Impending restructuring reform: Formal debt restructuring and simplified liquidation for small businesses

09/10/2020 - 08:52

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The most significant insolvency reform in Australia in the last 30 years has been announced.  On 7 October 2020, the Treasury released some of the proposed details to the reforms for public consultation.  The purpose of this article is to examine some of the details.

The most significant insolvency reform in Australia in the last 30 years has been announced.  On 7 October 2020, the Treasury released some of the proposed details to the reforms for public consultation.  The purpose of this article is to examine some of the details.

New Formal Debt Restructuring for Small Businesses

This formal debt restructuring process allows an eligible company to restructure their debts and maximise their opportunity for survival.  The formal debt restructuring process will allow a company director to retain control of their business, and its property and affairs while developing a plan to restructure their debt with the assistance of a “small business restructuring practitioner”.

The moratorium that will apply on a third parties’ ability to enforce rights against the company is consistent with the moratorium that applies during voluntary administration.  A Court may extend this period if it is satisfied it is appropriate to do so in the interests of justice.

During the restructuring period, the company directors retain control of the company’s business property and affairs – and must seek the consent of the small business restructuring practitioner – who can only be a registered liquidator – for actions outside the ordinary course of business.  A transaction in contravention of this prohibition is void.  This includes transactions altering the ownership of the company. Any payment made or transaction entered into with the consent of the small business restructuring practitioner is not liable to be set aside in any subsequent winding up of the Company. The restructuring practitioner is taken to be an agent of the company when they perform a function or duty to exercise a power as the company’s restructuring practitioner.  They are obliged to provide a declaration of relevant relationships to relevant creditors and ASIC as soon as practicable after appointment.  Their appointment cannot be revoked.  The restructuring practitioner may terminate the debt restructuring process at any time if they believe on reasonable grounds that include:

  • the company does not meet the eligibility criteria; or
  • it would not be in the creditors’ interests to continue.

A company undergoing the debt restructuring process must give notice on all public documents that it is under the restructuring process by adding “restructuring practitioner appointed” after the company’s name.

If there is an application for winding up on foot when the company enters the new debt restructuring process, the application may be adjourned if the Court is satisfied that it is in the best interests of the company creditors for the company not to be wound up – much like the current position in VA.

The rights of a secured party during the debt restructuring process is analogous to their position in VA.  The secured party may continue to possess property during the restructuring of the company – but they cannot sell or otherwise enforce security interests over property subject to exemptions (e.g. perishable goods).

At the end of the restructuring process, creditors vote to accept or reject the plan.  To ensure this process is fair, related entities are unable to vote on the plan.  No creditor meetings are required during the debt restructuring process, with voting on the plan occurring electronically or via technology – without the need for physical meetings.  These sorts of virtual meetings required express approval from the Federal Court of Australia in the recent Virgin administration – which caused the administrators to cause meetings to be held among thousands of creditors in the middle of the global pandemic that would not have otherwise been possible.

In relation to the plan itself:

  • A company is taken to be insolvent if it proposes a restructuring plan to its creditors;
  • The regulations (yet to be seen) may prescribe the requirements in relation to proposing a restructuring plan.  These requirements may include:
    • how the value of debts and claims under a restructuring plan are to be calculated;
    • the proof and ranking of those debts and claims under a restructuring plan;
    • the company property that must or may be used in payment of debts to and claims against the company;
    • how those debts and claims are to be treated if the company property is not sufficient to satisfy them in full;
    • the nature and duration of any moratorium on the enforcement of debts and claims against a company under restructuring; and
    • the effect of a restructuring plan on rights, obligations and liabilities in relation to debts of and claims against a company.

In the event that regulations are made which are inconsistent with the Corporations Act or any other Act, the regulations will prevail to the extent of any inconsistency.

Most notably, the eligibility criteria requires that no director of a company has been a director of a company that has been the subject of a debt restructuring process or a simplified liquidation process during the period prescribed in the regulations. This is designed to prevent unlawful phoenixing conduct.  The regulations may also prescribe a circumstance in which a director is exempt – which presumably include where there are common directors over a group of companies entering external administration.

The new simplified liquidation process

The intention of the simplified liquidation process is to supplement the existing ‘one–size-fits-all’ liquidation regime with a regime that has appropriate pathways for less complex liquidations, in particular for incorporated small businesses. This is intended to provide a faster and lower cost liquidation, increasing returns for both creditors and employees.

This process is only available to a liquidator if the eligibility criteria are satisfied.  These criteria include:

  • the company’s tax lodgements are up to date;
  • the total liabilities do not exceed the amount to be prescribed in the regulations ($1m); and
  • no director has been a director of a company that has previously used the simplified liquidation process or a debt restructuring process.

It is only available in a creditor’s voluntary liquidation.  There is no ability for this process to occur in a member’s voluntary winding up or a winding up ordered by a Court.  It is also not capable of being used when creditors have requested the liquidator not use that process.

Within 5 days of the process being triggered a director must provide the liquidator with:

  • a summary of the company’s affairs’; and
  • a declaration for eligibility for the simplified liquidation process.

Most notable differences to the existing ‘one size fits all’ liquidation process are:

  • a relaxed reporting requirement to ASIC for liquidators;
  • a liquidator may not convene a meeting of creditors at any time, cannot be directed to convene a meeting at any time.  Instead the liquidator may provide information to creditors electronically and proposals will be put to giving notice to creditors or contributories;
  • no committees of inspection;
  • the Court’s oversight powers are retained for the simplified liquidation process – including the power to appoint a reviewing liquidator (like a special purpose liquidator).

The regulations will prescribe a more “fit-for-purpose” reporting process which reduce the burden on liquidators without undermining confidence in the insolvency regime. More details in the regulations remains to be seen.

In relation to unfair preferences, this will obviously remain under the simplified liquidation process.  However, the regulations may provide circumstances in which a transaction is not an unfair preference or a voidable transaction for companies in the simplified liquidation process.  The Explanatory Memorandum ominously suggests that the regulations may provide that “an unfair preference must relate to a transaction of a certain value”.

The Explanatory Memorandum also suggests that the Regulations may provide a simpler process for submitting and admitting proofs of debt – presumably this will include a mechanism to avoid costly legal proceedings relating to contested proofs of debt.

If a liquidator forms the view in undertaking the simplified liquidation process that a company no longer meets the eligibility criteria, the liquidator must exit the simplified liquidation process.

If you require any assistance in relation to the article, please contact us on (08) 6188 3340 or by email to aaron@pragma.law.

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