A NEW ERA FOR INSOLVENCY | New debt restructuring process & simplified liquidation

Following earlier passing by the House of Representatives, the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (“the Insolvency Reforms Bill”) was passed by the Senate on 10 December 2020. The Insolvency Reforms Bill provides for:

  • a new debt restructuring process for eligible small companies to allow a restructure of existing debts whilst remaining in control of their business; and
  • a simplified liquidation process for eligible companies to allegedly provide a faster, lower-cost method for winding up the affairs and distributing the property of a company in a creditor’s voluntary liquidation.

The reforms are intended to reduce the cost of external administration for small businesses and the compliance burden for insolvency practitioners, thereby assisting more businesses to remain viable or increasing returns to creditors and employees in situations where they are not salvageable.

The Federal Government is touting the reforms as “the most significant changes to the Australian insolvency framework in almost 30 years” and will commence on 1 January 2021.

New debt restructuring process at a glance

While the Regulations associated with the Insolvency Reforms Bill are yet to be finalised, the key components are as follows:

  • Companies with total debts of less than $1 million. ‘Total debts’ includes secured debts and related party debts, but does not include contingent debts;
  • The Company has not been under a debt restructuring process within the past seven (7) years;
  • The directors (and former directors) of the Company have not been directors of other companies subject to a formal debt restructuring process within the last seven (7) years;
  • All due and payable employee entitlements (including superannuation) are paid before any debt restructuring plan is put to creditors; and
  • All Australian Taxation Office (“ATO”) lodgements for the Company are up to date before any debt restructuring plan can be put to creditors.
  • A distressed business approaches a Small Business Restructuring Practitioner (“SBRP”) who will need to confirm the eligibility of the Company to enter into a restructuring process;
  • The Board / Directors of the Company then appoints the SBRP;
  • Creditors receive notice of the commencement of the new debt restructuring process and details of how to access important and necessary information;
  • Company directors develop a restructuring plan with the SBRP. The SBRP also provides a restructuring proposal statement for the monitoring of the plan;
  • The SBRP issues a Report to Creditors within twenty (20) business days of being appointed, outlining;The Company’s restructuring plan;
    1. The standard terms which apply to all restructuring plans;
    2. A certificate from the SBRP stating whether or not the Company meets the eligibility criteria and whether the Company is likely to meet its obligations under the plan; and
    3. A restructuring proposal statement, which includes a schedule of debts and claims as well as details of the proposed remuneration for monitoring the plan.
  • The SBRP can immediately stop the restructuring process if misconduct is identified;
  • Related party creditors are prohibited from voting on the restructuring process;
  • From the appointment of the SBRP, unsecured creditors (and some secured creditors) are prohibited from pursuing enforcement action against the Company or enforcing personal guarantees;
  • There are safeguards preventing the implementation of ‘Ipso Facto’ clauses during the restructuring process;
  • Eligible small businesses will be able to declare their intention to utilise the process from 1 January 2021 via the publication of a notice on the Australian Securities and Investments Commission (“ASIC”) website. If such a notice is published, the restructuring process needs to commence by 31 March 2021;
  • Once a notice is published on the ASIC website, the directors will receive relief from insolvent trading liabilities, enforcement of director guarantees and Statutory Demands until the appointment of an SBRP;
  • SBRP’s must be Registered Liquidators;
  • Payments made by the Company in the ordinary course of business during the debt restructuring process or with the consent of the SBRP will be excluded from subsequent insolvent trading claims should the Company ultimately enter liquidation;
  • Secured creditors may take enforcement action in respect of their security positions within thirteen (13) business days of being notified of appointment of an SBRP;
  • Otherwise secured creditors will require leave of the Court to commence enforcement action during the debt restructuring process; and
  • Debts incurred during the debt restructuring process are provable, if the Company is subsequently wound up.

