Following the end of temporary measures to protect businesses financially impacted by the COVID-19 pandemic on 31 December 2020, the new Corporations Amendment (Corporation Insolvency Reforms) Act 2020 (Cth) (“Act”) and associated regulations commenced on 1 January 2021.
The three key aspects of the new regime are:-
- a formal debt restructuring process for eligible small companies aimed at maximising their chances of survival;
- the extension of temporary relief for those seeking to invoke the new debt restructuring process; and
- a simplified liquidation process
The new debt restructuring process
The new debt restructuring process is designed to enable financially distressed but viable businesses to restructure their existing debts under a restructuring plan, and continue to trade, with the assistance of a small business restructuring practitioner (“Restructuring Practitioner”).
Eligibility
The new debt restructuring process is available to any company that:
- has total debts of less than $1 million;
- has not invoked the debt restructuring process within the past 7 years; and
- does not have a director who has invoked a formal debt restructuring process within the past 7 years (aimed at preventing illegal phoenixing activity).
The process
The process commences with the appointment of a Restructuring Practitioner (i.e. a registered liquidator). To appoint a Restructuring Practitioner, the directors must resolve that they have reasonable grounds for suspecting that the company is insolvent, or is likely to become so.
The directors and the Restructuring Practitioner then have 20 days (or an extra 10 days if extended by the Restructuring Practitioner, or additional time if extended by the court) to assess the company’s affairs and propose a restructuring plan to the company’s creditors.
The roles, responsibilities and rights of relevant parties during the process are:
The directors:
- retain control of the company’s business, property and affairs;
- must provide the Restructuring Practitioner with information about the company and cooperate with any requests the Restructuring Practitioner makes;
- must not cause the company to enter into a transaction affecting its property, other than in the ordinary course of business, except with the Restructuring Practitioner’s consent or under court order; and
- are relieved from liability for insolvent trading in respect of a debt incurred in the above circumstances.
The Restructuring Practitioner:
- acts as the company’s agent;
- helps the directors to develop a debt restructuring plan;
- has the power to investigate the company’s business, property and affairs;
- must only consent to transactions in the best interests of the company’s creditors;
- is not liable for any action or omission carried out in good faith and without negligence; and
- is entitled to be indemnified for remuneration and disbursements incurred over the course of their appointment.
The company:
- must add the phrase “restructuring practitioner appointed” to all public documents;
- must not undertake activities that alter the ownership or control of the company without the Restructuring Practitioner’s consent;
- has similar protections available to it to those under the existing voluntary administration regime (i.e. a stay on proceedings); and
- is protected by safeguards preventing the implementation of “ipso facto” clauses.
Third parties:
- generally speaking, cannot exercise property rights in relation to property used by the company unless with the Restructuring Practitioner’s consent;
- cannot rely on the debt restructuring process as a trigger for liability under a guarantee, except with leave of the court;
- may take enforcement action within 13 business days, or with leave of the court, if a secured creditor over the whole, or substantially the whole, of the company’s property.
The restructuring plan
Before a company can propose a restructuring plan to creditors, it must be up-to-date with the payment of its employee entitlements and tax lodgements, or at least substantially compliant. A company that proposes a restructuring plan is taken to be insolvent.
A restructuring plan will be accepted if a majority of creditors (excluding related entities) vote in favour of it. If accepted, the restructuring plan will bind the company, its directors, the Restructuring Practitioner and creditors with debts or claims under the plan. Secured creditors will only be bound if they agree, or to the extent their claim exceeds the value of their security.
Termination
The preliminary restructuring process comes to a natural conclusion when a restructuring plan is accepted. The process will also terminate if:
- the creditors vote against the plan;
- the company fails to propose a plan within the requisite period;
- the directors make a declaration that the process is to end;
- the Restructuring Practitioner terminates the process;
- an administrator or liquidator is appointed to the company; or
- the court orders that the process should end.
A restructuring plan will terminate when the obligations under the plan have been fulfilled. Other circumstances in which a restructuring plan will terminate include:
- by court order;
- if the plan is based on a condition that remains unsatisfied for 10 business days;
- if a contravention of the plan is not rectified within 30 business days; or
- if an administrator or liquidator is appointed to the company.
Temporary relief
To facilitate the transition towards the new small business restructuring scheme, the second key aspect of the new regime is the extension of temporary relief for businesses seeking to access the new debt restructuring process.
Until 31 March 2021, eligible small businesses are entitled to declare their intention to access the new process. Following this declaration, the company and its directors are entitled to temporary restructuring relief for 3 months (or 4 months if the company obtains an extension). In effect, this extends the insolvent trading protections, and restrictions relevant to statutory demands, which ended on 31 December 2020. If the declaration is not sought, directors will be exposed to liability for insolvent trading up until the date the declaration is made, and the company will not have the previously available protections in respect of statutory demands.
Simplified liquidation
The third key aspect of the new legal framework is a simplified liquidation process, aimed at providing a cheaper and expedited liquidation, thereby increasing returns for creditors.
Eligibility
The simplified liquidation process is available to any company that:
- has resolved to be wound up voluntarily (i.e. creditors’ voluntary liquidation);
- cannot repay its debts in full within 12 months;
- has total debts of less than $1 million;
- has not undergone a simplified liquidation process within the last 7 years;
- does not have a director who has invoked the simplified liquidation process within the last 7 years; and
- is up-to-date with all ATO lodgements.
Overview
The simplified liquidation process preserves most of the pre-existing framework applicable to a creditors’ voluntary winding up, except in certain respects, including:
- there is no requirement for a section 533 report to be completed and submitted to ASIC;
- there are no meetings of creditors held or committee of inspection;
- there is a reduced ability for the liquidator to recover unfair preference claims;
- there is a simplified method for proving debts or claims.
Conclusion
While the true impact of the COVID-19 pandemic on businesses will only be known once government assistance ceases in March 2021, many small businesses will be well placed now to assess their financial position. Please contact our team if you need any assistance in understanding the new provisions, or to discuss other options.
~ with Christian Mennilli, Lawyer and Louise Mendes, Seasonal Clerk.
