New Insolvency Laws for Small Business

December 2020

New Insolvency Laws for Small Business

On 8 October 2020, we released a brief article on our website about the changes to Australia’s insolvency laws (please click here).  The Federal Government has recently passed the changes and is expected to come into operation on 1 January 2021 after it receives Royal Assent.

Key Takeaways:

  • The new insolvency laws establish the framework for restructuring and the simplified liquidation process for eligible small businesses.
  • A debt restructuring process enables directors to retain control of the company.
  • A debt restructuring process is available for small businesses that satisfy the eligibility criteria.
  • The new insolvency laws create a new role for small business restructuring practitioners (SBRP).
  • The new insolvency laws give a company breathing space to restructure and revert to normal trading, and provide some protection for directors who have given personal guarantees for their company’s debts.
  • Eligible small businesses can utilise the simplified liquidation process in a creditor’s voluntary liquidation as a faster, cheaper and less complicated liquidation process.

Debt Restructuring Process

The new insolvency laws will allow eligible companies that are financially distressed but with a viable business to restructure its debts so they can continue to trade.  It also shares many features of the voluntary administration process under Part 5.3A of the Corporations Act 2001 (Cth) but was tailored to suit small and less complex businesses better.

 Eligibility Criteria

A small business must satisfy the eligibility criteria before it can utilise the debt restructuring process under the new insolvency laws.  The eligibility criteria includes:

  • a resolution from the company’s board of directors that:
    1. it has reasonable grounds for suspecting the company is insolvent or is likely to become insolvent at some future time;
    2. an SBRP should be appointed; and
  • the total liabilities of the company on the day that the debt restructuring begins does not exceed $1 million (excluding contingent liabilities).

Currently, there is no definition of contingent liability included in the Act.  However, under the accounting standards in Australia, a contingent liability means any liability that is either:

  1. a potential obligation that is dependent on the occurrence of a future event; or
  2. a present obligation where an amount could not be reliably measured.

Accordingly, a claim for unspecified damages against a company is a contingent liability and would be excluded in the calculation of the total liabilities for debt restructuring purposes.

 On the other hand, a company would be ineligible for debt restructuring if:

  • it is already under restructuring or administration;
  • it has in place a restructuring plan or a deed of company arrangement that has not yet terminated;
  • the company appointed a liquidator or provisional liquidator;
  • it has previously used the debt restructuring process or a simplified liquidation process within seven years preceding the intended date of the SBRP appointment; or
  • any of its directors within the preceding twelve months, has been a director of another company that has been subject to debt restructuring process or a simplified liquidation process within seven years preceding the intended date of the SBRP appointment.

Commencing a Debt Restructuring Process by Appointment of SBRP

A debt restructuring process begins with the appointment of SBRP in writing by the company.  Once an SBRP is appointed, the company cannot revoke the appointment.  However, the company can replace the SBRP if that SBRP resigns.

Within one business day of being appointed, the SBRP must lodge a notice of appointment with the Australian Securities and Investments Commission (ASIC).  The SBRP must also lodge a declaration of any relevant relationships (DIRRI) with ASIC as soon as practicable.

The company’s directors are required to provide information about the company’s business, affairs and financial circumstances to the SBRP as reasonably required by the SBRP.  Within five business days, the company directors must also provide SBRP with a declaration stating:

  • whether the company has entered into any transactions that would be voidable under section 588FE of the Act; and
  • whether the company directors believe that the company met the restructuring eligibility criteria.

Preparing the Debt Restructuring Plan

During the twenty business days following the appointment (Proposal Period), the SBRP must assist the company directors preparing a debt restructuring plan.  The SBPR could extend the Proposal Period for a maximum of ten days, if satisfied on reasonable grounds.

The debt restructuring plan must:

  • be in an approved form;
  • identify the company’s property that is to be dealt with (and how);
  • provide for the remuneration of the SBRP; and
  • specify the date on which the company directors signed the restructuring plan.

The debt restructuring plan must set out a standard set of terms including an equal ranking of debts and proportional distribution to creditors if the total amount to be distributed to creditors under the debt restructuring plan is insufficient to discharge the company’s debt in full.  It must be accompanied by a restructuring proposal statement, which includes a schedule of debts and claims to be covered.

The company must provide to its creditors the proposed debt restructuring plan within the Proposal Period, including a certificate from SBRP stating that:

  • the debt restructuring plan is true and correct;
  • the eligibility criteria have been met; and
  • the company is likely able to discharge its debt under the debt restructuring plan.

The creditors may dispute the restructuring proposal statement, including the schedule of debts and claims.  Additionally, the creditors have a period of fifteen days to either accept or reject the proposed debt restructuring plan.

Suppose the creditors voted to accept the restructuring plan by passing a resolution – In that case, the restructuring plan binds the creditors with admissible debts or claims, the company, the company’s officers and members, and the SBRP.

Once the company enters into a debt restructuring plan with its creditors, it is deemed insolvent.  Accordingly, the company must give notice of this fact on all public documents and negotiable instruments by adding ‘(restructuring practitioner appointed)’ after the company name.

