New Insolvency and Restructuring Regime for Small Business

21 Jan New Insolvency and Restructuring Regime for Small Business

The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (the New Regime) which commenced on 1 January 2021 provides a new regime for formal restructuring and simplified liquidations for eligible companies. The New Regime, in conjunction with the amendments to the Corporations Regulations (Regulations) and Insolvency Practice Rules (Rules), seeks to simplify the existing voluntary administration process under Part 5.3A of the Corporations Act 2001 (the Act) and the process for winding up of small companies which don’t have complex debt restructuring requirements.

Small Business Restructuring (SBR) –Part 5.3B of Corporations Act 2001

The SBR regime offers an alternative to voluntary administration for companies which are experiencing financial hardship and are insolvent, or may become insolvent in the future. The key distinction between the SBR regime and the existing voluntary administration process is that it allows for the directors to largely remain in control of the company for the duration of the SBR while still providing certain protections to the directors while seeking to trade through financial hardship.

Eligible companies can resolve to appoint a restructuring practitioner  pursuant to s453C of the Act, on the basis that they have formed the view that the company is insolvent or is likely to become insolvent in the future. The Rules establish the restructuring practitioner as a new category of registered insolvency practitioner, in addition to the existing administrator and liquidator roles.

Eligibility for Small Business Restructuring

In order to be eligible to appoint a restructuring practitioner, the company must meet the criteria prescribed by the Regulations. In summary:

• The companies’ liabilities must be less than $1,000,000;
• The company must not have entered into a restructuring plan or participated in a simplified liquidation process in the last 7 years; and
• The directors of the company must not have been directors of another company which has been subject to a restructuring or simplified liquidation in the last 7 years.

Role of the Restructuring Practitioner

The powers and responsibility of the restructuring practitioner is broadly similar to that of a voluntary administrator or liquidator. Primarily they are required to investigate the business and its affairs to determine the viability of the company, suitability of any restructuring and the eligibility of the company for the SBR scheme. The restructuring practitioner can advise the company on matters relating to the restructuring and assist it in preparing a restructuring plan.

The restructuring practitioner may terminate the restructuring if they determine:

• The company is not eligible for SBR;
• The restructuring is not in the interest of creditors; or
• It is in the interest of creditors for the company to be wound up.

Business Operations

The key distinction with the New Regime as opposed to the existing voluntary administration process, is that the company retains control of the company’s business, property and affairs through the SBR process, subject to certain restrictions and the oversight of the restructuring practitioner.

During restructuring, directors of the company cannot enter into transactions or deal with the company property unless:

• it is in the ordinary course of the company’s business; or
• the consent of the restructuring practitioner has been obtained (and any conditions imposed by the restructuring practitioner have been complied with); or
• it is in accordance with a court order.

Any transactions which are in contravention of this are rendered void under the New Regime. The Regulations set out some examples of what will not be considered in the course of business, for example:

• transactions satisfying a debt or claim arising out of contract of an arrangement entered into before the restructuring (with the exception of paying employee entitlements);
• transactions relating to the sale of whole or part of the company’s business; or
• payments of dividends.

Following the appointment of a restructuring practitioner, the company must include “(restructuring practitioner appointed)” in its name. The company is not permitted to deal with or alter the control of ownership and share capital without the consent of the restructuring practitioner for the duration of the SBR. Any purported transfer or dealing during the restructuring practitioner’s appointment will be rendered void.

The appointment of a restructuring practitioner acts as a moratorium on winding up applications and the court must adjourn any such application once the company enters SBR. It also has the effect that there is a stay on the commencement of claims against the company and a stay on the enforcement of personal guarantees of directors or their relatives without the leave of the court. Rights arising against the company by virtue of the company having entered into administration (such as ipso facto clauses where a party automatically has the right to terminate in the event of insolvency of the company) are not enforceable without the leave of the Court.

A key difference with the SBR process as opposed to voluntary administration is that debts incurred during the restructuring are provable debts if the company is subsequently wound up.

Restructuring Plans

Following the appointment of a restructuring practitioner, the company must propose a restructuring plan (Plan). It is important to note that the execution of a Plan by the company constitutes an act of insolvency and if it not accepted by creditors could give rise to an application for winding up.

A proposed Plan should be set out in the prescribed form detailing company’s property and how it is to be dealt with, remuneration of restructuring practitioner and the payment of creditors, must be given within the proposal period (being 20 business days from the day restructuring begins). This proposal will lapse If not accepted by creditors within 15 days. The Plan is deemed to be accepted when a majority of those affected creditors in value who reply to the restructuring practitioner’s proposal agree to adopt the Plan.

The restructuring period will end if the company fails to propose a Plan during the proposal period or if the proposal lapses due to its failure to be accepted by the creditors. Should the Plan fail to be adopted, it is possible that the company may be placed into voluntary administration or liquidation.

Simplified Liquidations

The New Regime also introduces a simplified liquidation process for companies which meet the eligibility criteria. This simplified liquidation process is only available in the case of creditors voluntary winding up and will not be available in members voluntary winding up or compulsory winding up by an order of the court.

Where a liquidator has been appointed, they may adopt the simplified liquidation process where they are satisfied that the eligibility criteria have been met. The liquidator must do so within 20 days of the company passing the special resolution to be wound up. The simplified process cannot be adopted if more than 25% of the creditors of the company request the liquidator not adopt the process.

Eligibility

• The companies’ liabilities must be less than $1,000,000;
• The company must not have entered into a restructuring plan or participated in a simplified liquidation process in the last 7 years; and
• The directors of the company must not have been directors of another company which has been subject to a restructuring or simplified liquidation in the last 7 years.
• The company has provided updated tax returns, financial records and other documents as required by the tax law.

Key Differences in the Simplified Liquidations Process

• Creditors Meetings
  • The simplified liquidation process provides that certain requirements under the Insolvency Practice Rules do not apply. In particular, it is not a requirement that liquidators hold creditors meetings. Instead, a liquidator can provide information to creditors electronically and proposals put forward by the liquidator can be voted on electronically.
• Transactions which are not voidable under the process
  • Notwithstanding the provisions of s588FE relating to voidable transactions, a transaction which would otherwise be an unfair preference will not be voidable under the Regulations where:
    • It was not entered into during the 3 months ending on the relation-back day; or after that day but on or before the day when the winding up began; and
    • No creditor under the transaction is a related entity of the company; and
    • The transaction results in a creditor receiving no more than $30,000 in value or a series of transaction result in cumulatively no more than $30,000.

The changes which take affect under the New Regime and the Regulations,  seek to provide more efficient alternatives for businesses without complex debt restructuring requirements.

With increased financial difficulty as a result of the COVID-19 pandemic, it is expected that many businesses may need to rely upon the New Regime, in particular the new restructuring provisions, to ensure the ongoing viability of the business while meeting the demands of creditors.

Harris & Company has experience acting for both debtor companies and creditors in respect of insolvency and debt arrangements. If you have any questions regarding the New Regime set out in this article or require legal advice in relation to the impact of these changes on your business, please contact Ian Smith ismith@harrisco.com.au or Jonathan Harris jharris@harrisco.com.au.

This article is intended to provide general information on the identified legal topics and does not constitute legal advice and should not be relied upon as such.