Introductory Info
Date introduced: 12 November 2020
House: House of Representatives
Portfolio: Treasury
Commencement: Sections 1-3 on Royal Assent; Schedule 4 on the day after Royal Assent; Schedules 1 and 3 on 1 January 2021; and Schedule 2 immediately after the commencement of Schedule 1.
The Bills Digest at a glance
The purpose of the Corporations
Amendment (Corporate Insolvency Reforms) Bill 2020 is to implement
insolvency reforms to support small business. The three key elements of the reforms
are:
- small
business restructuring: a new formal debt restructuring process for eligible
incorporated small businesses, which the Government has indicated will apply to
businesses with liabilities of less than $1 million, to allow a faster and less
complex process to restructure existing debts and maximise their chances of
survival
- small
business liquidation: a new simplified liquidation pathway for eligible
incorporated small businesses, which the Government has indicated will apply to
businesses with liabilities of less than $1 million, to provide for a faster
and lower cost liquidation process and
- other
measures: to provide temporary insolvency relief until 31 March 2021—to address
the issue of eligible small businesses not being able to access the process
immediately whilst insolvency practitioners become familiar with small business
restructuring
The Government estimates
that the reforms will cover around 76 per cent of businesses subject to
insolvencies—98 per cent of which have less than 20 employees.
Stakeholder comments
An exposure draft of the Bill was circulated for comment
by The Treasury during the period 7–12 October 2020. No submissions
in response to that consultation are available. In addition, the Bill was not
referred to Committee for inquiry and report.
The reforms have been ‘largely welcomed’ by the Australian
Restructuring, Insolvency and Turnaround Association who consider that such
reforms are definitely
overdue. Industry leaders have described the proposed changes as a lifeline
for small business owners.
However, other stakeholders have expressed concern
that the measures should not be seen by some directors as an opportunity to
keep a bad business going.
Purpose of
the Bill
The purpose of the Corporations
Amendment (Corporate Insolvency Reforms) Bill 2020 (the Bill) is to amend a
number of statutes—primarily the Corporations Act
2001— in order to implement insolvency reforms to support small
business.
Structure of
the Bill
The Bill comprises four Schedules:
- Schedule
1 amends the Corporations Act to create a debt restructuring process for
eligible small companies. Part 2 of Schedule 1 contains consequential
amendments to the Banking
Act 1959, the Corporations Act, the Insurance Act 1973,
the Life
Insurance Act 1995, the Payment Systems and
Netting Act 1998, the Personal Property
Securities Act 2009 (PPSA) and the Taxation
Administration Act 1953 (TA Act)
- Schedule
2 amends the Corporations Act to provide temporary relief for eligible
companies seeking to enter the formal debt restructuring process established
under Schedule 1
- Schedule
3 amends the Bankruptcy
Act 1966 and the Corporations Act to create a simplified
liquidation process for a creditors’ voluntary winding up of an insolvent company
and amends the Insolvency Practice Schedule to refine the registration
requirements for a liquidator and
- Schedule
4 amends the Corporations Act to expand the situations where documents
relating to the external administration of a company may be given
electronically.
Background
About
Australia’s insolvency system
The Productivity Commission conducted an inquiry into
business set-up, transfer and closure in 2015.[1]
In its inquiry report, the Productivity Commission noted that ‘in comparison to
overseas systems, a dominant feature of the Australian system is a focus on the
creditor in preference to the rehabilitation of the company’.[2]
It added:
In particular, the focus on the return to creditors (even in
voluntary administration), the degree of reporting to creditors and their
ability to challenge various elements of the administration and liquidation
processes are seen to favour the interests of creditors over the continuation
of the company. Or, as others have put it, in contrast to Australia, systems
such as the chapter 11 process in the United States put ‘recovery ahead of
burial’.[3]
Extent of
small and medium insolvency
On 18 December 2019 the Australian Securities and
Investments Commission (ASIC) published its annual overview of corporate
insolvencies for the 2018–2019 financial year, which provides an overview of
the nature of corporate insolvencies.[4]
According to ASIC, some key observations from the report were:
- small
to medium size corporate insolvencies continue to dominate external
administrators’ reports. 85 per cent had assets of $100,000 or less, 76 per
cent had fewer than 20 employees and 38 per cent had liabilities of $250,000 or
less
- 96
per cent of creditors in this group received between 0–11 cents in the dollar,
reflecting the asset/liability profile of small to medium size corporate
insolvencies
- ASIC
requested 875 supplementary reports from external administrators where the
initial report meets certain thresholds in assessing if further action was
warranted
- generally,
due to a lack of evidence or because ASIC considered no further action was
required given the circumstances, over the last three years on average, fewer
than 20 per cent of these supplementary reports resulted in further regulatory
action
- external
administrators advised that in nearly 50 per cent of reports where they alleged
a civil breach for insolvent trading, they had either commenced or were
contemplating initiating recovery actions for insolvent trading. External
administrators are best placed to assess the available information and
determine whether it is in the best interest of creditors to pursue
compensation for insolvent trading from directors.[5]
Ombudsman
inquiry
On 10 October
2019, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO)
launched an inquiry into the insolvency system, to investigate whether existing
insolvency practices achieve the best possible outcome for small and family
businesses in financial trouble.[6]
The final
report by the ASBFEO was published in June 2020.[7] One of the findings of the
inquiry was:
External administrations are focused on maximising the return
to creditors, irrespective of the cost of the process or the effect on the business.
