Simplified Liquidations for Small Business: Insolvency Reforms (Part 2)

Simplified Liquidations for Small Business: Insolvency Reforms    (Part 2)
Posted on 9 Oct 2020

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:

  • Reduced circumstances in which a liquidator can seek to clawback an unfair preference payment from a creditor that is not related to the company.
  • Only requiring the liquidator to report to ASIC (under section 533) on potential misconduct where there are reasonable grounds to believe that misconduct has occurred.
  • Removing requirements to call creditor meetings and the ability to form committees of inspection.
  • Simplifying the dividend process (where creditors receive a return proportionate to their debt) and the proof of debt process (where creditors provide information as to the debt they are owed, which is assessed and accepted or rejected by the liquidator).
  • Maximising technology neutrality in voting and other communications

  

How will it work?

Some of the more significant aspects of the proposed SL are as follows:

  • Under a new proposed section 500A, a liquidator may adopt the simplified liquidation process but can’t do so if:
  • More than 20 business days has passed since the triggering event; or
  • At least 25% in value of creditors request him/her not to.
  • A company is only eligible for a simplified liquidation in circumstances where employee entitlements are paid and tax lodgments are up to date;
  • A creditor/s may, if carrying more than 25% vote in value alone or combined, direct the liquidator to transition the SL to a formal liquidation (after the SL’s commencement);

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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