The insolvency reforms aimed at helping small businesses through insolvency, passed in the The Corporations Amendment (Corporate Insolvency Reforms) Act 2020, commenced on 1 January 2021 without much take up.
On Monday 1 February 2021 I had the pleasure of speaking with the the CPA Insolvency & Reconstruction Discussion Group in Melbourne, at the invitation of Hugh Milne, about my thoughts on the reforms now they have commenced.
So far no one has actually commenced an insolvent administration under the new part 5.3B, but it’s only been a month.
Five companies have lodged declarations under section 458E of the Act in which they indicate an intention to appoint in the future, and gained the advantage of temporary restructuring relief against winding up and insolvent trading claim through to the end of March.
Hardly the flood of insolvencies that the part was introduced as a cheap and quick way to disperse.
In the discussion I pondered:
if political rather than reform imperatives were involved in the rush to legislate, perhaps explaining why submissions from the industry bodies, lawyers and accountants were largely ignored
is the typical company eligible to use the part as rare as a unicorn: whether the barriers to qualify for using the part (tax lodgement and employee entitlements) will leave it largely unused
will directors will have the credit or cash available to trade through the reconstruction period of at least 35 days, given that trade-on creditors of the company will have no recourse to company assets during the reconstruction period
whether the $1 million debt threshold is really too low given that contingent and future claims appear to be captured within it, in the final set of regulations.
A copy of the presentation powerpoint slides can be found here:
KEY ASPECTS FOR PRACTITIONERS, PPSA ISSUES AND OTHER MATTERS WORTH NOTING
The Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (the Bill) was introduced in Parliament on Thursday 12 November 2020. I have previously commented on the exposure draft of the Bill here and made a submission to Treasury concerning that Bill here.
The text of the Bill as read in Parliament is available at the parliamentary website here, with a mark up against the exposure draft available here.
On 17 November 2020 the Treasury released exposure drafts of the proposed regulations and rules that will be introduced with the Bill once enacted, which are available here. The content of the regulations and rules and the revised Bill have been summarised extensively elsewhere, see for example an excellent summary by HWL Ebsworth at their website here.
In this article I comment on particular aspects of the regulations that are of interest to insolvency practitioners in operating under the reforms, aspects of the reforms that impact on PPSA issues and other matters of interest. This article is not intended to be a general review of the regulations or rules, which can be obtained by referring to the sources noted above.
Issue: employee entitlements and tax lodgment
Despite many submissions to government to exclude these thresholds, they remain. In short, companies will have to have their employee entitlements paid up and have lodged all outstanding federal tax returns and similar documents before being eligible to take part in a restructuring process.
Issue: debts incurred in the restructuring are provable in a subsequent winding up
The Bill has amended s553(1A) of the Act so that debts incurred by the company when it is under restructuring or under a restructuring plan are provable. See the Bill, schedule 1, Part 2 item 48. The text of the existing sub-section is repealed and replaced to that effect.
The Bill has amended s553(1A) of the Act so that debts incurred by the company when it is under restructuring or under a restructuring plan are provable. See the Bill, schedule 1, Part 2 item 48. The text of the existing sub-section is repealed and replaced to that effect.
Issue: Temporary protection of insolvent small businesses from statutory demands to eligible companies, where declaration is made
There will be an extension of the effective moratorium on statutory demands to 31 July 2021 for companies eligible for temporary restructuring relief: see regulation 5.4.01AAA.
The government anticipates a shortage of practitioners available to take appointments from 1 January 2021. This measure is a device to shelter companies from statutory demands whilst waiting to line up an appointee.
The meaning of the phrase “eligible for temporary restructuring relief” is given by s 458 of the Act. To qualify, directors must make and publish a written declaration of three matters:
Insolvency of the company and the company would meet the eligibility criteria for restructuring;
The board has resolved to appoint a restructuring practitioner;
There is no other current insolvency appointment (Restructuring Practitioner, VA or liquidator).
Once made a company has made a declaration, the company is eligible for temporary restructuring relief for three months, which can be extended a further month if directors have been unable, despite trying, to appoint a restructuring practitioner.
How are creditors supposed to know whether any particular debtor is eligible for restructuring when they are not insiders of the company? Some relief will come from the publication of the notice. One would need to know that the company has less than $1m in liabilities excluding contingent claims. This will add a degree of uncertainty for people proposing to use a statutory demand process.
