COMMENTS ON THE EXPOSURE DRAFT CORPORATIONS AMENDMENT (CORPORATE INSOLVENCY REFORMS) REGULATIONS 2020 AND RULES 2020

KEY ASPECTS FOR PRACTITIONERS, PPSA ISSUES AND OTHER MATTERS WORTH NOTING

Introduction

  1. 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.
  2. 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.
  3. 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.
  4. 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

  1. 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

  1. 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  The text of the existing sub-section is repealed and replaced to that effect.   
  1. 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  The text of the existing sub-section is repealed and replaced to that effect.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

  1. 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. 
  2. 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. 
  3. 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).
  4. 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.
  5. 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

  1. 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.
  2. Preference recoveries against related entities of the company will be unaffected.

Issue:  Restructuring appointment triggers PPSA Vesting

  1. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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. 
  5. 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

  1. 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. 
  2. 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?

  1. 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.
  2. The regulations provide a definition of “ordinary course of business” – see 5.3B.04. 
  3. 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. 
  4. 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. 
  5. 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.
  6. Practitioners should be aware of that requirement as it seems to me it will be a not uncommon occurrence.

Issue: when a restructuring ends

  1. 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).
  2. 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.
  3. 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

  1. Section 455B of the Act as amended provided for regulations to be made about the process of proposing a restructuring plan.
  2. 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.
  3. 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.
  4. 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).
  5. 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.
  6. 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.
  7. 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

  1. 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.
  2. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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

  1. 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.
  2. 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

  1. The functions and powers of a restructuring practitioner under a plan, once made, are  provided in subdivision D, regs 5.3B.32 to 40.
  2. 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.
  3. 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.
  4. 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.
  5. 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

  1. 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. 
  2. 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

  1. 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.
  2. Points of interest:
    1. 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. 
    2. 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. 
    3. The Court has a wide power to make orders to terminate, void or validate a restructuring plan. 

Issue:  Simplified liquidation

  1. The regulations also provide for circumstances in which a simplified liquidation process will end. 
  2. 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. 

Date:  26 November 2020

Mark McKillop

Castan Chambers

Melbourne Victoria

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