Insolvency reform: details of new formal debt restructuring and simplified liquidation announced – Insolvency/Bankruptcy/Restructuring

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Australia’s biggest insolvency reform in 30 years has been announced. Yesterday, October 7, 2020, the Treasury released some of the proposed details of the reforms for public comment. The purpose of this article is to examine some details.

New formal debt restructuring for small businesses

This formal debt restructuring process allows an eligible company to restructure its debts and maximize its chances of survival. The formal debt restructuring process will allow a business manager to retain control of their business, assets and affairs while developing a debt restructuring plan with the assistance of a the restructuring of small enterprises”.

The moratorium that will apply on the ability of a third party to assert rights against the company is consistent with the moratorium that applies during voluntary administration. A court may extend this period if satisfied that it is appropriate to do so in the interests of justice.

During the restructuring period, the directors of the company retain control of the company’s assets and affairs – and must obtain the consent of the small business restructuring practitioner – who can only be a registered liquidator – for actions outside the normal course of business. A transaction contrary to this prohibition is void. This includes transactions changing the ownership of the business. Any payment made or transaction entered into with the consent of the Small Business Restructuring Practitioner is not subject to reversal upon any subsequent liquidation of the Company. The restructuring practitioner is considered an agent of the company when exercising a function or an obligation to exercise power as a practitioner of the restructuring of the company. They are required to provide a statement of relevant relationships to affected creditors and ASIC as soon as possible after their appointment. Their appointment cannot be revoked. The Restructuring Practitioner may terminate the Debt Restructuring process at any time if he believes, on reasonable grounds, including:

  • the company does not meet the eligibility criteria; or

  • it would not be in the interest of the creditors to continue.

A company undergoing a debt restructuring process must indicate on all public documents that it is undergoing a restructuring process by adding “named restructuring practitioner” after the name of the company .

If there is a liquidation claim pending when the company enters the new debt restructuring process, the claim may be adjourned if the court is satisfied that it is in the interest of the company’s creditors that the company is not liquidated – much like the current position in VA.

The rights of a secured creditor during the debt restructuring process are analogous to their position in VA. The secured party may continue to own assets during the restructuring of the business, but may not sell or otherwise enforce security interests in assets subject to exemptions (eg, perishable goods).

At the end of the restructuring process, the creditors vote to accept or reject the plan. To ensure that this process is fair, related entities cannot vote on the plan. No meeting of creditors is required during the debt restructuring process, with voting on the plan taking place electronically or via technology – without the need for physical meetings. These types of virtual meetings required the express approval of the Federal Court of Australia in the recent administration of Virgin – which led administrators to organize meetings between thousands of creditors in the midst of the global pandemic who would not have were possible otherwise.

Regarding the plan itself:

  • A company is considered insolvent if it proposes a restructuring plan to its creditors;

  • Regulations (still to be seen) may prescribe the requirements for submitting a restructuring plan. These requirements may include:

    • how the value of debts and receivables under a restructuring plan should be calculated;

    • the justification and classification of these debts and receivables within the framework of a restructuring plan;

    • the assets of the company which must or may be used for the payment of debts and claims against the company;

    • how these debts and receivables must be treated if the assets of the company are not sufficient to satisfy them in full;

    • the nature and duration of any moratorium on the execution of debts and receivables against a company undergoing restructuring; and

    • the effect of a restructuring plan on the rights, obligations and liabilities relating to a company’s debts and claims.

In the event that regulations inconsistent with the Corporations Act or any other law are made, the regulations shall prevail to the extent of any inconsistency.

In particular, the eligibility criteria require that no director of a company has been a director of a company that has been the subject of a debt restructuring procedure or a simplified liquidation procedure during the period provided for by regulation. This is designed to prevent illegal phoenix behavior. The regulations may also prescribe a circumstance in which a director is exempt – which presumably includes where there are joint directors on a group of companies entering external administration.

The new simplified liquidation procedure

The intention of the simplified liquidation process is to complement the existing “one size fits all” liquidation regime with a regime that has appropriate pathways for less complex liquidations, particularly for smaller incorporated businesses. This aims to provide faster and lower cost liquidation, thereby increasing returns for creditors and employees.

This process is only available to a liquidator if the eligibility criteria are met. These criteria include:

  • the company’s tax declarations are up to date;

  • the total liabilities do not exceed the amount to be prescribed in the regulations ($1 million); and

  • no director has been a director of a company that has previously had recourse to the simplified liquidation procedure or to a debt restructuring procedure.

It is only available in the event of voluntary liquidation of a creditor. This process cannot occur in the case of a voluntary liquidation of a member or a liquidation ordered by a court. It also cannot be used when creditors have asked the liquidator not to use this process.

Within 5 days of initiating the process, an administrator must provide the liquidator with:

  • a summary of the affairs of the company”; and

  • a declaration of eligibility for simplified liquidation.

The most notable differences from the existing “one size fits all” liquidation process are:

  • a relaxed ASIC reporting requirement for liquidators;

  • a liquidator may not call a meeting of creditors at any time, nor may he be ordered to call a meeting at any time. Instead, the liquidator may provide information to creditors electronically and proposals will be made to give notice to creditors or contributors;

  • no inspection committees;

  • the supervisory powers of the Court are retained for the simplified liquidation process – including the power to appoint a liquidator reviewer (such as an ad hoc liquidator).

The regulations will prescribe a more “fit for purpose” reporting process that will reduce the burden on liquidators without undermining confidence in the insolvency regime. More details in the regulations remain to be seen.

With regard to unfair preferences, this will obviously remain within the framework of the simplified liquidation procedure. However, regulations may provide for circumstances in which a transaction is not an unfair preference or a voidable transaction for companies under the simplified liquidation process. The explanatory memorandum ominously suggests that regulation may provide that “an unfair preference must relate to a transaction of some value”.

The explanatory memorandum also suggests that the Regulations could provide a simpler process for submitting and admitting evidence of debt – this will likely include a mechanism to avoid costly legal proceedings regarding disputed evidence of debt.

If a liquidator considers, by undertaking the simplified liquidation procedure, that a company no longer fulfills the eligibility criteria, the liquidator must leave the simplified liquidation procedure.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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