Issue: Restrictions on voidable transactions in simplified liquidation
In regulation 5.5.04, the restrictions on unfair preference recoveries have been set out. In essence, unfair preference recoveries will be restricted to debts that exceed $30,000 in total or in cumulative series of related transactions, and will be restricted to transactions entered into on the three month period ending on the relation back day rather than 6 months.
Preference recoveries against related entities of the company will be unaffected.
The Bill as read in parliament now amends s 267 of the Personal Property Securities Act 2009 (Cth) (PPSA) so that the effect of a restructuring appointment is to trigger vesting of unperfected security interests in the company. See items 115 to 117 of the Bill. This was left out of the exposure draft.
Issue: Determining the amount of liabilities to be counted in the $1 million cap for restructuring – still messy
Two issues that were open from the exposure draft of the Bill were the types of debts to be counted into the $1 million threshold, whether other indicia might be used (eg turnover opr employee numbers) and whether the amount of the threshold might be changed.
By the regulations, contingent debts are to be excluded from calculation but future debts remain: see r 5.3B.03(1). The threshold is confirmed to be $1m, to be calculated on the day the restructuring begins. No other indica are to be used.
The total will accordingly exclude contingent debts where the contingency has yet to crystallise but include future non-contingent debts, for example rent, which whilst not yet due are certain to arise.
Query the position of contingent debts that crystallise on an insolvency appointment or associated act of default. The wording of the regulation is ambivalent as to whether crystallised debts of that sort are to be included, since the calculation is to be taken on the day the restructuring begins, not upon the commencement of the restructuring. It would seem to me that crystallised debts are included since by application of section 36 of the Acts Interpretation Act 1901 (Cth), the restructuring period would be taken to include the whole of the day on which it commences.
It follows that the commencement of the restructuring may well push the company over the $1 million threshold when such cystallised debts are included. The Law Council of Australia has recommended in a submission on the regulations that the threshold be calculated fromimmediately before the appointment (see item 1 here), which seems to me to be sensible. It avoids the need for a review of company contracts to detect contingent debts which might not be disclosed in the accounts of the company.
Issue: it appears payments to referrers for appointments are allowed
The regulations appear to permit a restructuring practitioner to pay a “broker”, being a person referring an appointment, for the referral – see reg 5.3B.16.
This has attracted criticism – it will feed perceptions of a lack of independence of the practitioner to say the least.
Issue: What Transactions are in the ordinary course of business in the restructuring period?
By s.453L of the Act there is a general prohibition on dealings outside the ordinary course of the company’s business, unless the restructuring practitioner has consented or the transaction was entered into under an order of the Court.
The regulations provide a definition of “ordinary course of business” – see 5.3B.04.
A transaction that is for the purposes of paying a debt or claim arising prior to the commencement of the restructuring, relating to the transfer or sale of the whole or part of the business, or relating to the payment of a dividend are all outside the ordinary course of business. Payments of company employee entitlements are not considered outside the ordinary course of business.
It seems the intent of the regulation is to give the practitioner a measure of control and require their supervision during the restructuring period. The company will not be able to pay any essential debts arising before the appointment without consent: for example, a payment to a key supplier might be necessary to continue trading.
Reg 5.3B.05, sets out a process for restructuring practitioners to follow when consenting to transactions outside the ordinary course of business. Written consent is to be given by the practitioner and a record of the consent to be kept by the practitioner and given to the company within two business days of the consent being given.
Practitioners should be aware of that requirement as it seems to me it will be a not uncommon occurrence.
Issue: when a restructuring ends
How a restructuring is to end was left out of the Bill and is now provided for in the regulations. Regulation 5.3B.02 deals with when a restructuring is to end. In summary, a restructuring will end if the company:
fails to propose a restructuring plan in the restructuring period;
a proposal to make a restructuring plan lapses;
the restructuring practitioner terminates the restructuring;
the Court orders the restructuring to end;
an administrator of the company is appointed;
a liquidator or provisional liquidator is appointed;
or the company makes a restructuring plan (a successful ending).
There are a couple of interesting points:
It appears to me that directors can still appoint a voluntary administrator even though the company is under restructuring;
Directors have a power under r5.3B.02(2) to unilaterally end a restructuring on giving notice to the practitioner and ASIC. It seems odd to me that given that a company that enters into a restructuring is presumed to be insolvent and it would seem to be poor policy to allow the directors of the company to end the restructuring process without completing it and continuing to trade.
If a restructuring is terminated by the restructuring practitioner, regulation 5.3B.02(6) requires the contents of the written notice required from the restructuring practitioner of the decision to terminate (see s.453J(3)(b) of the Act) are set out. The notice must include the reasons for terminating the restructuring.
