From 1 January 2021, the world of insolvency changed dramatically in Australia, with some of the most significant insolvency reforms in over 30 years coming into effect.
In this article, we’ll set out briefly what you need to know about the new insolvency laws.
The Main Changes
The main aim of the reforms is to introduce two new concepts into the world of insolvency, being:
- Small Business Restructuring; and
- Simplified Liquidation.
While the reforms also deal with some ancillary measures, the focus is on these two options introduced into the world of insolvency.
Small Business Restructuring
Here we’ll set out what you need to know about small business restructuring and its differences from the previous insolvency options.
How Small Business Restructuring is Different
Previously, the normal response to financial distress was for a company director to appoint an administrator or liquidator to the company (putting aside forced action by banks).
That administrator or liquidator, governed by the provisions of the Corporations Act, would then take control of the company and its assets. Following a review and assessment of the company’s financial position and viability, that person would then make recommendations to creditors upon which creditors would resolve, by vote, what the future of the company ought to be.
One option in that process was for a director to propose a “deed of company arrangement”, essentially a deal whereby certain things would happen leaving the creditors better off than in liquidation, and the director might be able to regain control of the company to help rebuild it into the future. That process was a regular and common form of attempted company restructure.
One challenge here, however, was that during the company’s external administration the control of the company rested entirely with insolvency practitioners. All deals, invoices, management and supervision ultimately had to occur with their input. This can be sensible, as it gives the creditors confidence that systematic problems with the director’s management are being avoided, and the director isn’t free to divest assets or create more problems along the way.
Unfortunately, it’s also really expensive. Adding in an entire team of professional accountants, each costing hundreds of dollars an hour, to an already distressed business can often make it impossible for that business to recover.
The new Small Business Restructuring process is designed to address that issue. It leaves control of the company in the hands of the director (mostly) during the restructuring process, and limits the necessary input (and therefore cost) of the consulting accountants. This allows the business to keep trading while it attempts to navigate the restructure.
Who is Eligible for Small Business Restructuring?
An eligible company needs to have resolved that:
- It has reasonable grounds for suspecting current, or a likelihood of future, insolvency; and
- That a Small Business Restructuring Practitioner (SBRP) should be appointed.
The company will also need to have total liabilities of less than $1m, excluding “contingent” liabilities.
You can’t be eligible for small business restructuring if:
- The company has already gone through the process in the last 7 years;
- Any current (or sometimes former) directors have gone through the process in the last 7 years;
- The company is already in external administration.
What is a Small Business Restructuring Practitioner and What Do They Do?
An SBRP is a type of registered liquidator that will be a broader field of people than those who practice currently as registered liquidators.
So, for example, accountants who are currently CA or CPA members will be eligible for registration even though they would not be eligible to be a “normal” registered liquidator.
For obvious reasons, the SBRP needs to be appropriately independent of the company in question.
Their job, in essence, is to help draw up and certify the restructuring plan, deal with creditors, investigate the company’s property and affairs, and administer the restructuring plan.
How Does Small Business Restructuring Work?
Each company is going to have its own unique features, but here is how the process works in broad terms.
Restructuring can be carved into two main phases:
- The initial phase of the process during which the restructuring plan is prepared and put to the creditors for consideration; and
- After a company has an approved restructuring plan and that plan is being implemented.
Initially, the eligible company makes the necessary resolution (see above) and appoints its SBRPs.
The company and the SBRP will then work together to prepare a restructuring plan. This will involve, usually, specifics about what the company will do, what creditors will get paid and when, and any injections of cash from the director. Fairly obviously the director, to convince creditors, will need to have a plausible explanation for why the future is going to look different from the past. The new regulations set out in detail the requirements of the restructuring plan, and your SBRP will help you with this.
Company creditors will then vote on the proposal. Importantly, the company and its director need to be aware that simply making this resolution is an act of insolvency – so even if the creditors don’t accept your proposal, you might still find yourself faced with an application to wind up your company.