During the Debt Restructuring Process

During the debt restructuring process, the company directors retain control of the company’s business, property and affairs.  This is a major difference to the current laws.  The SBRP’s role is mainly advisory.  However, the insolvency laws prescribe that the SBRP has the power to investigate the company for:

  • preparing a certificate on the debt restructuring plan;
  • deciding whether to terminate the debt restructuring;
  • resolving any disagreement on a creditor’s admissible debts or claims; and
  • performing or exercising any other necessary function, duty or power.

While the company is under restructuring, its directors must not enter into, or purport to enter into, a transaction or dealing affecting the assets of the company, unless it is:

  • in the ordinary course of the company’s business;
  • with the consent of the SBRP;
  • ordered by the Court; or
  • exempted from the prohibition (in the case of certain specific payments).

A transaction or dealing in breach of the above prohibition is void unless the Court orders otherwise.  Additionally, any transactions that would alter the ownership control of the company is void unless written consent is obtained from the SBRP, who must reasonably believe that the transaction is in the best interest of its creditors.

During the restructuring process, creditors are prevented from commencing legal proceedings against the company or directors, enforcing personal guarantees or exercising rights to terminate the contract (‘ipso facto rights’), unless with written consent from the SBRP or leave of Court.

On the other hand, a party with a security interest over the whole or substantially the whole of the company’s property (either in one or multiple securities) may be able to enforce its security interest if it acts before or during the ‘decision period’.  The ‘decision period’ commences when the secured party receives notice of the debt restructuring process or at the beginning of the restructuring process, and terminates after thirteen business days.

The restructuring plan will bind secured creditors if they agree, and to the extent that their admissible debt or claims exceed the value of their security interest.  Additionally, they are not prevented from realising or otherwise dealing with their security interest.  The SBRP is not allowed to dispose of any property of the company that is subject to a security interest.

Terminating the Debt Restructuring Plan

The debt restructuring plan will terminate at any time if the SBRP believes on reasonable ground that:

  • the company does not meet the eligibility criteria for restructuring;
  • it would not be in the creditors’ interest to make a restructuring plan;
  • it would be in the interests of creditors for the restructuring to end;
  • it would be in the interests of creditors for the company to be wound up; or
  • any other grounds prescribed by the regulations.

The regulations prescribe that a debt restructuring plan terminates on the following events (whichever happens first):

  • the day on which all the obligations under the plan have been fulfilled, and all admissible debts or claims have been settled with accordingly;
  • the day specified in the Court order to terminate the plan;
  • if the restructuring plan is subject to the occurrence of a specified event within a specified period of no longer than ten business days after the restructuring plan was made, the next business day after the end of that period;
  • if a contravention of the restructuring plan by a person bound by it has not been rectified within thirty business days, then the next business day after the end of that period; or
  • the day an administrator, liquidator or provisional liquidator of the company is appointed, and the company enters into liquidation or voluntary administration process.

Simplified Liquidation Process

The new rules for simplified small business liquidation process (SSBL) allows eligible companies to access a faster, cheaper and less complicated liquidation process.  By reducing the complexity, time and costs in the liquidation process, the SSBL ensures greater returns to creditors and employees.

SSBL is only available in a creditor’s voluntary liquidation.  A liquidator may adopt the SSBL instead of the traditional liquidation process if the company meets the eligibility criteria.  The eligibility criteria for the SSBL are:

  • the company must have resolved to be wound up voluntarily;
  • the directors must have given the liquidator a report about the company’s affairs and a declaration that the company will be eligible for the SSBL;
  • the total liabilities (excluding contingent liabilities) of the company must not exceed $1 million;
  • the company is insolvent;
  • the company and its directors have not previously used a simplified liquidation process or a debt restructuring process; and
  • the company’s tax lodgements are up to date.

A liquidator will not be able to utilise the SSBL in the event that more than twenty days have passed since the relevant trigger event which brought the company into liquidation, or at least 25% in value of the creditors of the company have requested the liquidator not to adopt the SSBL.

The SSBL departs from the traditional liquidation process in the following aspects:

  • removal of the obligations to report suspected wrongdoings to ASIC; and
  • removal of the obligation to convene meetings with creditors.

Instead of meetings with creditors, the liquidator will provide information proposals to creditors electronically, and proposals will be decided by electronic voting.

The SSBL must cease if the liquidator has reasonable grounds to believe that the company or any of its directors has engaged in conduct:

  • that had, or is likely to have, a material adverse effect on the interests of creditors;
  • that was fraudulent or dishonest.

Additionally, the company must exit the SSBL if it no longer meets the eligibility criteria.

Small Business Restructuring Practitioner

Only registered liquidators are permitted to act as SBRP.  However, if a practitioner wishes to register and practice only as an SBRP, the applicant must be a recognised accountant.  However, a company cannot appoint a registered liquidator as SBPR if that person has a ‘connection’ with the company.  A person is connected and therefore disqualified from acting as SBRP for the company if he or she is:

  • a debtor or creditor of the company (or its related body corporate) in an amount of greater than $5,000;
  • a director, secretary, senior manager or employee of the company or of a body corporate that is a secured party in relation to the property of the company; or
  • an auditor, or a partner or employee of the auditor, of the company.

Contact Us

If you or your company is experiencing financial difficulties and you require help with understanding your options, contact us today.  We would be happy to assist you with specific advice on the best course of action available, including the use of the new insolvency laws.

Contact us by phone on (02) 8920 0475 or by email at mail@teneolaw.com.au.

Craig Higginbotham and Richen Mojica
22 December 2020

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