By June Ahern – Bankruptcy & Insolvency Content Editor
On 12 November 2020, the Morrison Government introduced legislation into Parliament which reflects the most significant changes to Australia’s insolvency framework in 30 years. This is part of a wider economic recovery plan to keep businesses afloat following the Covid-19 pandemic. The reforms were first announced by the Government on 24 September 2020. They are designed to reposition Australia’s insolvency system to help more small businesses restructure and survive the economic impacts of Covid-19. There is little doubt that small businesses have suffered most as a result of the pandemic.
As the economy continues to recover, it is critical that distressed businesses have the necessary flexibility and tools to either restructure their operations or to wind down in an orderly manner. The new laws are designed to provide that flexibility.
The changes
As part of these changes, a new debt restructuring process will be introduced for incorporated businesses with proposed liabilities of less than $1M. This approach draws on some of the key features of the US Chapter 11 bankruptcy model.
It is intended that, by moving from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model, eligible small businesses will be able to restructure their existing debts whilst remaining in control of their business. Crucially, it provides those viable businesses which can be saved with the opportunity to survive. For those businesses which unfortunately simply can’t survive the economic fallout of the pandemic, a new simplified liquidation pathway is being introduced. This will allow for faster and lower-cost liquidation, allowing small business owners to move on as quickly as possible. The objective is to avoid a lengthy legal process which consumes the business assets, leaving creditors with next to nothing.
Complementary measures will also be enacted to ensure that the insolvency sector can respond effectively both in the short-term and the long-term as a “wave of insolvencies’ is expected, once the Government’s financial relief packages, such as JobKeeper, abate on 28 March 2021[1]. These complimentary measures include waiving registration fees for insolvency practitioners for a period of two years and creating a new class of insolvency practitioner specialising in the new simplified small business process.
The detail
- Schedule 1 – This schedule creates a debt restructuring process for eligible small businesses. The eligibility test will be based on the liabilities of the company and will be prescribed by the Corporations Regulations (the Regulations). The intention of the debt restructuring process is to reduce the complexity and cost of the administration process, providing a greater role for company directors and allowing them to retain some measure of control throughout the process. The company will be obliged to put a debt restructuring plan in place, with the assistance of an independent small business restructuring practitioner. Much of the detailed requirements relating to the debt restructuring process will be prescribed by the Regulations. This includes the requirements for terminating the debt restructuring process by either the company or the small business restructuring practitioner.
- Schedule 2 – Provides temporary relief for eligible companies seeking to enter the formal debt restructuring process provided for in Schedule 1. This includes temporary relief from the director’s duty, under s 588G(2) of the Corporations Act 2001 (the Act), to prevent insolvent trading. An eligible company waiting to access the debt restructuring process will also be relieved from their obligation to respond to creditors’ statutory demands. The company must establish their eligibility for relief between 1 January 2021 and 31 March 2021 (the eligibility period). A director’s declaration is required, which must be published and also made available to ASIC. However, these relief measures only apply if the company has fully and truthfully disclosed all material facts and ensure to inform ASIC if they are no longer eligible for temporary relief.
- Schedule 3 – Creates a simplified liquidation process for a creditor’s voluntary winding up of an insolvent company. The simplified liquidation process will only be available in a creditors’ voluntary liquidation and where the company liabilities do not exceed a threshold as prescribed by the Regulations. In other words, the simplified process is designed for small businesses. The liquidator must give each member and creditor of the company a notice containing information on the simplified liquidation process. The simplified liquidation process still works within the framework which applies to a regular liquidation. However, the process reduces investigation and reporting requirements, including the requirement for meetings. The Regulations will prescribe the details and requirements for exiting from the simplified liquidation process.
Schedule 3 also amends the Insolvency Practice Schedule to refine the registration requirements for a liquidator. The aim is to increase the number, and diversity, of insolvency practitioners into the field in order to cope with the expected increase in demand for insolvency expertise.
- Schedule 4 – Expands the situations where documents relating to the external administration of a company may be provided electronically. It also allows documents relating to the external administration of a company to be signed electronically. However, it must be reasonably expected that the document(s) can be readily accessed electronically, and the recipient must have provided a valid electronic address.
Schedule 4 also proposes amendments to the Insolvency Practice Rules to facilitate virtual meetings.
In summary, Schedule 1 is directed at those viable companies which can be saved, whereas Schedule 3 is directed at those companies which can clearly not survive the economic impacts of the Covid-19 pandemic.
Further details on the proposed law can be found here.
Marketplace reactions
The move to introduce the new insolvency reforms has been largely welcomed by industry bodies. The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, commented that the legislation will be a “game changer” for small businesses and is largely in line with the recommendations made in the Ombudsman’s Insolvency Practices Inquiry Final Report, handed down in July of this year.
However, other bodies have warned against the new laws facilitating the continued existence of “zombie” companies, that is, companies who should enter liquidation, due to mismanagement, etc. Such companies should not continue to be propped by Government relief measures.
There is also concern regarding the potential influx of insolvency practitioners into the marketplace, particularly when it comes to qualifications and expertise.
Next steps
The Bill and Explanatory Memorandum were introduced to Parliament on 12 November 2020. Following the passage of the legislation through Parliament it is intended that these new insolvency measures will be available for small business from 1 January 2021, well in advance of the 28 March 2021 end-date for JobKeeper, when the first potential “wave of insolvencies” is expected.
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Sources: Corporations Amendment (Corporate Insolvency Reforms) Bill 2020, 12 November 2020, accessed 12 November 2020.
Explanatory Memorandum, 12 November 2020, accessed 12 November 2020.
Treasury Department, Insolvency Reforms to support small business, Joint Media Release, the Hon Josh Frydenberg MP, Treasurer and the Hon Michael Sukkar MP, Minister for Housing and Assistant Treasurer, 12 November 2020, accessed 12 November 2020.
[1] Modelling by Deloitte Access Economics estimated approximately 240,000 small businesses are at risk of financial failure. This financial impact is likely to hit once the Government’s economic lifelines (such as JobKeeper) cease.
