Small Business Insolvency ReformsDec 2020 | Litigation & Dispute Resolution
Appropriately branded as the ‘most significant reforms to Australia’s insolvency framework in 30 years’ the Corporations Amendment (Corporate Insolvency Reforms) Bill was introduced to Parliament on 12 November 2020, following public consultation in October 2020 and passed both houses on 10 December 2020.
The amendments to the Corporations Act 2001 (and consequential acts) implemented by the Bill, together with proposed new regulations, will:
- be effective from 1 January 2021;
- implement a new Small Business Restructuring Process (likened to the US Chapter 11 process), by which eligible small companies may restructure their debts with the assistance of a Small Business Restructuring Practitioner, but without the appointment of an external administrator or liquidator; and
- introduce a Simplified Liquidation Process for eligible small companies.
In a domain where the same familiar processes of administration, liquidation and receivership have existed in much the same form for many years, these changes (and particularly the introduction of a the new Small Business Restructuring Process) will require consideration and adaptation not only by the soon to be ordained ‘Small Business Restructuring Practitioners’ and eligible small companies, but also by individuals and corporations that do business with such companies.
In addition to considering the potential impacts of these reforms on your interactions with such businesses, in the immediate term it may be prudent to consider the adequacy of any insolvency related clauses in your contractual documents and your approach to security.
To be eligible for the Small Business Restructuring Process or the Simplified Liquidation Process a company must:
- have total liabilities (excluding contingent liabilities) of less than $1 million;
- not have previously utilised a small business restructuring/simplified liquidation process; and
- not be subject to another external administration or restructuring process.
Small Business Restructuring
The new legislation proposes to insert a new Part 5.3B into the Corporations Act 2001 to provide for a ‘debtor in possession’ restructuring process for eligible companies that allows those companies:
- to retain control of the business, property and affairs while developing a plan to restructure with the assistance of a Small Business Restructuring Practitioner (SBRP); and
- to propose a restructuring plan to creditors.
Relevantly, from 1 January 2021:
- directors of eligible companies may resolve to appoint a SRBP to assist them to continue running their business whilst preparing a restructuring plan and proposing that plan to creditors (within 20 business days of the SBRP’s appointment);
- a company will be taken to be insolvent if it proposes a restructuring plan to its creditors;
- creditors (identified by the company directors and confirmed by the SBRP) will have a period of 15 business days, from receipt of the plan, to accept or reject the plan;
- if more than 50% of affected creditors (by value) approve the plan all unsecured creditors will be bound by the plan;
- if creditors approve the plan, directors will continue to run the business whilst they and the SBRP give effect to the plan and make distributions to creditors;
- if creditors reject the plan the restructuring process will come to an end and the company must elect to proceed with traditional administration or liquidation or to utilise the new simplified liquidation process; and
- unsecured creditors, and some secured creditors, will be prevented from pursuing the company and personal guarantors, enforcing security, and terminating contracts on the basis of the SBRP’s appointment, from the time the SBRP is appointed.
Simplified Liquidation Process
Pursuant to the amended legislation, from 1 January 2021, eligible companies will be able to access a simplified liquidation process. Relevantly:
- if eligibility criteria are met, a liquidator may adopt the simplified liquidation process within 20 business days of their appointment (in a creditors voluntary winding up); but
- if, within 20 days of a liquidator’s appointment, 25% of creditors (in value) request that the simplified process not be utilised, the simplified process will not be used.
The new process aims to reduce the costs which are often associated with ‘traditional’ liquidation and which are often untenable in winding up small companies.
The simplified liquidation process maintains the structure of the existing creditors voluntary winding up process, but proposes time and cost savings by reducing the investigative and reporting requirements imposed on liquidators.
Many transactional documents (including contracts, supply agreements and deeds) include clauses which rely on the ‘Insolvency’ of one party as a triggering event for certain rights. These clauses were drafted at a time when the appointment of an administrator, liquidator or receiver or the filing of an application for winding up were the usual indicators of insolvency.
Whilst many clauses we have recently reviewed refer to the ‘Insolvency’ of one party in a sufficiently general way so as to allow for the inclusion of the new Small Business Restructuring Process, we have also seen clauses which refer specifically to the appointment of an administrator, liquidator or receiver or the filing of an application for winding up. In circumstances where the appointment of a SBRP or proposing a restructuring plan to creditors is not referred to, such clauses would not trigger insolvency rights if the Small Business Restructuring Process is commenced.
In order to ensure that transactional documents cover all available insolvency processes, it is important for those documents to be reviewed and, if necessary, amended to reflect the new Small Business Restructuring Process. This should also include consideration of related rights, including in respect of termination, security and guarantees.
Expiry of Temporary Insolvency Amendments
As identified above, the Small Business Insolvency reforms will take effect from 1 January 2021. This timing coincides with the expiry of the temporary amendments to insolvency law which were introduced by the Government in March 2020. Those temporary amendments were initially due to expire in September 2020, but were extended to 31 December 2020. To date, no announcement has been made regarding a further extension of the temporary amendments.
Significantly, when the temporary amendments come to an end:
- creditors will once again be permitted to issue statutory demands which require a response within 21 days, rather than the 6 month response period which has been in place since March 2020;
- statutory demands will be permitted for debts of more than $2,000 rather than the $20,000 minimum which has been in place since March 2020; and
- directors of insolvent companies will no longer be relieved of their duty to prevent insolvent trading by s 588GAAA of the Corporations Act. This will mean that if a company is insolvent and continuing to trade on 1 January 2021 and its directors wish to be protected from prosecution for insolvent trading, they will need to appoint a SBRP, administrator or liquidator (perhaps under the simplified process, if applicable) by 1 January 2021.
There is a prospect that an effect of the temporary amendments coming to an end will be a wave of restructurings/administrations/liquidations, all of which may have flow on effects for the creditors/trading partners of the insolvent entities. This reinforces the importance of being prepared for the new regime.