Insolvency Law Reforms 2020
Following the coronavirus pandemic, Treasurer Josh Frydenberg has announced changes to the insolvency legislation and liquidator processes to assist distressed small businesses. The proposed changes intends to introduce “new processes suitable for small businesses, reducing complexity, time and costs for small businesses” into the insolvency framework. The Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 and its changes to the Corporations Act 2001 (Cth) are proposed to take effect from 1 January 2021 and marks an extended 6 months lifeline for Australian small businesses.
Broadly, the draft Bill introduces the following main provisions:
Introduction of Part 5.3B in Corporations Act 2001 (Cth) which establishes an alternative formal debt restructuring process for eligible smaller non-complex businesses;
Introduction of a simplified liquidation pathway for eligible smaller companies to allow for a more efficient and cost-effective liquidation process; and
Additional measures to ensure that the insolvency and restructuring sector can adequately respond to the needs of small businesses and the proposed small business insolvency reforms.
Part 5.3B of the Corporations Act 2001 (Cth)
To counteract the effect of small business increasing their level of debt to remain in business during COVID-19, the draft Bill proposes to introduce a new Part 5.3B within the Corporations Act 2001 (Cth) which allows a new, simplified restructuring process. Drawing on the United States Chapter 11 ‘debtor in possession’ model, Part 5.3B allows for directors of companies with outstanding debts of less than $1 million to retain control of their company by appointing a small business restricting professional (SBRP) to assist in developing a restructuring plan. Only registered liquidators may consent to act as an SBRP and their role would be to review a company’s financial affairs, support the company in developing a restructuring plan and to certify the plan to the company’s creditors.
For a company to be eligible to appoint an SBRP, its board must have resolved that the company has reasonable grounds for suspecting a current, or a likelihood of future insolvency. A company will be ineligible for small business restructuring if any of its current directors have utilised an SBRP for another company of which they are a director, to which there are a number of exceptions under the Corporations Regulations 2001 (Cth), or if it is currently subject to other forms of external administration or restructuring arrangements.
The proposed debt restructuring process begins with the appointment of an SBRP following which a restructuring plan, accompanying information and certification is developed and issued to creditors within twenty (20) business days, for approval. The restructuring plan is open for voting by creditors within fifteen (15) business days. The restructuring process is described as ending with creditor voting to either accept or reject the proposed plan. If approved, the restructuring plan will be implemented by the directors of the company with assistance by the SBRP. If rejected, the company may then need to consider alternative insolvency processes such as voluntary administration or a simplified liquidation pathway.
Whilst these reforms are heavily influenced by the existing voluntary administration framework in Part 5.3A of the Corporations Act 2001 (Cth), they seek to significantly improve this current rescue process for insolvent companies. Previous voluntary administration processes pursuant to Part 5.3A followed by the approval and implementation of a deed of company arrangement (DOCA), often yielded less than average returns to unsecured creditors and takes a ‘one size fits all’ approach to financial distress. In this respect, the draft Bill provides an alternative that may significantly advance the number of successful debt restructuring for small businesses.
There are a number of effects of the proposed small business restructuring reforms on existing provisions of the Corporations Act 2001 (Cth):
Voidable Transactions under section 588FE- if a company is wound up, transactions undertaken by the company during the restructuring process are voidable unless those transactions were made with the consent of the SBRP while under restructuring or were made on behalf of the company under the authority of the SBRP for the restructuring plan.
Directors Duties under Part 2D.1- company directors must help the SBRP by attending on the SBRP, providing information on the company’s business, property, affairs and financial circumstances and giving the SBRP access to inspect and make copies of company books. Failure to do so, without a reasonable excused, is considered a strict liability offence and may result in penalties.
Stay of Ipso Facto Clauses under section 451E: existing moratoriums in relying on ipso facto contractual clauses during voluntary administration of a company will be extended to scenarios involving companies undergoing the restructuring process. This stay period will commence when the company appoints an SBRP and concludes once creditors have voted to either accept or reject the proposed restructuring plan.
Simplified Liquidation Pathway
In addition to introduction of a new small business restructuring plan, the latest reforms seek to introduce a simplified liquidation pathway for eligible smaller companies. Current liquidation processes in Australia is mainly suited to larger corporations, however under the proposed reforms, a liquidator’s regulatory obligations for companies with outstanding debts of less than $1 million, are simplified with a number of proposed modifications such as:
Removal of a liquidator’s obligation to prepare a report to creditors under section 533 of the Corporations Act 2001 (Cth);
Removal of requirements to call creditor meetings and instead, liquidators to provide information to creditors electronically;
Reduced circumstances in which transactions can be deemed voidable or in which a liquidator can seek to clawback unfair preference payments; and
Simplifying the process of submitting proof of debts and dividend process to creditors.
This simplified liquidation pathway will only be available to companies that have resolved to undergo voluntary liquidation circumstances and must meet the following additional criteria:
The directors of the company must have given the liquidator a report about the company’s affairs and a declaration that the company is eligible for the simplified liquidation process;
The total liability of the company must not exceed $1 million;
The company’s tax lodgements are up to date;
No more than 25% of the creditors in value, have requested the liquidator to not adopt the simplified liquidation process; and
No more than 20 days have lapsed since the relevant triggering event that brought the company into liquidation.
Gartree Thomson Lawyers is broadly supportive of the proposed insolvency reforms and we look forward to release of the draft regulations that would further detail the above reforms. We will continue to closely monitor these updates and provide guidance as it comes to hand. However in the interim, please contact our office on (02) 9922 4111 to discuss how these reforms may apply to you.
By Pradha Gurumahan LL.B | Associate