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:
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.
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.