Insolvency law reforms for small businesses were announced on 24 September 2020 by the Treasurer. Following a brief period of consultation, the legislation enacting the reforms was introduced to Parliament on 12 November 2020, passed both Houses of Parliament on 10 December 2020 and was given royal assent on 15 December 2020. The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) (Act) commenced on 1 January 2021, following the conclusion of the temporary insolvency law relief measures which protected financially distressed businesses throughout the COVID-19 pandemic in 2020.

The Act is comprised of three key elements:

1. New Small Business Restructuring: a new 'formal debt restructuring process' for eligible small companies to allow a faster and less complex process to restructure existing debts and maximise their chances of survival.
2. New Small Business Liquidation: a new 'simplified liquidation pathway' for eligible small companies to allow a faster and lower cost liquidation process.
3. Further measures: to ensure that the restructuring and insolvency sector can respond to the measures in the small business insolvency reforms and the needs of small businesses.

The Act establishes the framework for the Small Business Restructuring and Small Business Liquidation processes. However important aspects, such as the eligibility criteria and rules about the registration of SBRPs, are the subject of amendments to the Corporations Regulations 2001 (Cth) (Corporations Regulations) and Insolvency Practice Rules (Corporations) 2016 (Cth) (Insolvency Practice Rules). Instruments amending the Corporations Regulations and the Insolvency Practice Rules, being the Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 (Regulations) and the Insolvency Practice Rules (Corporations) Amendment (Corporate Insolvency Reforms) Rules 2020 (Rules), respectively, commenced on 1 January 2020 following a short period of consultation.

New Small Business Restructuring

Entering Small Business Restructuring

The Act inserts a new Part 5.3B into the Corporations Act which establishes a new formal restructuring process for eligible companies with the view to enabling financially distressed but viable small businesses to restructure their debts so they can continue to trade. This is designed to be achieved by eligible companies working with SBRPs to develop and implement a restructuring plan that is agreed with the company's creditors.

The process closely follows the structure and many of the key aspects of voluntary administration under Part 5.3A, but seeks to streamline them so they are better suited to small and less complex businesses.

Small Business Restructuring commences upon the appointment of a SBRP and concludes as prescribed by the Corporations Regulations. Accordingly, an eligible company will be 'under restructuring' while its restructuring plan is being developed in consultation with the SBRP. The Explanatory Memorandum states that the restructuring process ends once the plan is in place.

Eligibility criteria

For a company to be eligible to appoint a SBRP, the 'eligibility criteria' must be met and the board of the eligible company must have resolved that:

• it has reasonable grounds for suspecting current, or a likelihood of future, insolvency; and
• a SBRP should be appointed.

The eligibility criteria are prescribed by the Corporations Regulations, including the test for relevant liabilities and their calculation. The Regulations prescribe that a company is eligible to enter the restructuring process if the total liabilities of the company on the day that restructuring begins does not exceed $1 million. Liability is defined as any liability to pay an admissible debt or claim..

A company will be ineligible for Small Business Restructuring if:

• the company has previously utilised Small Business Restructuring, or any of its current, and some former, directors have utilised Small Business Restructuring for another company of which they are a director within the period of 7 years preceding the desired appointment of a SBRP (this is designed to target illegal phoenixing and other high risk behaviours); or
• it is currently subject to other forms of external administration or restructuring arrangements.

Who can act as a SBRP?

Only registered liquidators are permitted to consent to appointment, and act, as SBRPs, noting that one or more SBRP may be appointed. Penalties (proposed to be a maximum penalty of 50 penalty units, currently $11,100) apply for a breach of this condition.

A new class of registered liquidator is established with respect to SBRPs under the Insolvency Practice Rules.

A person that is 'connected with' a company may not be appointed as a SBRP in relation to that company, except with leave of the Court. A person is deemed to be connected with a company if, among other things, he or she is:

• a debtor or, subject to certain exceptions, a creditor of the company or its related bodies corporate in an amount exceeding $5,000;
• a director, secretary, senior manager or employee of the company or a company that is secured party with respect to the company; or
• an auditor, or a partner or employee of the auditor, of the company.

Once a SBRP is appointed, the appointment cannot be revoked. However the Act provides that the SBRP may be replaced in the event of vacancy in the appointment of a SBRP such as where the SBRP resigns. The Court also has the power to appoint a SBRP where a company is 'under restructuring' but no SBRP is acting.