Issue: Proposing a restructuring plan and its contents
Section 455B of the Act as amended provided for regulations to be made about the process of proposing a restructuring plan.
Those regulations are included in Division 3 of the proposed regulations. Practitioners will need to be familiar with these provisions and develop precedents that conform with them for draft plans to be used in practice.
The plan must conform with that approved form and must also include various matters including regulation 5.3B.13. They include matters such as:
how the company property is to be dealt with;
what property is to be the subject of the plan;
the remuneration of the practitioner;
the date on which the plan was executed.
The plan may also:
authorise the practitioners to deal with identified property in a specified way (eg by sale);
providefor any matters relating to the company’s financial affairs;
be conditional upon the occurrence of events within a specified period no longer than 10 business days after the proposal is made and accepted (presumably, provision of finance, third party consents etc).
Plans cannot provide for the transfer of property other than money to a creditor and plans can only have a life of 5 years beginning on the day that the plan is made in respect to payment. In other words, payments under the plan have to be made within a maximum period of 5 years.
By regulation 5.3B.14 a restructuring proposal statement must be prepared to accompany the plan which will include a schedule of debts and claims that are affected by it, and that statement must be in a prescribed form.
The Act and regulations use the phrase “making a restructuring plan” and distinguish “proposing a plan”. Making a plan is where a proposed restructuring plan is accepted by creditors and is accordingly binding. Compare a deed proposal and a DOCA.
Issue: the “proposal period” and extending it
The default period of the restructuring process is 20 business days. That period can be extended by another 10 business days if the restructuring practitioner is satisfied that requiring the company to give their plan within the 20 day period would not be reasonable in the circumstances. Only one such extension can be given, that the Court can give further extensions on application. See regulation 5.3B.15.
This regulation mimics the practice in relation to voluntary administration of extensions made by the Court which, on the first request, are routinely given. It seems to me to be a sensible regulation but one could expect the Court to be less accommodating than in VA on the first request to it for more time.
Issue: Certification of the restructuring plan by the restructuring practitioner
Regulation 5.3B.16 provides detail of a certificate that restructuring practitioners have to provide in respect of each restructuring plan. They should be of concern to restructuring practitioners as to the burden of certification, because of their broad scope, remembering that practitioner’s freedom from liability in performance of their duties requires an absence of negligence. The certificate must confirm the following matters:
the eligibility criteria for restructuring are met by the company;
the company is likely to be able to discharge the obligation created by the plan when they become due and payable;
the practitioner believes on reasonable grounds that all information required to be set out in the company restructuring proposal has been set out in the statement;
if the practitioner believes that is not the case, they must set out or identify the matters in relation to which a belief on reasonable grounds could not be formed; and
if a person referred the company to the restructuring practitioner it requires them to set out any details of that relationship and any payments made to the broker in connection with the referral.
These obligations are serious and require a restructuring practitioner to satisfy themselves of the eligibility of the company for restructuring and the likelihood that the company imposing a plan will be able to satisfy the obligations that it is taking on.
A restructuring practitioner commits an offence if they prepare a certificate under this regulation and do not make reasonable inquiries into the company’s business, property, affairs and financial circumstances or take reasonable steps to verify the company’s business, property, affairs and financial circumstances. It is a 50 penalty unit penalty and an offence of strict liability.
The prospect of civil liability for breach of these provisions (if such a breach is either because of a lack of good faith or because of the presence of negligence) and the fact that failure to make reasonable inquiries and take reasonable steps as noted above is an offence, should make practitioners cognisant of the important role in investigating the affairs of the company and certifying the proposed plan under these provisions.
Further by Regulation 5.3B.17, a restructuring practitioner commits an offence if they fail to notify the company of incompleteness or inaccuracies in information in the plan or the restructuring proposal statement that accompanies it, where those flaws are likely to affect the company’s ability to meet its obligations under the plan.
By regulation 5.3B.18 a restructuring practitioner can cancel a restructuring proposal under certain conditions, which include the restructuring practitioner discovering before the plan is made that the information in the plan is incomplete, affected creditors have not been disclosed, the proposal statement was deficient because it omitted a material particular or there has been a material change in the company’s circumstances not previously foreshadowed which is capable of affecting creditors’ decisions as to whether to accept the plan.
That regulation provides the restructuring practitioner with a safety valve having regard to the onerous obligations that they are subject to.
