Date posted: 17/11/2020 6 min read

Insolvency reform in Australia

Legislation introduced to Parliament

In Brief

  • The new processes will start on 1 January 2021
  • New debt restructuring process for incorporated businesses with liabilities under $1 million.
  • New simplified liquidation pathway for small businesses

On 12 November 2020, Treasurer Josh Frydenberg introduced Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (the Bill) to Parliament. The reforms were announced on 24 September 2020, with further details in the government factsheet. The reforms are intended to assist small business to restructure when they are in financial distress, which has been particularly evident during the Covid 19 pandemic. 

The legislation has five key components:

  1. Debt restructuring
  2. Temporary relief for companies seeking a small-business restructuring practitioner
  3. Simplified liquidation
  4. Refinements to the registration of liquidators and trustees
  5. Virtual meetings and electronic communications

Much of the detail in relation to the reforms is in the regulations and rules, which were released for a brief consultation period from 17 to 24 November. The new processes will be available for small business from 1 January 2021. The current temporary moratorium for directors from insolvent trading ceases on 31 December 2020.

1. Debt restructuring

This Bill creates a formal debt restructuring process for eligible companies. The intention is to provide an alternative to the voluntary administration regime for small business. The ultimate aim of restructuring is to have a plan that sets out repayment of the company’s existing debts to enable the company to avoid being wound up. The restructuring covers the period during which a plan is developed by the business owners in conjunction with a small-business restructuring practitioner (SBRP).

The eligibility criteria include a liabilities test and a requirement that the company and directors have not previously used a debt restructuring or simplified liquidation process during the previous seven years. The draft regulations propose that the total liabilities must not exceed $1 million. 

The SBRP will provide advice about the company’s need to meet the requirements of the debt restructuring process. The SBRP will also help the company prepare the restructuring plan, make a declaration to creditors about the proposed plan in accordance with the regulations, and any other relevant functions under the Corporations Act.

Only a registered liquidator can consent to be appointed, and act as, a small business restructuring practitioner. The SBRP will be a third class of registered liquidator and details as to who can register as an SBRP are included in the rules and regulations. The legislation also includes criteria to ensure the independence of the SBRP.

The company directors retain control of the company’s business, property and affairs during the debt restructuring process. The company directors are responsible for compliance with the legislative requirements of the debt restructuring process.

2. Temporary relief for companies seeking an SBRP

The current temporary moratorium from insolvent trading for directors expires on 31 December 2020. The Bill includes a new temporary safe harbour in relation to a company that intends to enter into the formal debt restructuring process but has been unable to secure and appoint an external administrator. Temporary relief is available between 1 January 2021 and 31 March 2021. Once eligible, the temporary relief applies for three months, or for a further one month if the company is eligible to extend the period.

3. Simplified liquidation

The Bill establishes a simplified liquidation process for winding up the affairs and distributing the property of an eligible company in a creditors’ voluntary winding up, as well as the requirements for entering and exiting the process. The intention is to supplement the current ‘one–size-fits-all’ liquidation regime with a regime that has appropriate pathways for less complex liquidations, in particular for incorporated small businesses. By reducing complexity, time and costs in the liquidation process, it is intended that the simplified liquidation process will result in greater returns to creditors and employees.

The simplified process is a modified version of the process for a creditors’ voluntary winding up and can be undertaken only by a registered liquidator. Eligibility criteria include the company’s tax lodgements being up to date, being insolvent and no director having used the simplified liquidation pathway or debt restructuring process before.

4. Refinements to the registration of liquidators and trustees

Under the Corporations Act, only a registered liquidator can perform certain roles, such as that of the receiver of the property of a corporation, the administrator of a company or of a deed of company arrangement, or the liquidator or provisional liquidator of a company. An SBRP is also required to be a registered liquidator. Similarly, under the Bankruptcy Act, only the Official Trustee or a registered trustee can act as the trustee of a regulated debtor’s estate.

The Bill amends the existing registration requirements to provide more flexibility to committees considering applications for registration as a liquidator or trustee. The amendments provide that the committee may decide that an applicant should be registered even if the committee is not satisfied of particular criteria.

5. Virtual meetings and electronic communications

The Bill allows electronic communication to be used to give a document under the external administration provisions relating to a number of different legislative requirements. The amendments also allow documents relating to the external administration provisions to be signed electronically by using any reliable method to identify the signatory and indicate the signatory’s intention.

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