However, a restructure of business affairs, managed by the small business
owner and with approval from a registered liquidator could have more positive
outcomes, including providing a greater return to creditors. Where
businesses do need to be wound up, there is a concern that the cost of the
process far outweighs any benefit to creditors, even where liabilities are
small, and a business structure is simple.[8]
[emphasis added]
In light of this finding, the ASBFEO recommended, amongst
other things, that a form of Directors’ Insolvency Agreement be established for
small businesses where owners of a business can provide a proposal to a
registered liquidator on the best way to manage the business.[9]
In addition, the ASBFEO recommended that a simplified liquidation
process be introduced for a small business where the deficit of the business
(that is, total liabilities less total assets) can be shown to be less than
$50,000.[10]
Response to
Coronavirus
On 23 March 2020 the Parliament enacted the Coronavirus
Economic Response Package Omnibus Act 2020 (Omnibus Act).
Schedule 12 of the Omnibus Act contained amendments to put into effect three
temporary measures intended to avoid unnecessary insolvencies arising from business
closures due to coronavirus. They were:
- amendments
to the Corporations Act so that the time within which a debtor must
respond to a statutory demand (called the statutory period) will
be 21 days or a longer, prescribed period. In turn, the Corporations
Regulations 2001 were amended to provide that the prescribed statutory
period is six months[11]
- amendments
to ensure that a statutory demand could
only be issued when a debt is over the statutory minimum
being an amount of $2,000 or a greater amount prescribed by the Regulations. In
turn, section 5.4.01AA of the Corporations Regulations inserted the definition
of statutory minimum so that the prescribed amount is $20,000[12]
and
- amendments
to the Corporations Act to create a temporary safe harbour in response
to the coronavirus. It operates so that a breach of the duty to prevent
insolvent trading does not occur if the debt is incurred:
- in
the ordinary course of the company’s business
- during
the six month period starting on 25 March 2020 or a longer period that is
prescribed by the Regulations and
- before
any appointment during that period of an administrator, or liquidator, of the
company.
Subsequently these measures were extended to the end of 31
December 2020[13]
when they will cease.[14]
Announcement
of reforms
On 24 September 2020 the government announced the reforms
which are the subject of this Bill.[15]
The key elements of the reforms were said to include:
-
The introduction of a new debt
restructuring process for incorporated businesses with liabilities of less than
$1 million, drawing on some key features of the Chapter 11 bankruptcy model in
the United States.
-
Moving from a rigid
one-size-fits-all “creditor in possession” model to a more flexible “debtor in
possession” model which will allow eligible small businesses to restructure
their existing debts while remaining in control of their business.
-
A rapid twenty business day period
for the development of a restructuring plan by a small business restructuring
practitioner, followed by fifteen business days for creditors to vote on the
plan.
-
A new, simplified liquidation
pathway for small businesses to allow faster and lower cost liquidation.
-
Complementary measures to ensure
the insolvency sector can respond effectively both in the short and long term
to increased demand and to meet the needs of small business.
The reforms will cover around 76 per cent of businesses
subject to insolvencies today, 98 per cent of whom who have less than 20
employees.[16]
According to Treasurer, Josh Frydenberg:
Small business has been hit hard by COVID-19... we know that in
this COVID-induced recession some businesses will not survive in their current
form.
For many, through no fault of their own, the insolvency
process will be their next and last stop.
Under the present system, the majority of businesses that
enter voluntary administration are deregistered within three years.
However, many of these businesses could remain viable
concerns if they had more flexibility to restructure their affairs.
It is with this objective of keeping more businesses in
business and people in jobs that the Morrison government is embarking on the
most significant reforms of insolvency law in almost 30 years.[17]
Consultation
Treasury released a draft of the proposed legislation for
public comment on 7 October 2020.[18]
However that consultation was only open for five days. The submissions to
Treasury in relation to the draft legislation are no longer available on the
Treasury website.
In addition, Treasury commenced a consultation on Insolvency reforms to support small business–subordinate
legislation on 17 November 2020.[19] The subordinate legislation consists of amendments to the Corporations
Regulations 2001 and amendments to the Insolvency Practice
Rules (Corporations) 2016.
Committee
consideration
Senate
Standing Committee for the Selection of Bills
At its meeting of 3 December 2020, the Senate Standing
Committee for the Selection of Bills considered the Bill but was unable to
reach agreement. That being the case the Bill will not be subject to inquiry
and report.[20]
Senate
Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills (Scrutiny
of Bills Committee) has made comments in relation to specific provisions in the
Bill.[21]
These are canvassed under the relevant Schedule heading below.
Policy position of non-government parties/independents
Labor supports ‘the key measures contained in this Bill in
principle’ ... but ‘believe that it's appropriate that there be a statutory review included
in the Bill’ ... as well as ‘a sunset clause’.[22]
However, Labor also expressed its concerns about the paucity of formal
consultation stating:
The government's claiming these reforms are the most
significant for insolvency in 30 years, and yet they appear to have been
implemented with very limited consultation. Treasury only had the exposure
draft legislation up on their website for five days. When you consider the magnitude
of what we're thinking about here, that's clearly not good enough. We still
haven't seen submissions in relation to this legislation. We've done a lot of
consultation of our own, though. We know that there is anxiety about the lack
of consultation, and people are worried about the detail of the draft laws that
are before us.[23]
Position of
major interest groups
The Victorian Chamber of Commerce and Industry welcomed
the changes to the insolvency laws for small business stating:
... [the] announcement from the Treasurer will be met with
sighs of relief from small business owners who have their backs to the wall.
These unprecedented times call for innovative measures to
protect businesses and jobs so we can come out swinging on the other side.[24]
Similarly, the reforms were ‘largely welcomed’ by the
Australian Restructuring, Insolvency and Turnaround Association who consider
that such reforms are ‘definitely overdue’.[25]
Industry leaders have described the proposed changes as a lifeline for small
business owners.[26]
However, other stakeholders have expressed concern that
the measures should not be seen by some directors as an opportunity to keep a
bad business going.[27]
Financial
implications
According to the Explanatory Memorandum, the Bill will
have nil financial impact.[28]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed
the Bill’s compatibility with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[29]
Parliamentary Joint Committee on
Human Rights
The Parliamentary Joint Committee
on Human Rights had no comment on the Bill.[30]
Key issues and provisions—Schedule 1
Voluntary
administration regime
Voluntary administration is designed to resolve a
company’s future direction quickly. An independent and suitably qualified
person takes full control of the company to try to work out a way to save
either the company or its business.