If the creditors DO accept your proposal, then you need to live up to it. The SBRP will administer the proposal and has the power to terminate the restructuring if things are going off track.
There are certain rules and limitations along the way, however:
- Obviously you need to comply with the restructuring plan;
- You can enter into normal transactions in the ordinary course of business;
- You cannot, however, enter into a transaction that affects the company’s property outside the ordinary course of business unless the SBRP has consented to it, it was under an order of the Court, or it is exempted under regulations;
- If you do attempt a transaction that is prohibited, it will be void;
- Creditors are prevented from enforcing guarantees or commencing proceedings against directors or relatives liable for company debt unless they get the Court’s leave;
- You may not transfer ownership or control of the company unless the SBRP consents;
- Applications to wind up the company once it is in small business restructuring can be adjourned, if the Court is satisfied that continuing the restructuring process is in the best interest of the creditors (which is similar to the existing practise during administration).
- Contracting parties cannot terminate a contract with your company simply because you enter the restructuring process (unless there is another breach).
When Restructuring Plans End
Ideally, the plan will end when its terms have been met. That’s the best outcome.
However, a restructuring plan can also end if:
- an administrator or liquidator is appointed;
- the Court terminates the plan;
- An event occurs which is specified in the plan to bring it to an end;
- The plan is breached, and that breach hasn’t been rectified within 30 days.
After the company announces its intention to be “under restructuring” but before a plan is formally approved, the process can also be ended in a number of other ways. Most relevantly this could happen if the SBRP terminates the process, the company declares the process at an end, or the company fails to make a proposal within the necessary time.
Small Business Restructuring In a Nutshell
We suspect the process of writing down what small business restructuring involves is actually more complicated than implementing the process will be.
While it is designed to assist business owners, there are many rules and regulations that apply at different times, powers of the SBRP that you need to be aware of, and certain limitations on what you can and cannot do during the restructuring process.
Work closely with your legal advisors and SBRP during the process, ensuring that you ask questions as necessary. That will be the safest and best course for those who look to utilise the new regime.
Simplified liquidation is designed to be a lower cost, faster way for a liquidator to finalise a company’s affairs.
It is available only in a Creditor’s Voluntary Liquidation, and only if the liquidator determines that the simplified process:
- is available; and
- should be used.
Liquidators can utilise simplified liquidation if:
- company liabilities are less than $1m, on the same basis as for restructuring above;
- the company has resolved to wind up voluntarily;
- the liquidator has received the directors’ report about company affairs, together with a declaration from the directors that the simplified liquidation process will be available;
- tax returns and BAS are up to date.
If more than 20 days have passed since the event that commenced the liquidation, or if creditors with a total value greater than 25% of the overall debts of the company object, then the liquidator cannot use the simplified process.
What’s Simplified About It?
Liquidation is inherently complicated, so “simplified” is a bit of a misnomer.
However, some elements of regular cost and frustration have been altered or removed in order to make the “simplified” process a bit cheaper and faster.
First, liquidators do not need to report to ASIC about suspected wrongdoing by directors. This makes some sense given that ASIC rarely, if ever, took any action in response to such reports for smaller companies, and the cost of preparing the report is high.
Next, liquidators no longer need to call formal meetings. Instead, they can communicate with creditors and call for voting electronically as necessary.
Finally, the application of the “unfair preference” components of the Corporations Act have been restricted. If a debt was paid more than 3 months prior to the relevant day, was for less than $30,000, and the creditor was unrelated to the company then it is no longer a voidable transaction if the company is subject to simplified liquidation.
Will This Insolvency Reform Actually Help Anything?
Only time can answer this question.
While there are certain attractions to both the simplified liquidation and the small business restructuring, we really can’t say if they are going to have any significant impact on the financial distress that businesses have experienced over the last 12 months or so.
Whatever the case, we can only reiterate that any business in financial distress should be getting appropriate, sound advice from both accounting and legal perspectives. Even though these new schemes are being promoted as “simplified”, they are anything but simple, and you’ll need advice to navigate the best way forward for your business.