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Small business restructuring and liquidation reforms

Tim McGrath

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:

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:

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 restructuring plan:

Must

May

Must Not

  • be in the approved form (no form has been approved)
  • authorise the SBRP practitioner to deal with property in the way specified in the plan
  • provide for the transfer of property (other than money) to a creditor
  • identify the company property to be dealt with as part of the plan
  • provide for any matter relating to the company’s financial affairs
  • provide for payment under the plan in respect of admissible debts or claims after 5 years from the commencement of the plan
  • provide for the remuneration of the SBRP practitioner
  • be expressed to be conditional on the occurrence of a specified event within no longer than 10 days after the proposal to make the restructuring plan is accepted

 

  • specify the date of execution of the 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 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:

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.

If you have any questions or require assistance with any of the above, please do not hesitate to contact a member of Coleman Greig’s Insolvency team, who would be more than happy to assist you.