Small business restructuring and liquidation reforms
Currently all companies are treated the same under Australia's one-size-fits-all administration and liquidation processes. The appointment of external administrators and the process of administration and liquidation is the same irrespective of the size of the relevant company.
The Commonwealth government has announced proposed changes to the one-size-fits-all arrangements which are designed specifically for ‘small businesses'. The arrangements have not yet come into place and are still before the Commonwealth Parliament and otherwise in draft form. The key changes which relate to new restructuring and liquidation arrangements are due to come into effect on 1 January 2021.
What are the ‘key' changes?
The key changes are made through amendments to the Corporations Act, the Corporations Regulations and the insolvency practice rules. The regulations and the proposed amended rules have only been released in draft for consultation. They, like the relevant amending legislation, may be subject to change.
The proposed changes are as follows:
- the establishment of a new restructuring process available to companies which meet the eligibility criteria;
- the implementation of a moratorium on claims and against companies undergoing restructuring; and
- the establishment of a new liquidation process for eligible companies.
New restructuring process
Companies which are insolvent or likely to become insolvent have limited options under the current legislative arrangements. Generally speaking, companies in this position must either appoint an administrator or a liquidator who will then take control of the company's affairs.
The new process restructuring offers an alternative to external administration for eligible companies. The process comprises a number of steps required to be undertaken within limited timeframes:
- the appointment by a company of a small business restructuring practitioner (SBRP);
- the development of a restructuring plan proposal by the company with the assistance of the SBRP for submission to creditors;
- submission of the proposal to creditors for their acceptance; and
- implementation of the restructuring plan if it is accepted.
Failure to comply with any of the requirements within the relevant timeframes may result in the termination of the restructuring process.
Under the proposed new restructuring arrangements:
- a company is required to appoint a SBRP;
- the SBRP is required to assist the company with preparing a restructuring plan to be submitted to creditors;
- a company retains control of its affairs during the course of the restructuring rather then the SBRP or an external administrator – there are some limitations on the disposal of assets by the company during the course of the process;
- a moratorium applies to claims by certain creditors against the company engaged in the restructuring process;
- a company is required to propose a restructuring plan to creditors to continue to benefit from the moratorium;
- a company may only propose a restructuring plan if the company has paid employee entitlements that are payable and lodged documents required under taxation laws;
- the restructuring plan is required to be accepted by a majority in value of the company's affected creditors who reply to the restructuring plan proposal; and
- if the plan proposal is rejected, the company will likely be required to enter into voluntary administration or liquidation.
A restructuring plan:
There is no requirement that creditors receive any specified return on their debt as a result of implementation of the restructuring plan or that it achieve a better outcome then liquidation or administration. That said, the question for creditors considering a proposal will be whether or not the return they expect to receive on the implementation of the restructuring plan will be better than the alternatives available to the company.
Considerations for small business
The full effect of and practical operation of the proposed amendments are not yet known and they will take some time to work through. However, based on the current proposals, issues facing small businesses wishing to engage in the restructuring process are likely to include:
- the demands of engaging in a process the outcome of which may be rejected by creditors irrespective of the SBRP's recommendations;
- the requirement to satisfy preconditions for putting forward a proposal including the requirement to ensure all employee entitlements are paid and ensuring all lodgements under taxation laws are up to date; and
- the continuing rights of secured creditors.
The restructuring process offers small business owners the opportunity to consolidate their business and avoid the well-known drawbacks of external administration and insolvency to achieve an overall better outcome for creditors and their business.
Simplified liquidation process
The simplified liquidation process offers a ‘slimmed' down liquidation process.
An insolvent company which has total liabilities not exceeding 1 million and which would otherwise be entitled to undertake a creditors' voluntary winding up may be eligible to have a liquidation conducted in accordance with the ‘simplified liquidation process'. Whereas the restructuring plan offers an alternative to administration for eligible companies in financial distress, the simplified liquidation process largely operates by removing or limiting some of the features of an ordinary liquidation undertaken as part of a creditors' voluntary winding up.
A simplified liquidation is still required to be conducted by a liquidator, however:
- there are narrower offence reporting obligations on liquidators;
- there are reduced obligations to convene meetings;
- the right of creditors to appoint committees of inspection has been removed;
- there are greater limits on the clawback of unfair preferences for creditors unrelated to the company; and
- there is a simplified dividend process.
The simplified liquidation process offers some benefits to directors and creditors. However, it is important for directors to remember that it is the appointed liquidator who determines whether or not the simplified liquidation process will be engaged and not directors. Accordingly, directors will only know whether the process will be adopted once a liquidator is appointed. Even if it is adopted, the liquidator is empowered to cease following the process during the course of the liquidation in certain circumstances so that the ordinary liquidation procedures apply.
The current insolvency reforms and the proposed regulations and rules have not come into force. The amending legislation remains before the Commonwealth Parliament and the proposed regulations and reforms on which the above comments are based have been released in draft form only.
The above does not constitute legal advice and must not be relied upon as such. Small business owners should seek advice from appropriately qualified advisers based on their own circumstances and situation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.