Much of the powers, duties and functions of the SBRP are dealt with under the Corporations Regulations. Relevantly, the Regulations prescribe that the SBRP for a company under restructuring has the power to investigate the company’s business, property, affairs, and financial circumstances for the purposes of:

• preparing a declaration in relation to the restructuring plan;
• deciding whether to terminate the restructuring of the company;
• resolving a disagreement relating to a creditor’s admissible debts or claims; or
• performing or exercising any other function, duty or power as the small business restructuring practitioner for the company.

Additionally, the Regulations specify that a person who is or has been a SBRP has qualified privilege in respect of statements made, orally or in writing, in the course of performing or exercising any of their functions and powers relating to the restructuring of a company. The Regulations also provide that when performing a function or duty, or exercising a power, as SBRP for a company’s restructuring plan, the SBRP is taken be acting as the company’s agent.

The Rules deal with, among other things, the eligibility criteria for a person to become a SBRP, remuneration of SBRPs, and SBRP's obligation to undertake continuing professional education.

The Rules have amended the requirements for registration as a liquidator to allow for practitioners to be registered as a liquidator who only practises as a restructuring practitioner for a company or a restructuring plan, should they choose to do so. Recognised accountants (being certain members of Chartered Accountants Australia and New Zealand, CPA Australia and Institute of Public Accountants) are eligible for registration as SBRPs. Additionally, recognised accountants must demonstrate the capacity to perform satisfactorily the functions and duties of a registered liquidator (in the capacity of a registered liquidator who practices solely as a SBRP).

Functions of the SBRP for a restructuring plan

The Regulations prescribe that SBRPs have the following additional functions:

• receiving money from, and holding money on trust for, the company;
• paying money to creditors in accordance with the plan;
• if requested by the company’s directors:

• realising any property available to pay creditors in accordance with the plan; and
• distributing the proceeds of any realisation of property among creditors in accordance with the plan;

• answering questions about the performance or exercise of their functions and powers as the small business restructuring practitioner for the plan; and
• anything else that is incidental, necessary or convenient for the purpose of administering the plan.

SBRP power to dispose of company property, and secured creditor and lessor rights

The Regulations provide that in the course of undertaking their functions in respect of a plan, the SBRP may sell company property in order to make payments to creditors in accordance with the plan. However, a SBRP must not dispose of property that is subject to a security interest, or where the property may be used by, occupied by, or in possession of the company but someone else is the owner or lessor. This prohibition does not apply if the disposal occurs:

• in the ordinary course of business for that company;
• with the written consent of the secured party, owner or lessor; or
• with the leave of the Court.

Where a SBRP disposes of property that is subject to a security interest, the disposal extinguishes the security interest. Where the owner of secured property demands the return of that property, this does not prevent the SBRP from disposing of the property within the ordinary course of business. A disposal of the property that occurs after the demand is made does not mean that the disposal is not in the ordinary course of the company’s business. In making an order to grant leave for the sale of prohibited property, the Court must be satisfied that adequate arrangements have been made to protect the interests of the secured creditors, owners or lessors. The Court may prohibit the sale of property, despite it being in the ordinary course of the company’s business. The Court must only do so if it is not satisfied that arrangements have been made to adequately protect the interests of applicant for the order. This may be either the secured party, owner or lessor of the property.

Features of Small Business Restructuring

• Where a payment is made, a transaction is entered into or any other thing is done in good faith by the SBRP, the company with the consent of the SBRP or by the company in accordance with a court order, each will be valid and effectual at law and not liable to be set aside in a subsequent winding up of the company.
• The priority payments provisions of the Corporations Act have been amended to ensure that remuneration, debts and expenses of the SBRP are given the same priority as those of an administrator of a company under voluntary administration, and as long as the SBRP acts in good faith and without negligence in performing their functions and duties and exercising their powers, they will have a right of indemnity in respect of the remuneration, debts and expenses.
• SBRPs are not required to hold physical creditors meetings unless the SBRP is satisfied that there are exceptional circumstances and it is in the interests of the creditors to do so. The ordinary practice will be that restructuring plans will be voted on by creditors through technological means.
• Voidable transactions provisions of the Corporations Act have been amended with the effect that transactions undertaken by the company while the company is under restructuring or subject to a restructuring plan are voidable if the company is subsequently wound up, unless those transactions were made:

• in the ordinary course of business, or by or with the consent of the SBRP while under restructuring; or
• on behalf of the company by or under the authority of the SBRP for the restructuring plan.