Issue: Acceptance of the plan
Two interesting points regarding how a plan is accepted:
a plan is accepted if there is a majority in the value of the company’s affected creditors in favour who reply before the end of the acceptance period. It would seem that if creditors choose not to vote, the plan can be accepted provided the majority of those voting are in favour by value. Conceivably if one credited voted in favour and no other creditors voted, the plan would be approved.
if an affected creditor is entitled to vote because they have purchased another creditor’s claim, then the value of their vote is limited to the value that they paid for the debt. In other words it’s the purchase price of the debt, not its face value that matters.
The regulations make it an offence to give or agree or offer to give an affected creditor (simply a creditor who is bound by a plan or will be if the plan is made) any valuable consideration with the intention of securing an acceptance or non-acceptance of the plan. Vote buying is out!
Issue: Appointment functions and powers of a restructuring practitioner under a plan
The functions and powers of a restructuring practitioner under a plan, once made, are provided in subdivision D, regs 5.3B.32 to 40.
The functions include to receive and hold money for the company, pay money to creditors in accordance with the plan, realise property and distribute its proceeds if requested to do so by the directors, do anything incidental to the performance or exercise of their functions and powers and to do anything else necessary or convenient for the purposes of administering a plan.
By regulation 5.3B.34, there is a prohibition on a practitioner disposing of encumbered property, with exceptions. The exceptions are if the property is PPSA retention of title property, disposals in the ordinary course of business, disposals with the consent of a secured party or with leave of the Court.
By regulation 5.3B.35 the restructuring practitioner is the company’s agent when carrying out the company’s restructuring plan, and has qualified privilege in that respect and a right of indemnity with priority. The priority is dealt with in reg 5.3B.39. The right of indemnity prevails over all of the company’s unsecured debts, debts secured by a PPSA security interest that has vested, and debts secured by circulating security interest, except where a receiver has been appointed.
By regulation 5.3B.40, the restructuring practitioner has a lien to secure the indemnity on the company’s property.
Issue: Information to be provided to the restructuring practitioner and reporting obligations
Divisions 4 and 5 of the regulations deal with the company’s obligations to provide information to an incoming restructuring practitioner, declarations required to be made by the directors in relation to the appointment, notice of the restructuring plan and notices of contravention and termination of the plan.
A declaration by directors is required of the company’s eligibility to be under restructuring and other matters by regulation 5.3B.44. The declaration must include whether any transactions that have been entered into by the company would be voidable under s.588FE if the company were wound up, other than transactions which would be an unfair preference. This interesting obligation (one doubts it will be thoroughly observed) seems to require the directors to seek professional advice concerning the company’s transaction history to assess whether any voidable transactions may have occurred. It seems to me that an unadvised company director would identify such transactions and the director/s will probably seek assistance from the restructuring practitioner before making of this declaration.
Issue: Powers of the Court
Much of the powers of the Court are left to be dealt with in the regulations and those regulations are contained in Division 6 in regulations 5.3B.50 to 55.
Points of interest:
The Court has a jurisdiction to deal with creditor disputes over claims and debts that are not resolved by agreement. The jurisdiction only activates where a disagreement has arisen between the affected creditor and the restructuring practitioner; has refused to make a recommendation about it or has recommended that the dispute be referred to Court.
The Court also has a jurisdiction to vary restructuring plans on application of a company, an affected creditor, the restructuring practitioner or ASIC or on its own initiative.
The Court has a wide power to make orders to terminate, void or validate a restructuring plan.
Issue: Simplified liquidation
The regulations also provide for circumstances in which a simplified liquidation process will end.
A problematic point is a deeming provision in reg 5.5.07. If the company or a director of the company has been engaged in fraudulent or dishonest conduct that has had a material adverse effect on the interest of creditors as a whole or class of creditors as a whole, then the simplified liquidation process is taken to have ceased. It is an interesting provision because the activating event is the formation by the liquidator of a that the dishonest or fraudulent conduct has occurred, where held on reasonable grounds.
I recently presented a video podcast with my learned friend and fellow barrister Amanda Carruthers on the topic “PPS Issues in Insolvency”: see below. The format is to highlight the frequent PPSA issues that we see as barristers and how best to tackle them as a practitioner.
I had the pleasure of speaking to the first Zoom meeting of the CPA Insolvency & Reconstruction Group on Monday night about the Small business Insolvency Reforms, at the invitation of Hugh Milne. A copy of the paper I presented and the overheads from the night are linked below.