If it is not possible to save the company or its business,
the aim is to administer the affairs of the company in a way that results in a
better return to creditors than they would have received if the company had
been placed straight into liquidation.
After taking control of the company, the voluntary
administrator investigates and reports to creditors on the company’s business,
property, affairs and financial circumstances, and on the three options
available to creditors.[31]
The meeting with creditors must generally occur within 20 business days of the
voluntary administrator being appointed, unless the court allows an extension
of time.[32]
The options that are put to creditors are:
- end
the voluntary administration and return the company to the directors’ control
- approve
a deed of company arrangement through which the company will pay all or part of
its debts and then be free of those debts or
- wind
up the company and appoint a liquidator.[33]
The Bill ‘draws heavily on the
established voluntary administration framework which is set out in Part 5.3A of
the Corporations Act and shares many of its features’.[34]
Eligibility for restructuring
Item 1 in Part 1 of Schedule 1 to the Bill inserts proposed
Part 5.3B—Restructuring a company into Chapter 5 of the Corporations Act.
The object of the new Part 5.3B is to provide for a restructuring process for
eligible companies that allows the companies to:
- retain
control of the business, property and affairs while developing a plan to
restructure their debt with the assistance of a small business restructuring
practitioner and
- enter
into a restructuring plan with creditors.[35]
The new Part 5.3B comprises sections 452A to 458C.
A restructuring practitioner may be appointed by a company
if:
- the
eligibility criteria for restructuring are met in relation to the
company on the day the appointment is made and
- the
board has resolved the company is insolvent or is likely to become insolvent at
some future time and a restructuring practitioner for the company should be
appointed.[36]
The Bill sets out the eligibility criteria
for restructuring. They require that on the day that the restructuring
practitioner[37]
is appointed:
- any
liability test prescribed by the Regulations is satisfied—the Exposure Draft
Regulations propose an amount of liabilities not more than $1 million[38]
- no
person who is a director of the company (or was in the 12 months preceding the
date of appointment has been a director of another company that has been under
restructuring or been the subject of a simplified liquidation process within a
period prescribed by the Regulations—the Exposure Draft Regulations propose a
period of seven years[39]—unless
an exemption applies[40]
and
- the
company has not been under restructuring or been the subject of a simplified
liquidation process within a period prescribed by the Regulations— the Exposure
Draft Regulations propose a period of seven years[41]—unless
an exemption applies.[42]
Key issue
Whilst the Government has announced that the amendments in
the Bill are directed towards ‘small business’ the Bill does not define that
term.[43]
There are a number of definitions used to describe a small business including
statistical definitions and for other regulatory purposes, for instance:
However, the Bill does not import any of the existing
definitions. The Exposure Draft Regulations propose that a business will qualify
for restructuring if it has liabilities of less than $1 million.
Duration of restructuring
The restructuring of a company begins when a restructuring
practitioner for the company is appointed and ends in the circumstances
prescribed by the Regulations.[47]
According to the Exposure
Draft of the Corporations Amendment (Corporate Insolvency Reforms) Regulations
2020, there are a number of circumstances in which restructuring ends.[48]
Essentially, the restructuring process covers the period
during which a plan is being developed by the company director(s), following
the appointment of a small business restructuring practitioner. The
restructuring process ends once creditors vote to accept or reject the plan.
About
restructuring practitioners
Under the Bill, a restructuring practitioner must be a
registered liquidator[49]
and must consent to his, or her, appointment.[50]
A person must not consent to be appointed and must not act as a restructuring
practitioner unless the person is a registered liquidator. A failure to comply
with this requirement is a strict liability offence. The maximum penalty is 50
penalty units—being equivalent to $11,100.[51]
Functions of
a restructuring practitioner
The functions of the restructuring practitioner for a
company under restructuring are:
- to
provide advice to the company on matters relating to restructuring
- to
assist the company to prepare a restructuring plan
- to
make a declaration to creditors in accordance with the Regulations in
relation to a restructuring plan proposed to the creditors and
- any
other functions given to the restructuring practitioner under the Corporations
Act.[52]
According to the Explanatory Memorandum to the Bill:
[the declaration to creditors] is a critical component of the
new restructuring process. Creditors need to be able to rely on the small
business restructuring practitioner’s declaration in order to have confidence
that the process has been conducted appropriately, that the proposed debt
restructuring plan meets the prescribed requirements, and ultimately to decide
whether the proposed plan is the best way forward.[53]
In addition, the Regulations may make provision about:
- the
functions and duties of the restructuring practitioner for a company under restructuring
- the
powers of the restructuring practitioner for a company under restructuring and
- the
rights and liabilities of a person who is or has been the restructuring
practitioner for a company arising out of the performance of the functions and
duties, and the exercise of their powers.[54]
Scrutiny of Bills Committee
comments
The Scrutiny of Bills Committee noted that the Bill contains
a range of powers to prescribe matters in Regulations.
The committee's view is that matters which may be significant
to the operation of a legislative scheme should be included in primary
legislation unless a sound justification for the use of delegated legislation
is provided. The committee has generally not accepted a desire for
administrative flexibility to be a sufficient justification, of itself, for
leaving significant matters to delegated legislation. In this regard, the
committee notes that while some of these matters have been addressed in the
explanatory memorandum the information provided is generally insufficient to
justify the prescription of so many delegated legislation making powers.