• Company directors must assist the SBRP by attending on them, providing information on the company’s business, property, affairs and financial circumstances and giving the practitioner access to inspect and make copies of company books. Failure by a director to do so, without reasonable excuse, is a strict liability offence for which the proposed maximum penalty is 120 penalty units, currently $26,640.

Running the company in the ordinary course of business

While the company is 'under restructuring', its directors must not enter into, or purport to enter into, a transaction or dealing affecting the property of the company, unless:

• doing so is in the ordinary course of the company’s business;
• the SBRP has consented to the transaction or dealing (based upon reasonable grounds that entering into the transaction would be in the interests of the creditors), which may be provided subject to conditions;
• the transaction or dealing was entered into under an order of the Court; or
• in the case of some specific payments, the payment is exempted from the prohibition.

A transaction in contravention of the prohibition will be void unless the Court orders otherwise. Additionally, the Regulations prescribe circumstances in which entering into a transaction or dealing is, or is not, to be treated as in the ordinary course of a company’s business – the following transactions will not be treated as in the ordinary course of a company's business:

• the transaction or dealing is for the purposes of satisfying an admissible claim;
• the sale of whole or part of the business; and
• payment of a dividend.

While a company is under restructuring, creditors are prevented without leave of the Court from enforcing guarantees or commencing proceedings as against directors or relatives for guarantees of the company’s liability.

The Corporations Act's safe harbour provisions have been amended to ensure that certain director actions undertaken while the company is under restructuring are not in breach of insolvent trading laws, consistent with liability for insolvent trading not applying to companies under voluntary administration.

Effect of Small Business Restructuring on the company

When a company enters the Small Business Restructuring process it must give notice on all public documents and negotiable instruments by adding '(restructuring practitioner appointed)' after the company’s name.

Activities that alter the ownership control of the company, such as transferring or altering the status of share capital, when the company is under debt restructuring, are void unless written consent is obtained from the SBRP, who must reasonably believe that the transfer or alteration is in the best interests of the company’s creditors as a whole.

The Court is to adjourn applications to wind up the company once a company enters the Small Business Restructuring process if it satisfied that continuing the debt restructuring process is in the interests of creditors.

Effect on third party property and creditor rights

While a company is under restructuring, property rights cannot be exercised by third parties in relation to property of the company or property used, occupied by or in the possession of the company, unless the SBRP has provided written consent or leave is granted by the Court, being consistent with the systems applying to the existing voluntary administration process.

Again, consistent with voluntary administration, court proceedings and enforcement processes are stayed and cannot be begun or proceed during the debt restructuring process, except with written consent from the SBRP or leave of the Court.

A secured party with a security interest over the whole or substantially the whole of the company’s property, either in one or multiple securities, is able to enforce their security interest if they act before or during the 13 business day 'decision period'.

The decision period begins when the secured party receives notice of the debt restructuring process or when the restructuring process begins and ends thirteen business days from the day it begins.

The Act provides that debts incurred when a company is under restructuring are provable if the company is subsequently wound up. This differs to the approach in the voluntary administration regime where the administrator is personally liable for such debts.

In respect of creditors bound by the restructuring plan, the Regulations provide that:

• on and after the day on which a restructuring plan is made, the restructuring plan binds creditors with admissible debts or claims, the company, the company’s officers and members and the small business restructuring practitioner for the plan;
• secured creditors are only bound by the plan to the extent that they agree to be so bound by the plan, and to the extent that their admissible debt or claim exceeds the value of their security interest;
• a secured creditor is not prevented from realising or otherwise dealing with their security interest after the restructuring plan is made, unless the secured creditor has consented to be bound by the restructuring plan and the plan prevents them from realising or dealing in the security interest or because a Court so orders.

The Regulations provide for the following protections of the company and its property:

• while the restructuring plan is on foot, a person bound by the restructuring plan cannot make an application to wind up the company on the basis of an admissible debt or claim or proceed with such an application made before the plan became binding on the person; and
• in addition, a person bound by the plan must not begin or proceed with a proceeding, or an enforcement process, against the company in relation to any of its property to recover an admissible debt or claim, unless they have Court leave to do so and act within the terms of set by the Court.