As yet there is no indication yet of the date when the final bill or the regulations will surface. Since the legislation is supposed to commence by 1 January 2021, and the last sitting of parliament is in the two weeks from 30 November, we could assume that we will see some drafts by the end of the month. Here is hoping anyway.
I suspect the bill will end up being delayed and the commencement date pushed back to a date in March. I have no reason to say that other than that the first draft was very undercooked, and that job keeper has been extended again. One wonders whether the moratoriums on statutory demands, bankruptcy notices and insolvent trading will be too.
Treasury invited submissions on the Bill providing only 5 days notice, after the exposure draft and EM had been released.
I am not normally prone to making legislative drafting submissions, but the rush in this case really warranted one given that I had read and considered the merit of the exposure draft. I suspect that the short time frame, plus the lockdown in Melbourne, will have substantially limited the ability of many usual contributors to respond.
Some of the key points of my submission are as follows.
The debt threshold for the application of restructuring and simplified liquidation needs careful thought and ought be lowered.
The final draft of the law must minimise the operative provisions of substance that are left to regulations.
Debts incurred in the trade on period must be given some priority, if no personal liability is to be imposed on the directors.
Applications to Court during the restructuring and the simplified liquidation must be limited, probably most effectively by requiring leave and subjecting the discretion to grant it to a purposive test.
Transition to liquidation needs to be clearer, and there should be no transition to VA.
The reporting obligations and the investigative powers of the restructuring practitioner need to be reasonably strong, if truncated for purpose.
The employee entitlements and tax filing threshold obligations should be scrapped.
The legislation should be delayed by 2 months to allow more work to be done on it.
A copy of my submission is available at this link:
After announcing the introduction of streamlined Debtor in Possession reforms for small corporate business insolvencies just 2 weeks ago (see my thoughts at the time of release here) by 1 January 2021, the Commonwealth has now released an exposure draft of the amending legislation and an explanatory memorandum. It really is a case of making sausages.
In summary, the exposure draft leaves a lot of work to be done by the drafters to get the legislation finalised. A lot of the meat (no pun intended) in terms of substantive changes to the existing law is left to regulation, probably sensibly the only way to get this process done with consultation within the industry in time. It seems to me that the exposure draft has been rushed out by using this device and that a lot of the hard yards will be done in the process of sifting through submissions to be made, due on Monday and in further consultation, hopefully with industry bodies and the legal profession.
My thoughts on the exposure draft:
To be completed by regulations: the draft is the ultimate “fixer upper” opportunity, being only about two thirds finished. The unfinished parts are to be filled by regulations to be made later. Presumably the idea is to permit more time for the Commonwealth to consult with the professions, industry and other SME stakeholders, which may be the only practical way to get the changes made so they can commence by 1 January 2021. This approach, whilst unorthodox for insolvency reform, is welcome given that there was little or no consultation before the package was announced.
A whole new insolvency office: The term for the appointee used in the part is “restructuring practitioner”. A new definition in s.9 of the Act is included to define that term. The term is used for an appointee both during the restructuring period and after the restructuring plan is accepted: there is no term akin to “deed administrator”.
A whole new part: Rather than adapting the existing processes for voluntary administration, the drafters have inserted an entirely new part, Part 5.3B, dealing with restructuring of a company under the debtor and position model. Again, this reflects the object of the reforms, which is a revolutionary, rather than an adaptive.
#tag – (Restructuring Practitioner Appointed): Section 457B requires a company subject to the restructuring process must add the words “(restructuring practitioner appointed)” after its name.
An act of insolvency: like a part X proposal for an individual in bankruptcy, a company who proposes a restructuring plan is taken to be insolvent – s455A(2).
Restructuring Practitioner’s power to end it all: Interestingly, there is provision under subdivision C for the role of the restructuring practitioner to have the power to terminate a restructuring on certain grounds: see s453J. The grounds include at least if the company does not meet the eligibility criteria for restructuring, if it would not be in the interests of creditors to make a restructuring plan, or continue with a plan, or it would be in the interests of creditors for the company to be wound up. It will be interesting to see on what basis this power to terminate the restructuring of a company will be exercised in practice. One would imagine the type of situations in which a VA might recommend liquidation would be a basis – where businesses are dead and buried with no potential of saving, so that the appointment is misconceived, or cases involving substantial fraud or criminality.
Recycled nuts and bolts: A lot of basic mechanics dealt with in the new Part 5.3B are copies of similar provisions from 5.3A. An example: a person appointed as a restructuring practitioner must make a declaration of relevant relationships. The DIRRI provision, section 60, has been amended accordingly. Similarly, there are parallel restrictions on third party property and secured creditor action during the period of the restructuring process. See generally subdivision D.
