Introduction

With effect from 31 December 2020, the temporary COVID-19 relief measures introduced in March 2020 expired. As a result, insolvency laws rolled back to pre-COVID times, including the following matters which now have legal effect once more:

• The period of compliance with statutory demands and bankruptcy notices will revert to 21 days, and the minimum debt to which these processes apply will revert to $2,000; and
• Directors will once again be personally liable for debts incurred from the time that they suspect their company to be insolvent.

Despite the expiry of the COVID-19 relief measures, small businesses continue to struggle with the economic challenges created by the pandemic. Accordingly, with effect from 1 January 2021, the Australian Government has passed permanent reforms aimed at helping small businesses in distress. Inspired by Chapter 11 of the United States Bankruptcy Code, the result is Australia’s most significant, non-transitional insolvency law reform in 30 years.

The Reforms

The insolvency reforms are contained in the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) (‘Act’), which received royal assent on 15 December 2020. The Act introduces new laws into the Corporations Act 2001 (Cth) (‘CA’).

In summary, the Act aims to keep small businesses afloat by introducing:

• A formal debt restructuring process set out in Schedule 1 of the Act; and
• A simplified liquidation process for companies in a creditors’ voluntary winding up, as set out in Schedule 3 of the Act.

The key threshold criteria for access to these new processes is that the total liabilities of the company must not exceed $1 million. As a consequence, the most likely beneficiaries of these new rules are small to medium-sized businesses.

We discuss these amendments further below.

1. Debt Restructuring Process

Schedule 1 of the Act contains the new debt restructuring process, and officially came into effect on 1 January 2021 through a new Part 5.3B in the CA.

The debt restructuring process allows directors of financially distressed but viable companies to retain control of their company, its affairs and property, while restructuring their existing debts with the assistance of a small business restructuring practitioner (‘SBRP’). This enables the company to continue trading and avoid being wound up while it plans how the company will repay its existing debts.

The government has indicated that, provided the company makes certain declarations, the directors are protected from liability for insolvent trading for debts incurred while they undergo the restructuring or simplified liquidation process. Thus, directors are afforded the same immunity by this process as they are through the appointment of an administrator under voluntary administration.

The Treasury has stated that the reforms will reduce the ‘complexity, time and costs for small businesses’ of the administration process and encourage businesses to seek debt restructuring early to increase their chances of recovery.

The role of a SBRP is to provide advice to the company on matters relating to the restructuring, assist the company in preparing a restructuring plan, and make a declaration to creditors in accordance with the regulations in relation to a restructuring plan proposed to the creditors.

A SBRP must have the following key qualifications:

• Be a recognised accountant, defined as being a current member of CAANZ, CPA Australia or IPA;
• Have demonstrated the capacity to perform satisfactorily to the functions and duties of a registered liquidator; and
• If registered as a liquidator, be able to satisfy the conditions under the Insolvency Practice Schedule (Corporations).[1]

2. Simplified Liquidation Process

Schedule 3 of the Act introduces a liquidation regime that is simplified with respect to:

• The process of winding up a company’s affairs and distributing the property of small businesses in a creditors’ voluntary winding up; and
• The process of entering and exiting liquidation.

Notably, the simplified liquidation process supplements the ‘one-size-fits-all’ liquidation regime with faster and cheaper liquidation pathways that are better suited to the less complex liquidations of small businesses. This regime applies where the event that triggers the start of the winding up of a company occurs on or after 1 January 2021.

Eligibility Criteria

Companies who wish to benefit from these new processes must satisfy the following eligibility criteria:

• The total liabilities of the company must not exceed $1 million;
• The company must not have been under restructuring or the subject of a simplified liquidation process within the previous 7 years (subject to certain exceptions);
• The director cannot have been a director of a company that has been under restructuring or the subject of a simplified liquidation process within 7 years; and
• A related body corporate of the company cannot be or have been under restructuring or subject of a simplified liquidation process.

There are numerous additional criteria that apply to the specific insolvency process that the company wishes to undertake. These are contained in the Act and in the Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 (Cth).

Concluding remarks 

The Act appears to provide a number of benefits to eligible small businesses, including:

• The reforms allow the directors of the company to maintain control of the business, property and affairs while undergoing restructuring, rather than being obliged to immediately hand over the reins to paid strangers;
• Directors who appoint a qualified SBRP receive the same immunity from liability for insolvent trading as they would under voluntary administration; and
• The reforms aim to reduce complexity, time and costs of trading out of a distressed situation for eligible small businesses.

If you require corporate legal advice with specific respect to the pandemic, or more generally, please contact us below. We can quickly assess your situation and make immediate and cost-effective recommendations.

[1] Insolvency Practice rules (Corporations) 2016, s 20-2(2)(a)-(c).