Small business insolvency laws

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:

  • an alternative restructuring process by which a distressed company may seek to retain control of its business, property and affairs and seek to enter into a restructuring plan with its creditors; and
  • a simplified liquidation process for a creditors’ voluntary winding up,

and can be found in the new Part 5.3B of the Corporations Act.1

Restructuring process

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 are met; and
  • the board has resolved that there are reasonable grounds for suspecting that the company is or will become insolvent and that a restructuring practitioner should be appointed.

The eligibility criteria for restructuring include that:

  • the company’s total liabilities do not exceed $1 million; and
  • no person who is a director (or who, in the preceding 12 months, was a director) of the company has been a director of another company under restructuring or subject to the simplified liquidation process.

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.

Restructuring practitioners and directors

The functions of a restructuring practitioner include:

  • providing advice to the company in respect of restructuring; and
  • assisting the company in preparing a restructuring plan.

Subject to any restructuring plan and necessary instructions from the company’s directors, a restructuring practitioner is entitled to:

  • hold money on trust for the company;
  • make distributions to creditors; and
  • realise the company’s property.

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.

Conducting the business of the company

During a restructure, the directors of a company under restructure are prohibited from transacting on behalf of the company (section 453L) unless the transaction:

  • is part of the ordinary course of the company’s business;
  • has received the consent of the restructuring practitioner; or
  • was entered into under an order of the Court.

Consequences of restructuring 

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.

Simplified liquidation

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:

  • company has passed a resolution that it be wound up voluntarily;
  • directors of the company have provided the liquidator with a report in relation to the company’s affairs;
  • total liabilities of the company do not exceed $1 million; and
  • company has lodged all tax returns, notices and statements .

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):

  • dispensing with requirement to prepare a report to creditors under section 533;
  • dispensing with the requirements to convene a meeting of creditors in certain circumstances under sections 75-15 and 75-20 of the IPS; and
  • reducing the number of voidable transactions to exclude (among other things) unfair preference payments and transactions which resulted in a third party receiving no more than $30,000 in value from the company.

Lavan comment

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.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.