On 10 December 2020, the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) (the “Bill”) was passed by the Federal Parliament. The Bill makes a number of amendments to the Corporations Act 2001 (Cth) that come into effect from 1 January 2021. The new laws provide for a debt restructuring process that will enable a company’s directors to remain in control of the company. The new laws also allow for a simplified liquidation process to apply to a small business.
Small Business Restructuring
The small business restructuring process contemplates a ‘debtor-in-possession’ model that enables eligible small businesses the opportunity to work with a small business restructuring practitioner to develop and propose a debt restructuring plan to its creditors. Directors remain in control of the business, while the restructuring plan is developed.
To be eligible to use the above process, the company:
- must be insolvent or likely to be insolvent;
- must have liabilities of less than $1 million, including secured and related-party debt but excluding employee entitlements;
- must have paid all outstanding employee entitlements, including superannuation;
- must be substantially complying with its obligations to lodge returns with the Australian Tax Office; and
- cannot have a director that has previously used the small business restructuring or simplified liquidation process.
The process is commenced by a company’s directors passing a resolution that the company is insolvent or is likely to become insolvent and that a small business restructuring practitioner, who must currently be a registered liquidator, is appointed. The company then has 20 business days to develop, in consultation with the small business restructuring practitioner, a plan to restructure the company’s debt.
Once the plan has been presented to the company’s creditors, those creditors then have 15 business days to vote on whether to accept the plan or not. There are no physical meetings of creditors with proposals being voted upon electronically. The plan will be accepted if a majority in value of the company’s creditors who vote on the proposal, vote to accept it. Related creditors are ineligible to vote.
If the company’s creditors vote to accept the plan, the company, its unsecured creditors with admissible debts, and the small business restructuring practitioner will all be bound by the plan. Secured creditors of the company will only be bound if they voted in favour of the plan. As with a voluntary administration, a secured creditor will be free to realise or deal with their security unless a Court orders otherwise. Furthermore, Court proceedings and enforcement proceedings are stayed and cannot be commenced against the company during the debt restructuring process.
If the restructuring plan is not accepted or is terminated, the company is still at liberty to utilise a traditional external administration process such as a voluntary administration or a creditors’ voluntary liquidation.
The new laws also enable temporary relief for a company and its directors who wish to enter into the debt restructuring process but are unable to do so in the early part of 2021. In those circumstances, if a company director publishes a declaration on the ASIC insolvency notices website between 1 January 2021 and 31 March 2021:
- there are reasonable grounds to believe that the company is insolvent or likely to become insolvent;
- the company has satisfied the eligibility criteria for the small business restructuring process;
- the board has resolved that a restructuring practitioner should be appointed; and
- no restructuring practitioner or other insolvency practitioner has been appointed,
the company and its directors will be entitled to a three (3) month extension of the temporary insolvency relief implemented in March of 2020 pursuant to the Coronavirus Economic Response Package Omnibus Act 2020 (Cth). As you will recall, pursuant to that Act:
- directors are not liable for insolvent trading claims with respect of debts incurred during the ordinary course of business; and
- a company will have six (6) months to comply with a statutory demand that can only be issued for debts greater than $20,000.00,
until 31 December 2020.
The new laws also introduce a simplified liquidation process for eligible companies that is intended to reduce the costs of the traditional liquidation process. The simplified liquidation process includes the following features:
- creditors’ meetings will generally not be held;
- there will be no committees of inspection;
- the liquidator is subject to reduced obligations with respect to investigations of the company’s affairs and reports to ASIC; and
- there are some restrictions on the recovery of preference payments by the liquidator.
The eligibility criteria for the simplified liquidation process are the same as detailed above for the small business restructuring process except that the company must be up to date with all of its tax lodgements.
A liquidator cannot adopt the simplified liquidation process if more than 20 business days have elapsed since his or their appointment. The liquidator must also give creditors at least 10 business days’ notice before adopting the simplified process. If 25% of the creditors by value (excluding related creditors) oppose the process, the liquidator cannot adopt it.
The new laws commenced on 1 January 2021. That date coincides with the end of the COVID-19 temporary relief measures implemented pursuant to the Coronavirus Economic Response Package Omnibus Act 2020 (Cth). It will remain to be seen whether we will see a flood of small businesses taking advantage of the new reforms.
The Treasurer has said that the $1 million liabilities cap will cover around 76% of businesses subject to insolvencies today. In those circumstances, advocates of the new reforms suggest that the reforms will be available for a significant number of small businesses in Australia. However, the requirement for a company to have paid all of its employee entitlements and to have all of its tax lodgements up to date before proposing a restructuring plan or being eligible for the simplified liquidation process could well be a significant practical impediment to the implementation of such a process.
Marino Law has extensive experience acting for and against liquidators, administrators, lenders, brokers, financiers and creditors in the administration of all corporate and personal insolvency appointments. Our highly experienced lawyers regularly advise clients in the following areas of corporate and personal insolvency:
- voluntary administrations;
- business and asset sales;
- enforcement of securities;
- statutory demands and bankruptcy notices; and
- debt agreements and personal insolvency agreements.
Should you require assistance in any of the above areas, please contact one of our highly experienced lawyers.