So much to be provided by regulation: Some notable examples include:
The eligibility of a company to participate in a restructuring based on its liabilities, and the degree to which a director can have previously been involved in another restructuring – see 435C. The whole question of what liabilities count toward the threshold debt ceiling for eligibility, and even what the ceiling is to be, are not yet in the legislation;
Surprisingly, nearly all of the functions, duties and powers of the restructuring practitioner. There is a generic provision for basic functions like providing advice to the company on restructuring matters, assisting and preparing a restructuring plan, making a declaration to creditors “in accordance with the regulations” in relation to the plan and any other functions given to the practitioner under the Act. Apart from that, the regulations are to provide…;
The form, content, making, implementation, varying, lapsing, voiding, contravention and termination of restructuring plans. Regulations are also to provide for the role of the restructuring practitioner in relation to the plan. There are all very important issues for the success of the reforms. Whilst crossing the proverbial fingers, one would think that regulations are being used in order to allow consultation with the industry before the legislation is finalised, or perhaps allowing it to be easily tweaked after 1 January 2021. It will be interesting to see whether substantive text is used in the final draft of Part 5.3B rather than in regulations.
The Role of The Court is a work in progress:
There is a balancing act in any insolvency regime. On one hand it is desirable to allow creditors or other stakeholders to go to court to protect themselves from abuse of process. On the other hand, too much judicial oversight can make the process to expensive to use. Cost is a key complaint that has led to the reform package. The fact that the role of the Court is to be finalised in the Exposure Draft reflects, I think, a lot of thinking going on at government level and probably a desire to further consult on this issue with the profession.
The role of the Court is, in many respects, to be provided: there is division 6, which provides for the powers of the court in relation to restructuring plans to be subject to regulation. Among more mechanical sections of the part copied over from part 5.3A, the role of the Court is defined, for example regarding permitting or penalising dealing with assets or shares during the restructure that would otherwise not be permitted (Part 1 Subdivision D), effects of an appointment on a winding up (which are akin to a VA appointment) and secured creditor assets and leave to proceed.
Section 458A does provide that the powers of the Court will include at least a power to vary or terminate a restructuring plan and to declare a restructuring plan void.
Reporting Obligations to and from the Company and the Restructuring Practitioner are still to be finalised: Division 5 deals with information, reports and documents, in relation to the company. The draft provides for regulations to deal with these sorts of issues. Section 457A deals with the things that the regulations can provide for, and they do include matters such as reporting to the restructuring practitioner by the company or others, reporting to ASIC, reporting to creditors, and reporting generally about a restructuring or restructuring plan to the public by publication.
Secured Creditors Decision Period: there is an amendment to the dictionary in section 9 of the meaning of “decision period”. The decision period for restructuring is the same as for voluntary administration – that is 13 days after the day of appointment.
Relation Back Day: There are amendments to section 91 to accommodate the restructuring process into the relation back day definition for a company that goes into a subsequent liquidation. Basically, a restructuring appointment that is made after a winding up application starts preserves the relation back date of the application to wind up. Likewise, for a winding up which commences as a consequence of an application made after the beginning of a restructuring period, the relation back day is the date on which the restructuring appointment is made, called the section 513CA day.
Transition to VA and Liquidation: There is provision for transition to a voluntary administration or liquidation in the event that a restructuring plan is rejected. It is not clear to me exactly how this is to occur: it is to be provided for in regulations (s453A(b)). Amendments to the small business guide in Part 1.5 of the Act do provide that if creditors do not agree to the restructuring plan the company may be placed in voluntary administration or winding up. It appears that the rejection of the restructuring plan will amount to a resolution by creditors that the company be wound up unless alternative arrangements are made to transition to a voluntary administration. Logically it would be similar to the rejection of a DOCA proposal.
Voidable Transactions – Protection for ordinary course transactions in restructuring period: There is a significant change to voidable transactions for a liquidation which follows a restructuring. The main change is that there is a carve out for transactions entered into by the company whilst it is in the restructuring phase, in the ordinary course of business or with the consent of the restructuring practitioner. In voluntary administration there is a similar carve out for transactions entered into by a voluntary administrator or a deed administrator. Since the new process is a debtor in possession model, it does make sense for transactions entered into by the company in the ordinary course of its business or with consent of the restructuring practitioner to be similarly exempt. That is provided for in a new subsection 588FE(2C)(d) and (2D)(d).