The committee notes that a legislative instrument, made by
the executive, is not subject to the full range of parliamentary scrutiny
inherent in bringing proposed changes in the form of an amending bill.[55]
Accordingly, the Scrutiny of Bills Committee has requested
further detailed advice from the Treasurer about ‘why it is necessary and
appropriate’ to deal with the relevant matters in delegated legislation.[56]
Once a restructuring practitioner has been appointed, a
director of the relevant company must provide assistance to the
restructuring practitioner by giving information about the company’s business,
property, affairs and financial circumstances and allowing him, or her, to inspect
and take copies of the company’s books. This must be done at the times and in
the manner reasonably required by the restructuring practitioner.[57]
A failure to do so gives rise to an offence of strict liability,[58]
the maximum penalty for which is 120 penalty units.[59]
Scrutiny of Bills Committee
comments
The Scrutiny of Bills Committee noted that a failure to
comply with proposed subsection 453F(1) is a strict liability offence stating:
When a Bill states that an offence is one of strict
liability, this removes the requirement for the prosecution to prove the
defendant's fault. In such cases, an offence will be made out if it can be
proven that the defendant engaged in certain conduct, without the prosecution
having to prove that the defendant intended this, or was reckless or negligent.
As the imposition of strict liability undermines fundamental criminal law
principles, the committee expects the explanatory memorandum to provide a clear
justification for any imposition of strict liability, including outlining
whether the approach is consistent with the Guide to Framing Commonwealth
Offences.[60]
The Scrutiny of Bills Committee was not satisfied that the
Explanatory Memorandum to the Bill provides a sufficient explanation. That
being the case, the Committee has requested advice from the Treasurer as to:
- why
it is proposed to use an offence-specific defence (which reverses the
evidential burden of proof) in proposed subsection 453F(4), and whether general
defences in the Criminal Code apply to an offence under proposed section
435F or regard was given to providing for a more specific defence than that of
a reasonable excuse and
- the
justification for providing, in proposed subsection 453F(3), that the offence
is an offence of strict liability.[61]
Removal and
replacement
The appointment of a person as a restructuring
practitioner for a company or for a restructuring plan cannot be revoked.[62]
However, where a restructuring practitioner dies, becomes prohibited from
acting in that role or resigns by notice in writing to the company a
replacement may be appointed.[63]
If the restructuring practitioner was appointed by the
Court—then the Court may appoint a replacement. Otherwise the company may
appoint a replacement restructuring practitioner by resolution of the Board.[64]
What happens
during restructuring
The Bill provides that while a company is under restructuring
the company has control of the company’s business, property and affairs.[65]
Key issue—debts arising during
restructuring
This is in stark contrast to the existing process of
voluntary administration which is designed to resolve a company’s future
direction quickly. An independent and suitably qualified person takes full
control of the company to try to work out a way to save either the company
or its business.[66]
In addition, the administrator is personally liable for the debts incurred
during the voluntary administration process.[67]
Those debts are provable in any subsequent liquidation and are afforded
priority.[68]
Prohibited transactions
There are some limits as to what the directors of the
company may do during the restructuring period. A director of the company under
restructuring commits an offence in either of the following circumstances:
- the
company purports to enter into a transaction or dealing affecting the property
of the company and the director approves of that action or
- the
director purports to enter into a transaction or dealing affecting the property
of the company on behalf of the company.[69]
Such a transaction or dealing is void, unless the Court
orders otherwise.[70]
In addition, where a court is satisfied that the company or another person has
suffered loss or damage because of the act or omission constituting the offence
the court may order the director to pay compensation.[71]
For the purposes of new Part 5.3B the term property
means any legal or equitable estate or interest (whether present or future and
whether vested or contingent) in real or personal property of any description.[72]
It includes any PPSA retention of title property.[73]
Scrutiny of Bills Committee
comments
The Scrutiny of Bills Committee noted that proposed
subsection 453L(1):
... provides that a person who is a director of a company
contravenes this section if the company is under restructuring and the company
purports to enter into a transaction or dealing affecting the property of the
company and the director approves that action. It is also a contravention for a
director of a company under restructuring to purport to enter into a
transaction or dealing affecting the property of the company on behalf of the
company.
Proposed subsections 453L(2) and (3) provide for specific
circumstances in which there will not be a contravention of proposed section
453L. These proposed subsections appear to provide offence-specific defences
which appear to reverse the evidential burden of proof.[74]
According to the Scrutiny of Bills Committee neither the
Bill nor the Explanatory Materials address this issue. The Committee has,
therefore, requested further advice from the Treasurer about ‘whether proposed
subsections 453L(2) and (3) provide for offence-specific defences which reverse
the evidential burden of proof, and if so, why this is necessary and
appropriate’.[75]
Permitted
transactions
The Bill provides that the following dealing and
transactions may occur:
- transactions
or dealings entered into in the ordinary course of the company’s business
- transactions
or dealings to which the restructuring practitioner has consented—on the basis
that there are reasonable grounds to believe that it would be in the interests
of the creditors for the company to enter into the transaction or dealing[76]
and
- transactions
or dealings which were entered into under an order of the Court.[77]
The prohibition on transactions and dealings does not
apply to a payment made by an Australian ADI out of an account kept by the
