Simplified Liquidations and Changes to Liquidator Preference Payments

Insolvent

Simplified Liquidations

Simplified Liquidations came into effect from 1 January 2021, although from looking at recent ASIC statistics, it appears that less than one percent (1%) of Creditors’ Voluntary Liquidations are adopting the streamlined process – most likely because they don’t meet the eligibility criteria (which is outlined further below).

What is a Simplified Liquidation?

How is the Simplified Liquidation process different to a full creditors’ voluntary winding up?

Meetings of creditors are not held in a Simplified Liquidation. Matters determined by creditors are decided without a meeting via the ‘proposal without a meeting process’.

Also, creditors cannot form a committee of inspection.

A liquidator in a Streamlined Liquidation must report to creditors within three months of the liquidator’s appointment, about:

  • any work performed to date by the liquidator;
  • the liquidator’s opinion on when the liquidation may be finalised; and
  • the likelihood of a dividend being paid to creditors.

There are no other mandatory reports to creditors and the report that is sent has far less detail than in a standard liquidation.

Creditors in a Simplified Liquidation can still make reasonable requests for information from the liquidator.

If funds will be available to pay a dividend to creditors, the liquidator is only able to make one dividend payment. This is likely to be near the end of the administration and there is no ability to make an interim dividend distribution.

The liquidator in a Simplified Liquidation is still required to report alleged misconduct to ASIC if:

  • in the opinion of the liquidator, there are reasonable grounds to believe conduct constituting an offence under a law of the Commonwealth or a State or Territory in relation to the company may have occurred; and
  • that conduct has, or is likely to have, a material adverse effect on the interests of creditors as a whole or a class of creditors as a whole.

Importantly for AICM members, in a Simplified Liquidation, unfair preference recoveries by liquidators, from non-related entities are limited to claims greater than $30,000 that occur 3 months prior to the relation back day (usually the date of appointment). Previously there was no minimum and the time frame was 6 months.

Overall, the purpose of a Simplified Liquidation is to reduce time incurred by the liquidator to hopefully increase the return to creditors where there are recoveries by the liquidator; and also, to reduce time and costs being incurred by liquidators where there are little or no assets to pay them for tasks they might otherwise be required to do for no real benefit to the creditors.

What are the eligibility requirements?

A Simplified Liquidation is a streamlined creditors’ voluntary winding up for companies that have liabilities less than $1 million.

To be eligible for the simplified liquidation process:

  1. the company must be in a creditors’ voluntary winding up where the event that triggers the start of the winding up occurs on or after 1 January 2021;
  2. liabilities of the company on the day a liquidator is first appointed in the creditors’ voluntary winding up must not exceed $1 million;
  3. the company will not be able to pay its debts in full within 12 months;
  4. the directors must within five business days (after the day of the meeting of the company at which the resolution for voluntary winding up was passed) give to the liquidator:
    1. a report on the company’s business affairs
    2. a declaration that they believe, on reasonable grounds, the company meets the eligibility criteria for the Simplified Liquidation process will be met;
  5. no person who is a director of the company, or who has been a director of the company within the 12 months before the date a liquidator was first appointed, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years;
  6. the company has not undergone restructuring or been the subject of a Simplified Liquidation process in the preceding seven years;
  7. the company has given all returns, notices, statements, applications and other documents required under the Income Tax Assessment Act 1997.

A recent government review of the process has acknowledged that the definition of “restructuring” in bullet points 5 and 6 above needs to be more clearly defined.

Can a liquidator adopt the Simplified Liquidation process for a creditors voluntary winding up?

The liquidator in a creditors’ voluntary winding up may adopt the Simplified Liquidation process if:

  • they believe on reasonable grounds the eligibility criteria are met;
  • not more than 20 business days have passed since the liquidator was first appointed;
  • the liquidator has given each member and creditor at least 10 business days before adopting the Simplified Liquidation process written notice of:
    • a statement that they believe on reasonable grounds the eligibility criteria for the Simplified Liquidation process will be met;
    • an outline of the Simplified Liquidation process;
    • a statement they will not adopt the Simplified Liquidation process if at least 25% in value of creditors direct the creditor in writing not to adopt the simplified liquidation process; and
    • prescribed information, if any, on how the creditor may give the direction in writing not to adopt the Simplified Liquidation process.

The liquidator must not adopt the Simplified Liquidation process if, before the liquidator adopts it, more than 25% in value of creditors provide a written statement to the liquidator requesting the liquidator not to follow the process.

When must a liquidator cease to follow the Simplified Liquidation process?

The liquidator must cease to follow the Simplified Liquidation process if:

  • the eligibility criteria for the process are no longer met; or
  • the liquidator believes on reasonable grounds that the company, or a director of the company, has engaged in conduct involving fraud or dishonesty and that conduct has had, or is likely to have, a material adverse effect on the interests of creditors as a whole or a class of creditors as a whole.

Considerations for AICM members

AICM members will most likely be acting for creditors when they find themselves faced with a Simplified Liquidation scenario. The two key questions for members then are:

  1. Do they anticipate they will benefit from the Simplified Liquidation process because of either less liquidator fees or a reduced ability for the liquidator to make preference recoveries due to the reduced relation back period and the minimum quantum of a claim (being $30,000)?
  2. Do they think that the Simplified Liquidation might be an abuse of process by the company’s director(s) and that a standard liquidation with more extensive investigations might lead to better prospects of dividends being paid to creditors?

After those questions are considered, members can decide whether they want to support the process or actively oppose it when they receive notice from the liquidator.

Changes to Liquidator preference payments

The federal government plans to further simplify and streamline insolvency law, building on the recent introduction of the Simplified Liquidation process and the Small Business Restructuring process. It also follows a government review of the Safe Harbour process. The intention of the changes is to enable viable businesses which are facing financial challenges to have an opportunity to restructure and continue trading.

One of the reforms proposed is to make fairer rules governing ‘unfair preference payment’ claims by liquidators for all liquidation types. In summary, creditors who act honestly shouldn’t be pursued for small payments where a company they dealt with enters liquidation.

Payments received by creditors that either total less than $30,000 or are made more than 3 months prior to the company going into liquidation will no longer be able to be clawed back by the liquidator, provided those payments are not to related creditors and are within the ordinary course of business. This proposal mirrors what is already being done through the Simplified Liquidation process.

With this in mind, AICM members might wish to consider dropping credit limits to below $30,000 where it’s possible to do so.

Other changes coming

From 1 July 2023, the Government is also providing an additional $20 million of funding over two years to the Assetless Administration Fund, which is a grant administered by ASIC from which liquidators will be able to apply for a grant of up to $5,000 per assetless liquidation, without needing to provide evidence of potential misconduct.  This recognises the high number of “Zombie Companies” that need to be wound up often years after they ceased trading.

The Government is also clarifying the treatment of trusts with corporate trustees under Australia’s insolvency law by introducing a legislative framework for the external administration of trusts. The framework will allow for greater efficiency of the external administration of corporate trusts, ultimately supporting better outcomes for distressed companies and their creditors. The reform reflects the outcomes of the Government’s 2021 consultation, which demonstrated there is broad stakeholder support for reform.

Finally, the Government is backing in reforms that provide greater certainty for company directors seeking to save financially distressed but viable companies as part of the Government response to the Review of the Insolvent Trading Safe Harbour.  These reforms have been commented on by Government, but the detail of the changes is not yet known.

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