Another safe harbour: There are amendments to the safe harbour provisions, and a new safe harbour for companies under restructuring in 588GAA(B). There is a carve out for insolvent trading in relation to transactions entered into during the restructuring period which are in the ordinary course of the company’s business or with the consent of the restructuring practitioner.
Liquidator Investigation: In terms of subsequent supervision, there is provision for a liquidator appointed after a restructuring to examine the restructuring practitioner on a mandatory basis under amendments to 596A and further consequential amendments in the examination provisions.
Insolvency Practice Rules A host of changes have been made to the insolvency practice rules, mainly to include restructuring practitioner where appropriate. However there are carve outs which indicate the limited nature of the simplified liquidation process. They include exempting completely from the simplified liquidation process any provision for committees of inspection. They simply do not apply to the simplified liquidation process.
Simplified Liquidation: Once again, future regulation is to play a large part in defining how the simplified liquidation process is to be implemented. The regulations are to provide in future for the eligibility criteria for the simplified liquidation process, simplified methods of dealing with proofs of debt and distribution of dividends, ASIC reporting, dealing with contributories, payment of dividends, and more limited basis of circumstances in which unfair preferences can be recovered. See generally a new subdivision B to be added at the end of Division 3 of Part 5.5 of the Corporations Act.
Virtually Done: As has been commented widely elsewhere, there are welcome changes that basically permit creditors meetings to be held virtually, notification and communication by electronic means and for “e signing” of documents electronically.
The outline of the Federal Government’s small business insolvency reform package, to introduce a debtor in possession model for incorporated businesses with less than $1 m in debt, have been covered elsewhere. This package was announced just after 4pm yesterday. A copy of the Treasurer’s media release can be found here. The lease also includes a link to a “Insolvency Reforms Fact Sheet” here. A useful summary of the proposed changes, by my colleague at the Victorian Bar, Carrie Rome-Sievers, can be found here.
Some thoughts that immediately spring to mind, from a PPSA perspective and generally follow.
Is the appointment of a “Small business restructuring practitioner” (SBRP) also going to trigger vesting under section 267 of the PPSA? Or will vesting not occur if and until an administration or liquidation occurs. A security interest which is unperfected vests in corporations which are wound up or enter into a voluntary administration or DOCA (s267(1)). The underlying policy principle behind vesting is to aid unsecured creditors in the insolvent administration left unaware of the unperfected security interest.
Presumably voidable transactions will continue to be recoverable only in liquidation. When will the relation back period commence for a subsequent liquidation? Will it be from the appointment of the SBRP, or will it be the date on which the voluntary administration is taken to commence? If it is the latter, the appointment of a SBRP will be a tool that can be used to manipulate the relation back period to protect voidable transactions. See the discussion in my article on this issue, relating to the manipulation of the relation back period by VA appointments.
The proposal requires all employee entitlements to be paid before a SBRP can be appointed. What entitlements? Arrears of wages and superannuation? What about unpaid accrued leave entitlements? Presumably contingent claims like amounts due on retrenchment are not included. Are such payments protected from preference claims in future liquidation?
Whilst the debtor is in possession, the business continues to trade for 20 business days whilst devising a turnaround plan. What is the status of debts incurred in this period? Is the owner/director personally liable, because the SBRP is not. This seems to be a serious flaw compared to the personal liability of administrators in the same position. It would seem to me that trade creditors would be reluctant to extend any credit once a SBRP was appointed without some security.
The new regime is set to apply from 1 January 2021, yet as others have noted today, there has been little or no industry consultation with respect to devising the proposal. Presumably that will follow in coming months, however the process of baking the pie seems somewhat arse end around (apology for the mixed metaphor).
The regime includes a transitional period from 1 January 2021 to 31 March 2020, anticipating that there will not be enough trained SBRPs to meet the demand at the start. In this period businesses will be able to declare an intention to access the new process and thereby extend statutory demand and insolvent trading relief for the same period, as long as they appoint someone before 31 March. It seems to me the transition will introduce an added layer of uncertainty. I would imagine many business owners will choose the transition option to buy another 3 months of trading time.
It has been suggested, but I have not verified, that the proposal is a lift from a similar reform brought into law in the UK in June. See the attached link to a summary of the Corporate Insolvency and Governance Act 2020) (UK) prepared by Norton Rose Fulbright. It certainly looks very similar. That may explain how this proposal has been put together inside Treasury without much external input.