company with the ADI and in good faith and in the ordinary course of the ADI’s
banking business.[78]
In addition, the Regulations may prescribe circumstances
in which entering into a transaction or dealing is, or is not, to be treated as
in the ordinary course of a company’s business.[79]
By way of example, a transaction or dealing which relates to the payment of the
entitlements of the company’s employees would be treated as in the ordinary
course of business.[80]
A payment made, transaction entered into, or any other
thing done, is valid and is not liable to be set aside in a winding up of the
company provided it is done in good faith by:
- the
restructuring practitioner for a company under restructuring
- a
company under restructuring with the consent of the restructuring practitioner
or
- a
company under restructuring in compliance with an order of the Court.[81]
Effect of
restructuring on shareholders
Generally speaking, a transfer of shares in a
company that is made while the company is under restructuring is void unless:
- the
restructuring practitioner gives written and unconditional consent the transfer
- the
restructuring practitioner gives written, but conditional consent to the
transfer and the relevant conditions have been satisfied or
- the
Court makes an order authorising the transfer.[82]
Importantly, the restructuring practitioner may only give
consent to the transfer of shares if he, or she, believes on reasonable grounds
that the transfer is in the best interests of the company’s creditors as a
whole.[83]
The Bill sets out the rights of a prospective transferor, a prospective
transferee or a creditor of the company to apply to the Court for an order in
relation to the giving of consent or the conditions of consent.[84]
The alteration of the status of members that is made while
the company is under restructuring is void, except in circumstances that are in
near equivalent terms to those set out above relating to the transfer of
shares.[85]
Effect on
winding up
Two immediate protections arise from restructuring:
- the
Court must adjourn the hearing of an application for an order to wind up a
company which is under restructuring where the Court is satisfied that it is in
the interests of the company’s creditors for the company to continue under
restructuring rather than be wound up and
- the
Court must not appoint a provisional liquidator of a company which is under
restructuring where the Court is satisfied that it is in the interests of the
company’s creditors for the company to continue under restructuring.[86]
Restrictions
on third party property rights
As a general rule, property rights cannot be exercised by
third parties in relation to property of the company or property used, occupied
by or in the possession of the company during the debt restructuring
period—unless the small business restructuring practitioner has given his, or
her, written consent or leave has been granted by the Court to exercise such a
right.[87]
Enforcement proceedings are stayed and enforcement
proceedings in relation to the property of the company are suspended during its
restructure.[88]
In addition, a guarantee of a liability of
the company cannot be enforced, during the restructuring of a company against a
director of the company or a spouse or relative of such director. Nor can a
proceeding in relation to such a guarantee be commenced against a director,
spouse or relative—except with the leave of the Court.[89]
However, property that is subject to a banker’s lien is
exempt from the restrictions that apply to third party property rights during
the restructure of the company—provided that the property is subject of a
possessory interest by an ADI or a clearing and settlement facility.[90]
This exemption applies to the following:
- cash
in the form of notes or coins
- negotiable
instruments
- securities[91]
and
- derivatives.[92]
Nature of
security interests
A security interest means an interest in personal
property[93]
provided for by a transaction that, in substance, secures payment or
performance of an obligation (without regard to the form of the transaction or
the identity of the person who has title to the property).[94]
By way of example, a security interest includes an interest in personal
property provided by a fixed charge, a floating charge or a hire purchase
agreement.[95]
Under the PPSA,
when more than one secured party has a security interest in the same
property, there are rules about who has priority.[96]
A ‘perfected’ security interest normally has priority over an ‘unperfected’ one. In most cases a
perfected security interest is one that is
registered on the Personal Property Securities Register.[97]
Meaning of
decision period
The Bill provides that a secured party with a security
interest over the whole or substantially the whole of the company’s property in
one or more securities can enforce their security interest if they act before
or during the decision period.[98]
The decision period, for a secured party in
relation to a security interest in the property of a company under
restructuring is the period:
- beginning
on the day when a notice of appointment of the restructuring practitioner is
given to the secured party as required by the Regulations (if any have been
made) or on day the restructuring begins and
- ending
at the end of the thirteenth business day after that day.[99]
Enforcement
before restructuring
Before the beginning of the restructuring of a company, a
secured party, receiver or other person may take any of the following actions
for the purpose of enforcing a security interest in that property:
- enter
into possession, or assumed control, of property of the company
- enter
into an agreement to sell the property
- make
arrangements for such property to be offered for sale by public auction
- publicly
invite tenders for the purchase of such property
- exercise
any other power in relation to such property.
In that case the Bill explicitly states that nothing in sections
453K, 453R, 453T, 453U or 454N, or in an order made under subsection 454P(1),
prevents the secured party, receiver or other person from enforcing their
security interest in relation to that property.[100]
Under proposed subsection 454F(2), the restructuring
practitioner may apply to the Court for an order that a secured party, receiver
or other person not perform specified functions, or exercise specified powers.
The Court may make such an order.
However, the Court must first be satisfied that the secured
party’s interests are adequately protected during the restructuring process.