Simplified liquidation at a glance

  • The Company must have resolved to be wound up voluntarily, i.e. a Creditor’s Voluntary Liquidation;
  • The Company will not be able to pay its debts in full within twelve (12) months after the liquidation commences;
  • Companies with total debts of less than $1 million. ‘Total debts’ includes secured debts and related party debts, but does not include contingent debts;
  • The Company has not been under a simplified liquidation process within the past seven (7) years;
  • The directors (and former directors) of the Company have not been directors of other companies subject to a simplified liquidation process within the last seven (7) years; and
  • All ATO lodgements for the Company are up to date.
  • The directors give the Liquidator a report as to the Company’s affairs and a declaration that the Company is eligible for the simplified liquidation process;
  • If the Liquidator decides to adopt the simplified liquidation process the Liquidator must, at least ten (10) business days before adopting it, give written notice to each member and creditor that includes:
    1. A statement that the Liquidator reasonably believes that the eligibility criteria will be met;
    2. An outline of the simplified liquidation process; and
    3. A statement that the Liquidator will not adopt the simplified liquidation process if at least 25% in value of creditors direct the Liquidator in writing within twenty (20) business days, not to adopt it.
  • The Liquidator must lodge a notice with ASIC within five (5) business days of adopting the simplified liquidation process, advising of the adoption;
  • There are no meetings of creditors held or Committees of Inspection formed;
  • No Section 533 Report is completed and submitted to ASIC by the Liquidator, though a new reporting obligation is to be introduced;
  • There is a reduced ability for the Liquidator to recover unfair preferences as the ‘claw back’ period has been reduced from six (6) to three (3) months and is only for claims of more than $30,000; and
  • There is a simplified method for proving debts or claims.
  • 25% in value of unrelated creditors may direct the Liquidator in writing not to adopt the simplified liquidation process within twenty (20) business days of the appointment of the Liquidator;
  • The Liquidator must adopt the simplified liquidation process within twenty (20) business days of their appointment or the option to adopt, lapses;
  • The Liquidator must cease to follow the simplified liquidation process if the Liquidator considers that either:
    1. The Company no longer meets the eligibility criteria; or
    2. Reasonable grounds exist to suggest that a director of the Company has engaged in fraud or dishonesty which has had, or is likely to have, a material adverse effect on the interests of the creditors, either as a whole or a class of creditors as a whole; and
  • The Liquidator must notify ASIC within five (5) business days of ceasing to follow the simplified liquidation process.

Industry reaction

There has been and remains significant criticism of the new legislation within credit groups, secured lenders and the insolvency industry generally. Despite the legislation being passed by both Houses of Parliament on 10 December 2020, there remains no official guidelines on the minimum content of a formal restructuring plan.

The Australian Restructuring, Insolvency and Turnaround Association (“ARITA”), the official body governing Australia’s Registered Liquidators, has indicated to its members that they should not take on simplified liquidation appointments at this time, on the basis that Liquidators who do perform such appointments will likely breach their statutory duties. Of particular concern is the conflict that currently arises between the obligation for Liquidators to allow creditors twenty (20) business days in which to object to the simplified liquidation process being adopted, versus the obligation placed upon Liquidators by the Legislation to adopt the simplified liquidation process within twenty (20) business days of being appointed.

Where to from here?

It remains open as to how the implementation of Regulations surrounding the Insolvency Reforms Bill will change opinions within the industry and effectively implement some further degree of safeguards sought.

In the interim, should you or your clients have any queries regarding the new restructuring schemes, please feel free to contact a Vincents Director for an obligation free discussion regarding your available alternatives.

How we can help

The Insolvency Practitioners at Vincents are members of ARITA and follow the ARITA Code of Professional Practice.

If you or your clients are running a business of any size and are currently encountering financial difficulties, do not let time and opportunity to engage early pass you by.  Take the very first step, by asking questions or seek help. You may find your situation is not nearly as bad as you had imagined. If it is, then early engagement will increase the options you have available to you, regardless of how the solution is eventually deployed. What we do know is that once it’s too late, it’s too late.

At Vincents, we provide straight-forward cost-effective insolvency and restructuring accounting services.

Our insolvency and restructuring services are delivered with clarity, transparency and accountability.

In addition to our insolvency services, we also provide professional services to small business for the following areas:

Want to know more?

If you would like to know more about the new new debt restructuring and liquidation processes, please contact Damien Davis our Insolvency & Reconstruction Associate Director for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

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