and creditors of the company that they have a reasonable belief that the company is eligible for the simplified liquidation proves and provided an opportunity for creditors to opt-out of the process; or
  3. creditors of the company have requested the liquidator not to adopt the simplified liquidation process.

Features of the simplified liquidation process
The simplified liquidation process departs from the usual process:

1. by providing in the Corporations Act 2001 (Cth) that particular aspects of the regular process do not apply. This will include:

i. reducing investigation and reporting requirements. For example, only requiring the liquidator to report to ASIC on potential misconduct where there are reasonable grounds to believe that misconduct has occured;
ii. reducing requirements to call meetings;
iii. excluding the use of committees of inspections and reviewing liquidators;
iv. simplifying the dividend process and the proof of debt process;
v. further elements that may be provided in regulations.

2. through supporting regulations to provide specific rules relevant to the simplified liquidation process.

Exiting the simplified liquidation process
In certain circumstances, the liquidator must cease to follow the simplified liquidation process. This includes where:

  1. the eligibility criteria for the simplified liquidation process are no longer met in relation to the company; and
  2. other circumstances prescribed by regulations.

Where the above occurs, the creditors’ voluntary winding up is still in progress and the company remains in liquidation. However, the liquidator must now follow the regular process for a creditors’ voluntary liquidation.

4. Refinements of the registration of liquidators

The Bill provides more flexibility to committees considering applications for registration as a liquidator.

Under current law, an individual may apply to ASIC to be registered as a liquidator. The application is then referred to a committee, which assesses the application against certain criteria, such as qualifications, conduct, fitness and insurance. The committee reports its decision to ASIC. If the committee decides the applicant should be registered, ASIC registers the applicant as a liquidator.

The amendments in the Bill provide that the committee may decide that an applicant should be registered even if the committee is not satisfied of particular criteria, provided that the applicant complied with certain conditions. The particular criteria to which this rule relates are that the applicant:

  • has the qualifications, experience, knowledge and abilities set out in the Insolvency Practice Rules;
  • has not had his or her registration as a liquidator cancelled within 10 years;
  • has not has his or her registration as a trustee under the Bankruptcy Act cancelled within 10 years; and
  • is a resident in Australia or another prescribed country.

5. Virtual meetings and electronic communications

The Bill allows electronic communication to be used to provide a document under the external administration provisions, the Insolvency Practice Schedule, Corp Regulations, the Insolvency Practice Rules and any other relevant instrument.

It also allows documents relating to external administration to be signed electronically. Signatories may sign different copies of the document, provided that the copy includes the entire contents of the original document.

Contact us
Lionheart Lawyers will provide a further update once this Bill is progressed in the Parliamentary process and its supporting regulation is announced. In the meantime, please contact our team to discuss how these changes may apply to your business.

Important Disclaimer: The material contained in this publication is of general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you require further information on the content of this publication, please contact our office on 9299 0112.