Importantly, this provision does not apply in relation to a security interest
over the whole or substantially the whole of the company’s property, where that
security interest is enforced before or during the decision period (as set out
in proposed section 454C).[101]
Sale of
property with possessory security interest
If the property
of a company under restructuring is subject to a possessory interest[102] and is in the
possession of the secured party then the property may be sold by the secured
party—provided there is no other security interest in the property.[103] In that case, the
Bills sets out the manner in which the proceeds of sale are to be distributed.[104]
Importantly, the Bill provides for the Court, on
application from the restructuring practitioner, to make an order to limit the
powers of a receiver or other person seeking to enforce a right of an owner or
lessor of property where that property is used or occupied by or in the
possession of the company under restructuring.[105]
Stay on
enforcement rights
A right cannot be enforced against a company that has come
under restructuring if the right arises by reason of an express provision of a
contract, agreement or arrangement which provides for the right based on the
company’s financial position or entering restructuring.[106]
The stay period starts when the restructuring of the company
begins and ends at the later of the following:
- when
the restructuring ends
- if
one or more court extension orders are made for the company as the result of an
application made before the restructuring ends—when the last made of those
orders ceases to be in force
- if
the company ceases to be under restructuring because of a resolution or order
for the company to be wound up—when the company’s affairs have been fully wound
up.[107]
The Court may order an extension of the stay period[108]
or may lift the stay if it is satisfied that either is appropriate in the
interests of justice.[109]
Making a
restructuring plan
A company may propose a restructuring plan to its creditors.[110]
The Regulations may make provision for various matters including, but not
limited to, the following:
- proposing
a restructuring plan
- making,
varying and terminating a restructuring plan
- debts
and claims that must be dealt with in the restructuring plan
- identifying
contributories of the company and
- the
circumstances in which a restructuring plan is void.[111]
According to the Explanatory Memorandum to the Bill:
Given that the company directors retain control of the
company during restructuring, the role of the small business restructuring
practitioner is largely advisory and supportive in nature – providing advice to
the company directors during the debt restructuring process and assisting the
company directors to develop a restructuring plan.[112]
How the process works
The Exposure Draft of the Corporations Amendment
(Corporate Insolvency Reforms) Regulation 2020 proposes that the following
steps are to be followed:
- the
company must execute a restructuring plan during the proposal period—that
is, the period of 20 business days beginning on the day the restructuring
begins.[113]
The period may be extended by no more than 10 business days if the
restructuring practitioner is satisfied on reasonable grounds that it would not
be reasonable in the circumstances to require the company to prepare the
restructuring plan within the original timeframe
- the
restructuring plan must be in the approved form. It must identify the company’s
property that is to be dealt with and how it will be dealt with, provide for
the remuneration of the restructuring practitioner and specify the date on
which the restructuring plan was executed[114]
- a
restructuring plan must be accompanied by a restructuring proposal statement which
includes a schedule of debts[115]
- as
soon as practicable after the restructuring plan is executed, the restructuring
practitioner prepares and signs a certificate either endorsing the plan or not[116]
- the
restructuring practitioner gives the restructuring plan and certificate to as
many of the company’s affected creditors as reasonably practical[117]
- the
acceptance period for the plan is 15 business days[118]
and
- a
company’s restructuring plan is accepted if a majority in value of the
company’s affected creditors who reply before the end of the acceptance period
state that the restructuring plan should be accepted.[119]
Rights,
obligations and liabilities
The Bill sets out a broad Regulation-making power which
may be made in relation to the rights, obligations and liabilities of a
company, its officers and former officers in relation to a person who is a
restructuring practitioner.[120]
The Bill also provides that the restructuring practitioner
has a right of indemnity in relation to their remuneration and any debts or
liabilities incurred and damages or losses sustained so long as they have acted
in good faith and without negligence.[121]
The right of indemnity has priority over other debts.[122]
Safe harbour
Subsection 588G(1) of the Corporations Act applies
where:
- a
person is a director of a company at the time when the company incurs a debt
- the
company is insolvent at that time, or becomes insolvent by incurring that debt and
- at
that time, there are reasonable grounds for suspecting that the company is
insolvent, or would so become insolvent.
Under subsection 588(2), a person contravenes section 588G
by failing to prevent the company from incurring the debt if:
- the
person is aware at that time that there are such grounds for so suspecting or
- a
reasonable person in a like position in a company in the company’s
circumstances would be so aware.
Item 65 in Part 2 of Schedule 1 to the Bill inserts proposed
section 588GAAB into the Corporations Act to create a ‘safe harbour’
for companies under restructuring. The effect of the provision is that
subsection 588(2) of the Corporations Act will not apply where the
relevant company has incurred a debt during restructuring provided that the
debt is incurred:
- in
the ordinary course of the company’s business
- with
the consent of the restructuring practitioner or
- by
order of the Court.
Key issues and provisions—Schedule 2
Form of temporary restructuring relief
Item 3 in Schedule 2 to the Bill inserts proposed
section 588GAAC into the Corporations Act to create a ‘safe harbour’
for companies which are looking for a restructuring practitioner. The effect of
the provision is that subsection 588G(2) of the Corporations Act (discussed
above) will not apply in relation to a person and a debt incurred by a company
if:
- the
company is eligible for temporary restructuring relief when the debt is incurred
- the
debt is incurred in the ordinary course of the company’s business and
- the
company has taken all reasonable steps to appoint a restructuring practitioner
before the debt was incurred.
In a proceeding for, or relating to, a contravention of
subsection 588G(2) of the Corporations Act the person bears an
evidential burden in relation to the matters comprising the ‘safe harbour’.
However, the ‘safe harbour’ does not apply to a person and
a debt in circumstances which may be prescribed by the Regulations.[123]
Eligibility for temporary restructuring relief
The Bill provides that a company
is eligible for temporary restructuring relief if all of the following are satisfied:
- before
31 March 2021, the directors of the company make and publish a declaration
setting out the company’s eligibility[124]
- the
directors declare that there are reasonable grounds to believe that the company
is insolvent or likely to become insolvent and that the eligibility criteria
for restructuring would be met on any day on or after the day the declaration
is first published and before the declaration expires[125]
- the
board has resolved to the effect that a restructuring practitioner for the
company should be appointed[126]
- the
company has not already entered into a form of external administration[127]
- the
declaration has not expired[128]
- the
company has not ceased to be eligible[129]
and
- the
company was not previously eligible for temporary restructuring relief that has
since ceased.[130]
A declaration as set out above expires three months after
notice of the declaration is first published in the prescribed manner (called the
initial relief period).[131]
A further one month of relief is available provided that:
- there
are reasonable grounds to believe that the company is insolvent or likely to
become insolvent and that the eligibility criteria for restructuring would be
met on any day after the declaration is published and before the temporary
relief expires
- the
board has resolved to the effect that a restructuring practitioner for the
company should be appointed and
- the
company has not already entered into a form of external administration[132]
- the
directors of the company have taken all reasonable steps to appoint a restructuring
practitioner but have been unable to do so[133]
- the
directors of the company make and publish a further declaration in the
prescribed manner[134]
and
- notice
of the further declaration is published no later than two weeks before the end
of the initial relief period.[135]
Where the directors of a company publish notice of a declaration
as set out above, they must send a copy of the declaration to ASIC no later
than five business days after doing so.[136]
When eligibility ceases
A company ceases to be eligible for temporary
restructuring relief if any of the following occurs:
- the
declaration under which the company was eligible for temporary restructuring
relief expires
- the
directors of the company fail to give ASIC a copy of the declaration within the
relevant time frame
- a
small business restructuring practitioner for the company is appointed
- an
administrator of the company is appointed
- a
liquidator, or provisional liquidator, is appointed to wind up the company
- the
company publishes notice that the company is not, or is not to be treated as,
eligible for temporary restructuring relief or
- the
Court orders that the company is not eligible for temporary restructuring
relief.[137]
The directors
of a company must make and publish a declaration that the company is not
eligible for temporary restructuring relief if there
are not reasonable grounds to believe that the company is eligible for that
relief.[138]
The declaration must be published and a copy of the declaration must be given
to ASIC within five business days of the directors becoming aware that there
are not reasonable grounds to believe that the company is eligible for
temporary relief. A failure to comply with these requirements gives rise to a
civil penalty under subsection 1317E of the Corporations Act.[139]
The Court may make an order that a company is not eligible
for temporary restructuring relief upon the application of a creditor of
the company or ASIC, or on its own initiative. In that case, the directors of
the company must, within five business days after the order is made, publish
notice of the order in the prescribed manner and give ASIC a copy of the order.[140]
Key issues and provisions—Schedule 3
Choosing the simplified liquidation
process
Item 8 in Schedule 3 to the Bill inserts proposed
Subdivision B—Simplified liquidation process for creditors’ voluntary winding up
of an insolvent company into Division 3 of Part 5.5 of the Corporations
Act.