Stay on enforcing 'ipso facto' clauses

A right that arises by express provision of a contract, agreement or arrangement for one of the following reasons is unable to be enforced during the stay period for that reason:

• the company is under restructuring;
• the financial position of the company while under restructuring;
• a reason prescribed in the regulations, if the company later comes under restructuring; or
• a reason that, in substance, is contrary to the above provisions.

The 'stay period' generally commences when the company enters restructuring and concludes when the restructuring process concludes.

The Court has power in certain circumstances to order that a stay on enforcement does not apply during the stay period if the making of such an order is in the interests of justice.

Rights that are created under a contract, agreement or arrangement entered into after the company begins restructuring are not be stayed.

Proposing a restructuring plan to creditors

A company is taken to be insolvent if it proposes a restructuring plan to its creditors.

The Regulations prescribe the content of, and other significant matters related to, restructuring plans, including that:

• restructuring plans must be in the approved form, identify the property of the company and how it is proposed to be dealt with, provide for the remuneration of the SBRP and specify the date on which the restructuring plan was signed by the directors of the company;
• restructuring plans are taken to include a standard set of terms concerning, among other things, equal ranking of debt and proportional distribution to creditors if the total amount to be paid under the restructuring plan is insufficient to meet the company's debts in full;
• restructuring plans must be accompanied by a restructuring proposal statement in the approved form that includes a schedule of debts and claims to be covered by the restructuring plan;
• as soon as practicable following the execution of the restructuring plan by the company’s directors, the SBRP must give the proposed restructuring plan (and the other prescribed documents) to as many of the affected creditors as reasonably practicable, the creditors will have a period of 15 days within which to accept or reject the restructuring plan; and
• creditors may dispute matters set out in the schedule of debts and claims included with the company’s restructuring proposal statement before a restructuring plan is made.

Ending the debt restructuring process

The Regulations provide that a restructuring plan terminates on whichever happens first of:

• the day on which all of the obligations under the plan have been fulfilled, and all admissible debts or claims have been dealt with in accordance with the plan;
• if the Court orders termination of a restructuring plan, the date specified in the orders;
• if the plan is expressed to be subject to the occurrence of a specified event within a specified period of no longer than 10 business days after the day on which the plan is made, and that event does not occur within that period, then the next business day after the end of that period;
• if a contravention of the plan by a person bound by the plan has not been rectified within 30 business days, then the next business day after the end of that period; or
• the day an administrator, liquidator or provisional liquidator of the company is appointed and the company enters liquidation or a voluntary administration process.

In relation to ending the preliminary 'under restructuring' stage of the Small Business Restructuring process, the Regulations prescribe that the restructuring of a company ends if:

• the company makes a declaration that restructuring is to end;
• the company fails to propose a restructuring plan within the proposal period;
• the company’s proposal to make a restructuring plan lapses;
• the SBRP terminates the restructuring process;
• the Court orders that the restructuring of the company is to end;
• the company enters into another external administration process; or
• the company makes a restructuring plan.

The Act provides that the SBRP may terminate the debt restructuring process at any time if they believe on reasonable grounds that:

• the company does not meet the eligibility criteria for restructuring;
• it would not be in creditors’ interests to make a restructuring plan;
• it would be in the interests of creditors for the restructuring to end; and
• it would be in the interests of creditors for the company to be wound up.

New Small Business Liquidation

The second key aspect of the reform which is detailed in the Act is the new Small Business Liquidation process which will be available to eligible companies in order to allow faster and lower cost liquidations as simpler alternative to existing liquidation processes.

Entering into the (simplified) Small Business Liquidation process

The simplified Small Business Liquidation process is only available in a creditor’s voluntary liquidation (CVL). Therefore, it is not available in a member’s voluntary winding up or a winding up ordered by the Court.

Where a liquidator believes on reasonable grounds that a company in a CVL meets the eligibility criteria, the liquidator is able to adopt the simplified Small Business Liquidation process instead of the general CVL process.

The eligibility criteria for Small Business Liquidation include:

• the company must have resolved to be wound up voluntarily;
• the directors must have given the liquidator a report about the company’s affairs and a declaration that the company will be eligible for the simplified liquidation process;
• the total liabilities of the company must not exceed the $1 million limit on liabilities; and
• the company’s tax lodgements are up to date.

