On 1 January 2021, the Federal Government’s amendments to the Australian insolvency framework commenced with the aim of reducing the complexity, time and cost associated with restructuring and liquidating small businesses.
The amendments are, among other things, intended to ameliorate some of the burden expected to flow from the expiration of the Government’s temporary COVID-19 fiscal relief package.
The new regime sets out:
and can be found in the new Part 5.3B of the Corporations Act.1
The new Part 5.3B process provides a potential alternative to external administration allowing a distressed company, with the aid of a qualified restructuring practitioner, to instead, seek to enter into a restructuring plan with its creditors.
The restructure of a company begins upon the appointment of a restructuring practitioner. Under section 453B, a company may appoint a small business restructuring practitioner if:
The eligibility criteria for restructuring include that:
Additionally, a company is not be permitted to appoint a restructuring practitioner if that company is already under restructure, under administration, subject to a deed of company arrangement or in liquidation.
The functions of a restructuring practitioner include:
Subject to any restructuring plan and necessary instructions from the company’s directors, a restructuring practitioner is entitled to:
Equally, the directors of a company under restructure are required to assist the appointed restructuring practitioner, including by providing the restructuring practitioner with information about the company’s business, property, affairs and financial circumstances.
During a restructure, the directors of a company under restructure are prohibited from transacting on behalf of the company (section 453L) unless the transaction:
Secured parties are prevented from enforcing their security interests against companies under restructure in the absence of the restructuring practitioner’s consent or leave of the Court: section 453Q. Similarly, creditors are prevented from enforcing guarantees against directors and their relatives: section 453V.
The existing safe harbour provisions have also been amended such that directors are not liable for any debts incurred by a company under restructure.
A new simplified liquidation process has also been introduced by the Act but is only available in a creditors’ voluntary winding up.
The eligibility criteria for the simplified liquidation process (section 500AA) include that the:
Additionally, the directors of a company must give the liquidator a declaration that they believe, on reasonable grounds, that the eligibility criteria for the simplified liquidation process have been met. The liquidator may then adopt the simplified liquidation process if he or she is satisfied that such eligibility criteria have been met.
The new section 500AE and related regulations exclude a number of otherwise necessary components of the ordinary liquidation process from the simplified liquidation process. These include (among other things):
These amendments are another effort by the Commonwealth government to reduce the economic impact of COVID-19 on the Australian business community. Take-up from the business community will be necessary to determine whether the amendments achieve their mandate to reduce complexity and the time and cost associated with restructuring and liquidating small businesses or whether the existing external administration and liquidation frameworks are sufficient.