Draft CTH Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 Released

Thursday 15 October 2020 @ 2.38 p.m. | Corporate & Regulatory | Trade & Commerce

On 24 September 2020, the Commonwealth announced its proposed changes to "Australia’s insolvency framework", with the aim being "to better serve Australian small businesses, their creditors and their employees". A draft Bill, the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (the draft Bill) and Draft explanatory materials were released for consultation on 7 October 2020. The consultation period closed on 12 October 2020. 

Broadly the intent of the proposed changes is the introduction of "new processes suitable for small businesses, reducing complexity, time and costs for small businesses" into the insolvency framework. The proposed changes are intended to allow more Australian small businesses to quickly restructure, and where that is not possible, be able to wind up faster, enabling greater returns for creditors and employees.

According to the Treasury website, the reforms support Australia's emergence from the COVID 19 pandemic by supporting a "stronger, more resilient and more competitive economy". The draft Bill aims to give businesses and creditors "crucial" certainty required for re-starting confidence and activity as the economy moves to a recovery phase.

Overview of Reforms Proposed by Draft Bill

The draft Bill establishes a framework for reforms with more detail to be included in the Corporations Regulations and Insolvency Practice Rules.  This would include for example, rules about the registration of small business restructuring practitioners. Some of the key reforms covered by the draft Bill include:

  • a formal debt restructuring process for eligible companies;
  • extended temporary relief for eligible companies intending to undertake a formal debt restructuring process;
  • a simplified liquidation process for eligible companies in a creditors’ voluntary winding up;
  • refinements to the requirements for registration as a liquidator; and
  • the greater use of electronic documents and electronic signatures in an external administration.

Summary of Draft Bill Provisions

In Schedule 1, the draft Bill proposes the insertion of a new Part 5.3B into the Corporations Act 2001 (Cth) to establish a new formal debt restructuring process for eligible companies, enabling financially distressed but viable firms to restructure their existing debts.

The key intention of the "debt restructuring process" is described as being "to provide an alternative to the ‘one-size-fits-all' voluntary administration regime for small non-complex businesses". This is meant to assist in reducing the complexity and cost of the administration process, providing a greater role for the company directors during the process and allowing them to retain control over the company throughout. 

Schedule 1 of the draft Bill provides the requirements for accessing the debt restructuring process and includes the criteria that must be met. Entry to the restructuring process can only be opted into by the board of company directors; it cannot be commenced by creditors and other third parties and the company cannot be forced to enter the process. Entry to the debt restructuring process requires a company to be insolvent, or likely to become insolvent, with total liabilities lower than the amount to be prescribed in the Corporations Regulations.

The draft Bill contains safeguards that apply to protect against illegal phoenixing activity and other forms of corporate misconduct. As well, a company will not be eligible to use the debt restructuring process if a director of the company has previously used this process or the simplified liquidation process (described in Chapter 3 of the draft Bill).

Additionally, according to the draft explanatory material, the regulations may later prescribe circumstances in which a director is exempt from the requirement that they have not previously used either the debt restructuring or simplified liquidation process. Further, the Regulations may also prescribe additional safeguards which would have to be met before a plan can be put to creditors. An example given is that regulations could require the business to ensure that payments to employees and tax lodgments are up to date before the plan could be put to creditors.

The new debt restructuring process proposed by the draft Bill draws heavily on the established voluntary administration framework in Part 5.3A of the Corporations Act 2001 (Cth). For example, secured creditors’ rights under the debt restructuring process are consistent with existing voluntary administration processes and the moratorium that will apply on a third parties’ ability to enforce rights against the company is, according to the draft explanatory material, also consistent with the moratorium employed during voluntary administration.

The restructuring process is described in the explanatory material as ending with creditors voting to accept or reject the plan. Related entities are unable to vote on the plan and no creditor meetings are required during the debt restructuring process and voting on the plan can occur electronically or via technology. Where a plan is rejected, the restructuring process ends, and the company can seek to use an alternative formal insolvency process, like liquidation or voluntary administration.

The reforms are supported by amendments to the registration of insolvency practitioners and requirements for registration of a liquidator which are intended to provide more flexibility to the registration process while maintaining high professional standards. Also the reforms expand the situations where documents relating to the external administration of a company may be given electronically, and permit the electronic signing of documents relating to the external administration.  

Comment and Reaction

The Treasury Fact Sheet, Insolvency reforms to support small business, describes the proposed reforms as follows:

"The changes will enable more Australian small businesses to quickly restructure and to survive the economic impact of COVID-19. Where restructure is not possible, businesses will be able to wind up faster, enabling greater returns for creditors and employees. These reforms are the most significant changes to the Australian insolvency framework in almost 30 years."

In an article by Jotham Lian in the Accountant's Daily, it is pointed out that while reforms to unnecessary processes in small company liquidations were overdue and welcomed, elements within the proposed changes needed closer inspection. The article quotes Australian Restructuring Insolvency and Turnaround Association chief executive John Winter as saying:

“The biggest issue is going to be in the expectation that creditors — from banks through to suppliers, employees, subbies and the like — are going to keep allowing businesses to rack up more debt while this restructuring occurs, knowing that they may end up being owed more and getting nothing, . . . With the proposed creation of Small Business Restructuring Practitioners, the government needs to take the opportunity to fully regulate the provision of insolvency and restructuring advice, to shut down the exploding level of dodgy, unqualified advisers who facilitate phoenixing and asset stripping."

The Lian article also quotes, Chartered Accountants Australia and New Zealand business reform leader Karen McWilliams, as saying:

“. . . as these measures will be permanent rather than temporary during the pandemic, we consider it critical for there to be an in-built review process for late next year to ensure that the laws are still fit for purpose and relevant.”

Next Steps

These reforms are due to commence on 1 January 2021 following the expiry of the current COVID-19 insolvency relief measures scheduled for 31 December 2020.

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