Liquidators are not able to utilise the Small Business Liquidation process in certain circumstances which include the fact that more than 20 days have passed since the relevant triggering event that brought the company into liquidation or at least 25% in value of the creditors of the company have requested the liquidator not adopt the simplified liquidation process.

Features of the simplified liquidation process

The preparation of a report to creditors under section 533 of the Corporations Act (which requires a liquidator to report to ASIC about suspected wrongdoing) is not a feature of the Small Business Liquidation process. This obligation's removal is anticipated to result in time and cost efficiencies.

Certain provisions of the Insolvency Practice Rules do not apply such that creditors meetings are not held in a Small Business Liquidation. Instead, liquidators provide information to creditors electronically and proposals are put by giving notice to creditors for the purposes of electronic voting.

The Regulations provide that, in a Small Business Liquidation process, a transaction is not voidable under the Corporations Act in two circumstances:

• for transactions that occurred more than three months before the relation back day, an unfair preference is only voidable in a Small Business Liquidation process if a creditor under the transaction was a related entity of the company; and

• for transactions that occurred in the three months before the relation back day, or after that day but before the winding up began, an unfair preference is only voidable in a Small Business Liquidation if a creditor under the transaction was a related entity of the company and the value of the transaction was more than $30,000. Ceasing the simplified liquidation process.

The Regulations provide that the liquidator must cease to follow the Small Business Liquidation process where the liquidator has reasonable grounds to believe that the company or one of its directors has engaged in conduct that has had or is likely to have, a material adverse effect on the interests of the creditors, or a class of creditors, as a whole. Further, the liquidator must have reasonable grounds to believe that the conduct was fraudulent or dishonest.

Additionally, if a company's liquidator becomes aware that the eligibility criteria are no longer met, the company will have to exit the simplified liquidation process.

Further measures

Temporary relief for companies seeking a SBRP

For the three month period from 1 January 2021 to 31 March 2021, the Act provides that an eligible small business is able to declare its intention to access the Small Business Restructuring process to its creditors, including through ASIC's published notices website. This is in order to address the issue of eligible small businesses not being able to access the process immediately whilst insolvency practitioners become familiar with Small Business Restructuring and to register as SBRPs.

Following such a declaration, the temporary insolvency relief that was in place until the end of 2020 (relief from insolvent trading liability under section 588GAAA of the Corporations Act and the curtailment on the issuing of creditors' statutory demands) then applies to the business for a maximum period of three months (or four months if the company has obtained an extension), until they are able to access a SBRP or other insolvency practitioner. The company ceases to be eligible for the temporary relief following the expiry of this time period, if the directors withdraw the declaration, or if the company enters external administration.

Electronic communications with creditors

The Act has permanently expanded the situations where documents relating to the external administration of a company may be given electronically. It permits persons to sign documents relating to the external administration of a company electronically.

Electronic communications are now able to be used to provide any document that is required or permitted to be given under:

• Chapter 5 of the Corporations Act (dealing with external administration);
• the Insolvency Practice Schedule (Corporations) in Schedule 2 to the Corporations Act;
• Chapter 5 of the Corporations Regulations (dealing with external administration);
• the Insolvency Practice Rules (Corporations) or any other instrument made under Chapter 5 of the Corporations Act or the Insolvency Practice Schedule (Corporations); and
• a transitional provision that relates to the external administration rules in Chapter 10 of the Corporations Act or an instrument made under Chapter 10.

The Act has inserted a new definition of 'document' so as to ensure the reforms apply to all information, including information that is not in a paper or material form. There are also new default rules for determining when an electronic communication is sent and received, however these rules are able to be overridden by agreement of the parties.

These are welcome changes which will streamline the process restructuring and liquidation processes which has been demonstrated to increase efficiency as a result of the uptake of electronic communications and electronic signing as a result of the COVID-19 pandemic.

Refinements to the registration of liquidators

The Act has amended section 20-20 of the Insolvency Practice Schedule (Corporations) to allow committees convened by ASIC to approve the registration of a liquidator where the applicant does not satisfy the criteria listed above without conditions provided the applicant would be suitable to be registered as a liquidator.