Corporate Insolvency Reforms. New Year, New Scheme - What you need to know.

As the temporary relief and protection for businesses impacted by COVID-19 comes to an end on 31 December 2020, insolvency experts brace for a potential floodgate of insolvency administrations. Parliament clarifies the new provisions under the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) (Bill) which will commence on 1 January 2021.

The Bill is consistent with the Australian Government’s announcement on 24 September 2020 in relation to the proposed reforms we previously discussed. The Bill addresses in Schedules 1 and 2 the new formal debt restructuring process for small and medium businesses which will be administered by a small business restructuring practitioner (SBRP).

The Bill is complemented by the draft Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 (Cth) (Regulations) and Insolvency Practice Rules (Corporations) Amendment (Corporate Insolvency Reforms) Rules 2020 (Cth) (Rules).

Five key aspects:

We highlight below five interesting aspects about the debt restructuring process and SBRP provisions as seen in the Bill, Regulations and Rules:

1. Eligibility

The company will be eligible for the debt restructuring process if:

  • the subject company’s total debts do not exceed $1 million, excluding contingent debts (but appears to include secured creditors debts and related parties’ debts at this stage);
  • none of the current directors of the company or a previous director of the company within the 12-month period prior to the appointment of the SBRP has been a director of another company that has been under the debt restructuring or simplified liquidation processes within the past 7 years, but an exemption applies if:
    • - the other company is a related body corporate of the subject company; and
    • - a SBRP was appointed to the other company no more than 20 business days before the day on which the restructuring of the subject company began; or
    • - the other company began to follow the simplified liquidation process no more than 20 business days before the day on which the restructuring of the subject company began; and
  • the subject company itself has not been under the debt restructuring or simplified liquidation processes within the past 7 years.

2. SBRP’s qualification and role:

Only a registered liquidator can act as a SBRP. The SBRP acts as a company’s agent when performing a function or duty or exercising a power as a SBRP while the company is under debt restructuring.

One of the key functions of the SBRP is to make a declaration to creditors in relation to the restructuring plan proposed by the company directors.

The SBRP also has the power to terminate the restructuring of the company in certain circumstances, such as if the SBRP believes on reasonable grounds that it would be in the creditors’ interests that the company be wound up. However, the intention is that the SBRP would primarily act in a supportive role to the company, unlike the voluntary administration and liquidation processes where the insolvency practitioner has control of the company’s affairs.

In line with Parliament’s intention that the debt restructuring process be a cheaper option than conventional insolvency procedures and echoing the proportionality principle, the remuneration of the SBRP is to be stated in the company’s restructuring plan as a specified percentage of payments made to creditors. If the company is subsequently wound up, SBRP’s will have the same priority in respect of payment of their remuneration under section 556 of the Act as liquidators and administrators.

3. Protection from voidable transactions & other claims under the Corporations Act 2001 (Cth) ("Act"):

Payments made and transactions entered into in good faith during the restructuring process by a SBRP, the company with the consent of the SBRP or under an order of the Court are taken to be valid and effectual under the Act and are not liable to be set aside if the company is subsequently wound up. To avoid being a voidable transaction under the Act, the payments and transactions will also have to be made in:

  • the ordinary course of business, or by or with the consent of the SBRP for the company; or
  • on behalf of the company by or under the authority of the SBRP for the plan.

4. Relief from insolvent trading duties:

Directors will not be liable for insolvent trading in respect of debts incurred while the company:

  • is undergoing the debt restructuring process, provided that the debt was incurred in the ordinary course of the company’s business or with the consent of the SBRP or by order of the Court; or
  • has not yet entered the debt restructuring process, but the company is able to establish that:
    • - it is eligible for temporary restructuring relief in the period from 1 January 2021 to 31 March 2021, which is done by the directors declaring and publishing a notice that they have reasonable grounds to believe that:
      • the company is insolvent or likely to become insolvent before the expiry of the 3-month period from the publication of such notice;
      • that the company would be able to satisfy the eligibility criteria for the debt restructuring process if a SBRP was appointed on the date of, or on any day before the expiry of the 3-month period from, the publication of such notice;
      • the board has resolved to the effect that a SBRP should be appointed; and
      • one of the following is not available: SBRP for the company, 
    • - the debt is incurred in the ordinary course of the company’s business; and
    • - the company has taken all reasonable steps to appoint a SBRP before the debt was incurred.  

5. Creditor’s rights:

Secured creditors who have already begun the enforcement of a security interest prior to the beginning of the restructuring may continue with enforcement action.

Secured creditors may also take enforcement action in respect of their security interest if done during the decision period, being the 13 business days period beginning either on the day that notice of the SBRP’s appointment is given to the secured party or the restructuring begins. Otherwise, for both secured and unsecured creditors, during the restructuring of the company no enforcement process may be begun or proceeded with, except with leave of the Court.

Further, creditors cannot enforce a guarantee of the company’s debt against the company’s director or a spouse or relative of the director, except with leave of the Court. Unlike a voluntary administration, debts incurred while the company is under restructuring or a restructuring plan are provable if the company is subsequently wound up.

What’s next?

We anticipate that there may be further refinements to the final form of the new legislation. With businesses resuming operations, the uptake of the debt restructuring process will be seen in the New Year.

Seeking timely advice is key. The team at Hicksons can assist with any enquiries in respect of the debt restructuring process.

Post by Hicksons Partner, Marc Rossi, and Associate, Roxanna Lam

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