New insolvency processes – any use to your client?

In late September 2020 the federal government announced the pending release of bespoke insolvency legislation aimed at enabling more Australian small businesses to quickly restructure and hopefully survive the economic impact of COVID-19. This was to be accompanied by additional legislation, where a recovery was not possible, to provide for a liquidation pathway that was faster, enabling greater returns for creditors and employees – known as a Simplified Liquidation.

While these reforms were labelled as the biggest reform to insolvency law in 30 years it was disappointing that only a few months elapsed between announcement and legislation being passed into law resulting in limited opportunity for consultation with the industry and the implementation of feedback. Despite this short timeframe however, the IPA put together a consulting panel of insolvency experts to assist it in formulating its response to Treasury to actively represent its members.

A new debt restructuring process for small businesses – “small business restructure (SBR)”

It was viewed by the government that to help small businesses recover, they should be provided with a legislative mechanism to allow them to continue to trade while offering their creditors a “cents in the dollar” return on past debts. This process is akin to the Deed of Company Arrangement process achieved after a voluntary administration but in a much ‘cut-down’ version.

As such, the SBR process is designed to allow companies with creditors of less than $1 million (excluding employee entitlements) to restructure their debts and achieve a better outcome than from the pre-2021 insolvency processes e.g. administration or liquidation.

While a registered liquidator is appointed to oversee and administer this small business restructure, a critical selling point of this new process is that directors remain in control of the business and are able to continue trading. The directors are also immune to being held liable for insolvent trading during this period despite the company being insolvent and continuing to trade during the restructure period.

The registered liquidator (who is to be called a small business restructuring practitioner (‘SBRP’)) is appointed by the company to work with its directors. The role of the SBRP is limited to: Assist the directors prepare the plan (20 business days); Make reasonable inquiries and take reasonable steps to verify the information provided to them by the directors regarding the company’s affairs; Certify that it is reasonable to expect the company will meet obligations under the plan; Circulate the plan among the company’s creditors (giving them 15 business days to reply); Adjudicate and collate creditor votes on the plan; and If accepted, adjudicate on creditor claims and pay a dividend.

Once a plan is approved, all unsecured creditors of the company are bound by the plan.

Of note is that if the plan is not accepted by the creditors, the restructuring process ends and the company does not proceed into any form of liquidation (there is no automatic winding up or option to place the company into liquidation – unlike in a voluntary administration).

SBR hurdles

In addition to the company having less than $1 million in creditors, it is also necessary that the company have all statutory taxation reporting completed and employee entitlements paid before the SBR Plan can be presented to creditors.

The company is also only able to propose a restructure plan if neither it nor its directors have undertaken this process or gone through a simplified liquidation in the prior seven years.

Creditors restrained

Similar to the existing voluntary administration process, creditors are restrained from taking action against the company during the restructure period. Specifically, they cannot enforce security held against the company or guarantees provided by its director (or relatives).

Creditors are also generally stopped from recovering goods they have supplied to the company pursuant to any security interests (including PPSA) with any goods subject to unperfected PPSR registrations vesting in the company. The company can continue to deal with any goods it holds that are subject to PPSR registrations in the ordinary course of its business. As the proposal is forwarded to all creditors via email or post, there is no requirement for any meetings of creditors to be held. It should be noted that unlike a voluntary administration, the SBRP is not liable for any goods supplied to the company during the restructure period.

Limited information

During a voluntary administration, creditors are provided with information about the company at meetings and in detailed reports. Where a Deed of Company Arrangement is proposed, the voluntary administrator is required to provide a comparison of the proposal versus the potential return creditors may expect in a liquidation.

The administrator is also required to express their opinion on whether creditors should or should not accept the proposal. This information is not required to be provided by the SBRP. Rather, as stated above, the SBRP need only comment upon the ability of the company to fulfil the plan after having made reasonable inquiries and taken reasonable steps to verify the information provided to them by the directors regarding the company’s affairs.

SBR Plan like a DOCA lite

Accountants familiar with the Deed of Company Arrangement process would be aware that a deed can provide for a wide variety of terms and conditions with particular freedoms so as to provide the company with its best chance of survival. As the SBR is designed to be used with uncomplicated small businesses, the contents of the SBR plan are constrained and is contained within an ASIC template. In this regard, the plan must: Identify property to be available to creditors (e.g. a lump sum instalment held in a trust account); Specify how property is to be dealt with; Provide for remuneration of SBRP; Specify the date the plan is to be executed; Can be conditional for up to 10 business days after the proposal is accepted; Cannot transfer property to a creditor (e.g. real estate or equipment); and Cannot last for more than three years.

The plan is unable to compromise employee entitlements. As such, employees are unable to vote on the plan.

Useful?

The process, in its simplest form, is an offer to creditors to compromise their claims against it for something less than 100 cents in the dollar and/or an extension to payments over time.

It is meant to be a ‘light touch’ process whereby the registered liquidator handling the process is predominantly involved in an administrative process – thus meant to be cheap. Further, if the plan doesn’t succeed the company isn’t placed into liquidation. However, like all insolvency engagements each company’s circumstances will dictate whether this new process is appropriate for it to adopt and is not without its problems. Careful consideration should be undertaken in consultation with a registered liquidator by its directors prior to commencement.

The simplified liquidation process

The SL process piggybacks off the existing creditor’s voluntary liquidation process, with modifications made by the government with the intention to reduce time and cost. Unfortunately, water-cooler discussions held by registered liquidators have yet to identify how the modifications made will translate into a cheaper process for creditors (and directors).

Currently, a small corporate business can appoint a liquidator who takes control of the company and realises its assets for distribution to creditors. At the time of entry into the conventional creditors voluntary liquidation (‘CVL’) process, the directors can provide a notice of eligibility to the iquidator confirming that the SL process can be adopted.

The liquidator has 20 business days from appointment to decide whether to transition the CVL into an SL.

Under the adopted SL process, while the liquidator will still investigate and report to creditors about the company’s affairs and enquire into the failure of the company, the mandatory lodgement of a director offences report with ASIC has been done away with and the three-month report provided to creditors trimmed down.

The SL process also restricts the circumstances where a liquidator can pursue an unfair preference claim in recognition that in small engagements, this process can result in limited benefit to the creditor pool as a whole. Further: no meetings of creditors can be called by the liquidator; liquidator may only declare and distribute a dividend once; and proof of debts not admitted prior to the dividend being paid are excluded from receiving any money in the liquidation (as only one dividend is paid).

While it is too early to tell how effective this new SBR and SL process will be in increasing returns to creditors, the addition of these two new options for financially distressed small businesses certainly increases the options for both directors, advisers and registered liquidators to consider when assessing a company’s financial position.

As always, the earlier that discussions with a registered liquidator are commenced the greater the opportunity for the business to be saved through either an informal or formal turnaround process.

This article contains general information only and the author, by means of this article, is not rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. Neither the author nor Brooke Bird Pty Ltd shall be responsible for any loss whatsoever sustained by any person who relies on this article.