Within new Subdivision B, proposed section 500A of
the Corporations Act allows a liquidator to adopt the simplified
liquidation process for the purpose of winding up the affairs and distributing
the property of a company in a creditors’ voluntary winding up, if the
liquidator believes on reasonable grounds that the eligibility criteria are met
in relation to the company.[141]
In that case, the liquidator must give each member and
creditor of the company a notice in writing at least 10 business days before
adopting the simplified liquidation process. The notice must include the following:
- a
statement that the liquidator believes on reasonable grounds that the
eligibility criteria for the simplified liquidation process will be met
- an
outline of the simplified liquidation process containing the prescribed
information (if any)
- a
statement that the liquidator will not adopt the simplified liquidation process
if at least 25 per cent in value of the creditors direct the
liquidator in writing not to do so and
- information
about how a creditor may give a direction in writing not to adopt the
simplified liquidation process.[142]
Exception
There is an exception to the general rule that a
liquidator may adopt the simplified liquidation process. This arises if:
- more
than 20 business days have passed since the day on which the triggering
event occurred
- the
liquidator has not given each member and creditor of the company the written
notice which is set out above or
- at
least 25 per cent in value of the creditors request the liquidator not to
follow the simplified liquidation process.[143]
The method for working out whether the 25 per cent in
value of creditors test is met is contained in proposed section 500AD of
the Corporations Act.
Directors’
declaration
The directors of a company
must give the liquidator of the company a declaration in the prescribed form if
the directors believe on reasonable grounds that, on the declaration being
given, the eligibility criteria for the simplified liquidation
process will be met in relation to the company. That declaration must be given
within five business days after the day of the meeting of the company at which
the resolution for voluntary winding up is passed.[152]
Eligibility criteria
Proposed section 500AA in Schedule 3 to the Bill
sets out the eligibility criteria for the simplified liquidation
process. All of the following must be satisfied:
- a
triggering event occurs
- requirements
to give a report on the company’s business affairs and the declaration of
eligibility for simplified liquidation process have been complied with[153]
- the
company will not be able to pay its debts in full within a period not exceeding
12 months after the day on which the triggering event occurs
- if
a test for eligibility is prescribed in the Regulations in relation to the
liabilities of the company, that requirement is satisfied on the day the
triggering event occurs— the Exposure Draft Regulations
propose that the total liabilities of the company do not exceed $1 million[154]
- no
person who is a director of the company or was a director of the company within
the 12 months immediately preceding the day of the triggering event has
been a director of another company that has undergone restructuring or a
simplified liquidation process within a prescribed period— the Exposure Draft
Regulations propose a period of seven years[155]
- the
company has not undergone restructuring or been the subject of a simplified
liquidation process within a prescribed period— the Exposure Draft Regulations
propose a period of seven years[156]
and
- the
company has given returns, notices, statements, applications or other documents
as required by taxation laws within the meaning of the Income Tax
Assessment Act 1997.
Creditors opt-out
Importantly, the Bill provides a creditor of a company may, within 20 business days
after the day on which a triggering event in relation to the company occurs,
give the liquidator of the company notice in writing requesting the liquidator
not to follow the simplified liquidation process.[157]
What is the simplified
liquidation process?
The simplified liquidation process for a
creditors’ voluntary winding up is a modified version of the process for a
creditors’ voluntary winding up as currently set out in Chapter 5 and the
Insolvency Practice Schedule of the Corporations Act.
Proposed subsection 500AE(2) lists those provisions
that do not apply in the simplified liquidation process. The effect of the
amendment is:
- a
liquidator may not convene a meeting of creditors at any time, cannot be
directed to convene a meeting of creditors by ASIC or by creditors, and is not
required to convene a meeting of creditors in certain circumstances
- creditors
may not appoint a committee of inspection to monitor the liquidation and give
assistance to the liquidator and
- ASIC
and creditors cannot appoint a reviewing liquidator (although the court retains
this power).
In addition, Regulations may provide for further specific
rules for the simplified liquidation process.[158]
Ceasing the simplified
liquidation process
The Bill provides that the liquidator of a company must
cease to follow the simplified liquidation process if the eligibility
criteria for the simplified liquidation process are no longer met in
relation to a company or in other circumstances prescribed by the Regulations.[159]
The matters dealt with by the Regulations in relation to a
company that has ceased to be subject to the simplified liquidation process may
include:
- proofs
of debts and claims
- ranking
debts and claims
- the
identification of contributories
- the
declaration and payment of a dividend in the winding up and
- giving
information, providing reports and producing documents to ASIC.