SBRPs appear to be paid a fee bargained with the debtor as a percentage of the “disbursements under the plan”, presumably a percentage of the payments made to creditors. What happens if the SBRP is not content with the fee offered?
The process is said to be available only to incorporated businesses. Sole traders are not mentioned. Yet sole traders make up a sizeable proportion of small businesses in Australia. Are parallel changes going to be made in bankruptcy? Part X arrangements going to be harmonized for example?
Only incorporated businesses with liabilities less than $1 million can use the process. How is the debt under the cap calculated? Is it limited to actual debts of that amount, or are contingent debts included? Will uncrystallised claims count, say under a premises lease or equipment lease? What about liquidated damages or penalties accruing in default under operational contracts, such as in construction?
The role of SBRP can be filled by persons other than a registered liquidator: who in practice is going to take on the role other than registered liquidators? Remembering that at law, if not in practice, voluntary administrators are not limited to registered liquidators, yet the latter are nearly always used.
On 23 June 2020, here in Melbourne, in the calm between the lockdowns (which seems like an eternity ago now) I delivered an update to lawyers on COVID implications for the operation of the PPSA to the Leo Cussens Institute via Zoom. A copy of the paper presented is attached at this link.
The key takeaways were:
as a practitioner, know the basics: what is a security interest, why to register and how to register
make sure that clients take steps to protect themselves from simple mistakes;
in an environment where a pandemic of insolvency is a real risk, errors in dealing with the PPSA will be costlier than ever.
I suggested the minimum basics that a practitioner should know were:
The main impact of the PPSA is difficult times is in insolvency. The first thing a liquidator, administrator or bankruptcy trustee will do when appointed is search the PPSR for relevant registrations.
In most appointments of liquidators or bankruptcy trustees, unsecured creditors will either receive nothing or very few cents in the dollar. Therefore, if you propose to offer funds or goods to a person or entity on credit, considering security for the obligation should be the first thing at front of mind.
A first-ranking secured party can then generally choose whether to enforce their security and take the property or get priority of payment from the sale of the property.
To take security over personal property, clients will need two things:
a security agreement that is well drafted: usually within the terms of trade, or in a separate document; and
In February 2020 I delivered a now annual seminar providing an update on recent PPSA developments at the Leo Cussen Institute. The seminar covered three interesting recent cases:
Bluewaters Power 1 Pty Ltd v The Griffin Coal Mining Company Pty Ltd  WASC 438 (Bluewaters)
BMW Australia Finance Limited v @Civic Park Medical Centre Pty Ltd as trustee for @Civic Park Medical Centre Unit Trust  FCA 999 (Civic Park)
In the matter of Beechworth Land Estates Pty Ltd (admins apptd) and Griffith Estates Pty Ltd (admins apptd); Cussen and of Beechworth Land Estates Pty Ltd v Douglas Estate Holdings Pty Ltd and Others  NSWSC 1129 (Beechworth)
Topics covered in the seminar included:
the breadth of a “security interest”: do step-in rights require registration on the PPSR? The decision in Bluewaters;
PMSIs – traps where the debtor is the trustee of a trust: extension of time to register in the decision in Civic Park;
Administrators’ Lien over interests in land and proceeds of its sale: the decision in Beechworth;
Inventory security: issues of priority and vesting in relation to processing raw materials
A copy of the paper is attached at the following link:
I would not ordinarily post a link to something I had not read, but this is a pandemic! The Commonwealth announced its proposed insolvency law reforms just 2 weeks ago and has now released an exposure draft of the amending legislation together with an explanatory memorandum.
Submissions on the draft are due on Monday, 12 October 2020!!! So get cracking! This makes the road runner look slow.
I will make some further comments in the next day or so once i have read it.
I delivered a case law update to the Leo Cussens PPSA Half Day Seminar on Thursday morning, along with some excellent other presenters. One of the cases considered is Dalian Huarui Heavy Industry International Company Ltd v Clyde & Co Australia  WASC 132, a case involving an iron ore project in WA and security interests in funds paid into trust pending an arbitration over construction work. A copy of the paper is at the link.
The Dalian decision is particularly important for solicitors acting for judgment or arbitration creditors who obtain security for their claim prior to trial. The WA Supreme Court recognised that security lodged with a trustee (eg a solicitor acting for a party) by agreement will constitute a security interest for PPSa purposes. In this case Dalian failed to register but, through fortunate circumstances of the case, had become seized of full beneficial ownership of the security amount before the appointment of a liquidator. A happy $27 million piece of luck.