The draft of the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 has now been released.
We’ve previously given our overview of the proposed ‘debtor-in possession’ model which is to be introduced by the reforms. For more on that click here.
The explanatory memorandum to the proposed legislation makes it very clear from the outset that the purpose is to address the “one-size-fits-all system” that is presently in place and what are described as :
“barriers of high cost and lengthy process... preventing distressed small business from engaging with the insolvency system early, reducing their opportunity to restructure and survive”.
The Bill establishes the framework for the reform with the detail to be included in the Corporations Regulations and Insolvency Practice Rules. The philosophy behind it is to make the process less complex for smaller administrations and to maximise the prospect of a return to creditors. Like with the debtor-in-possession model, where the director retains control of the company during the restructuring plan, there is clearly a targeting of small business owners seeking to entice early engagement with the process to maximise potential recoveries by making the process more simplified and accessible.
What does a simplified liquidation (SL) look like?
The key modifications for a SL are:
How will it work?
Some of the more significant aspects of the proposed SL are as follows:
With the regulations not yet being released, it is premature to give a detailed consideration of the prospect of both the likely utilisation, and success of these simplified liquidation procedures.
The finalisation of the eligibility criteria will be determinative of the success of these reforms. In circumstances where presently the companies eligible will be those with liabilities of less than $1m (and how is that to be calculated or known by a practitioner before adjudications commence?) and companies must have paid all employee entitlements and ATO liabilities to date, there may be a very limited number of companies which will be eligible.
However, for those that are, there is then a potential disconnect between the overriding purpose of these reforms: to minimise cost and increase the instances of small business owners engaging early with the process, and the removal of the ability of the liquidator in an SL to recover voidable transactions (preferences, uncommercial loans, unreasonable director related transaction) particularly when often those recoveries are what maximises dividends to be declared.
There is still a lot of uncertainty as to how these SL’s will proceed and we won’t know until release of the regulations and of course, once the legislation is passed, which is earmarked for commencement in January 2021.
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