Key issues and provisions—Schedule 4
New definitions
Item 1 in Schedule 4 to the Bill inserts a number
of new definitions into section 9 of the Corporations Act in
support of the changes in Schedule 4 to the Bill.
Under the Bill the term document means any
record of information, and includes:
(a) anything on which there
is writing
(b) anything
on which there are marks, figures, symbols or perforations having a meaning for
persons qualified to interpret them
(c) anything
from which sounds, images or writings can be reproduced with or without the aid
of anything else and
(d) a map, plan, drawing or
photograph.
An electronic communication is:
(a) a
communication of information in the form of data, text or images by means of
guided and/or unguided electromagnetic energy or
(b) a
communication of information in the form of speech by means of guided and/or
unguided electromagnetic energy, where the speech is processed at its
destination by an automated voice recognition system.
A nominated electronic address, in relation
to the addressee of an electronic communication, is:
(a) the
most recent electronic address nominated by the addressee to the originator of
the electronic communication as the electronic address for receiving electronic
communications; or
(b) if:
(i) the
addressee has nominated an electronic address as mentioned in
paragraph (a) and the originator knows, or there are reasonable grounds to
believe, that the address is not a current electronic address for the addressee
or
(ii) the addressee has
not nominated an electronic address as mentioned in paragraph (a)
an electronic address that the
originator believes on reasonable grounds to be a current electronic address
for the addressee for receiving electronic communications.
The term virtual meeting technology means
any technology that allows a person to participate in a meeting without being
physically present at the meeting.
Communications sent and received
When sent and when received
Item 2 in Schedule 4 to the Bill inserts proposed
section 105A into the Corporations Act to specify that an electronic
communication is sent:
- when
the electronic communication leaves an information system under the control of
the originator or of the party who sent it on behalf of the originator or
- if
the electronic communication has not left an information system under the
control of the originator or of the party who sent it on behalf of the
originator—when the electronic communication is received by the addressee.[160]
An electronic communication is received when
the electronic communication becomes capable of being retrieved by the
addressee at the addressee’s nominated electronic address.[161]
The Bill includes the assumption that an electronic communication is capable of
being retrieved by the addressee when it reaches the addressee’s nominated
electronic address.[162]
Where sent from and where received
An electronic communication is deemed to have been sent:
- from
the address of the originator as contained on the register of members of the
company or registered scheme at the time the communication is sent—if the addressee is a company or registered scheme and the
originator is a member of the company or registered scheme
- from
the registered office of the originator—if the originator has a registered
office and the bullet point above does not apply
- otherwise
from the most recent physical address nominated by the originator to the
addressee or in the absence of such a nomination—from the originator’s usual
residential address in Australia.[163]
An electronic communication is deemed to have been
received:
- at
the address of the addressee as contained on the register of members of the
company or registered scheme at the time the communication is received—if the originator
is a company or registered scheme and the addressee is a member of the company
or registered scheme
- if
there is no address on the register of members of the company or registered
scheme—at the registered office of the addressee
- otherwise
at the most recent physical address nominated by the addressee to the
originator or in the absence of such nomination—at the addressee’s usual
residential address in Australia.[164]
Electronic communication of
documents
Item 19 in Part 2 of Schedule 4 to the Bill repeals
and replaces section 600G of the Corporations Act.
Currently section 600G lists provisions of the Corporations
Act under which a person is authorised or required to give or send a notice
or other document. Under that section the relevant notices or documents may be
provided by electronic means if the recipient consents.
Proposed section 600G applies to any document that
is required or permitted to be given to a person (the recipient)
or required to be signed by a person:
- under
Chapter 5 of the Corporations Act (which relates to external
administration) or an instrument made for the purposes of Chapter 5
- a
provision of Chapter 10 of the Corporations Act (which contains
transitional provisions) relating to the external administration of a company
or an instrument made for the purposes of a provision of Chapter 10 or
- Schedule 2—the
Insolvency Practice Schedule (Corporations) or an instrument made for the
purposes of a provision of Schedule 2.[165]
In that case, the document may be given to the recipient
by means of an electronic communication or by giving the recipient sufficient
information to allow the recipient to access the document electronically.[166]
Importantly though, this should only occur if it is reasonable to expect that
the document would be readily accessible so as to be useable for subsequent
reference and there is a nominated electronic address for the recipient. [167]
Signing the document
If the document is required to be signed by a person, that
requirement deemed to have been met in relation to the electronic communication
of the document if:
- the
person receives a copy or counterpart of the document that is in a physical
form or by way of electronic communication
- the
copy or counterpart includes the entire contents of the document
- the
person indicates, by means of an electronic communication, that the person has
signed the document
- a
method is used to identify the person and to indicate the person’s intention in
respect of the document and
- the
method that was used was either as reliable as appropriate for the purpose for
which the document was generated or communicated; or the method has been proven
to identify the person and to indicate the person’s intention in respect of the
document.[168]
Concluding
comments
The three key elements of the reforms to small business
insolvency are:
- small
business restructuring: a new formal debt restructuring process for eligible
incorporated small businesses, which the Government has indicated will apply to
businesses with liabilities of less than $1 million, to allow a faster and less
complex process to restructure existing debts and maximise their chances of
survival
- small
business liquidation: a new simplified liquidation pathway for eligible
incorporated small businesses, which the Government has indicated will apply to
businesses with liabilities of less than $1 million, to provide for a faster
and lower cost liquidation process and
- other
measures: to provide temporary insolvency relief until 31 March 2021—to address
the issue of eligible small businesses not being able to access the process
immediately whilst insolvency practitioners become familiar with small business
restructuring.
Safeguards have been included to prevent companies from
using the process to undertake corporate misconduct, including illegal phoenix
activity.