COVID-induced insolvency and restructuring measures - two years on

At the beginning of 2021, the Federal Government introduced new insolvency and restructuring measures in an attempt to deal with the aftermath of businesses struggling financially in the wake of the COVID-19 pandemic in 2020 and ensuing lockdowns. The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) introduced, among other things, the following two new insolvency processes:

• small business restructuring process (SBRP), and
• simplified liquidation.

These measures were intended to assist small businesses to restructure their debt more easily or, if that option wasn’t possible, to proceed through liquidation in a more cost and time efficient manner. When the reforms were introduced in September 2020, the Federal Government estimated that ‘the reforms will cover around 76% of businesses subject to insolvencies… 98% of whom have less than 20 employees’[1].

As we mark the two-year anniversary of the implementation of these measures, we considered it timely to review the processes and look at how the Australian business community has responded to them, in the uptake and feedback, as reported by ASIC and stakeholders.

Small Business Restructuring Process (SBRP)

Summary of process

Part 5.3B of the Corporations Act 2001 (Cth) (the Act) is centred on the SBRP. The process aims to assist small business out of a financial crisis by reducing the cost and time involved in the insolvency process. For a business to be eligible for the SBRP, the following criteria must apply:

1. the company’s liabilities must total less than $1 million on the day the company enters into the process
2. all employee benefits are paid
3. the company must be up to date on its statutory (taxation) lodgements
4. the board must resolve that the company is insolvent or is likely to become insolvent at some time in the future, and
5. a small business Restructuring Practitioner who is registered with ASIC as a Liquidator must be appointed.

With the assistance of the appointed restructuring practitioner, directors of the company must develop a restructuring of debt plan and a restructuring proposal statement, after which the company must put its restructuring plan to all creditors within 20 business days of entering the process, following this the creditors have 15 business days to vote in favour of the plan or against it. A plan is accepted when 51% or more of creditors (by value) vote in favour of the restructuring plan; following this, businesses must make repayments accordingly with the plan. If the proposed restructuring plan is rejected by the creditors, the SBRP ends, and creditors are not prevented from enforcing their rights to demand payment.

Should the company that has entered into a SBRP fail to make payments in accordance with the plan, it will remain liable for all of the original debt owed to creditors minus whatever repayments it had made prior to exiting the plan.

Uptake and attitudes to SBRP

ASIC has recently published a report on the SBRP for the period between 1 January 2021 (when the Act was implemented) to 30 June 2022. This report provided key observations on the amount of restructuring practitioners appointed and the statistical accomplishments they had in restructuring the debt plans of companies as well as some shortcomings of this new insolvency practice.

Some of the key findings from the report include the following.

1. Eighty two restructuring practitioners were appointed within the measured timeline, of those 72 transitioned to restructuring plans approved by their creditors. Of that 72, 47 plans were effectuated (65%), one plan was terminated (2%) and 24 were ongoing at the writing of report (33%).
2. The main states where appointments were made were NSW (44%), Victoria (34%) and Queensland (12%).
3. Of the restructuring plans that were effectuated, or the plan was ongoing, 66% of these companies were still operating or ongoing. For the other 34%, they had all either deregistered, ceased business or ASIC was unable to locate anything to indicate that the company had continued operations.
4. The average proposed dividend across the plans were 18.7 cents in the dollar, compared to the actual dividend of 15.2 cents in the dollar paid to creditors.

It is fair to say that 82 restructuring plans across 24 months is a slow uptake. ASIC acknowledges this in the report and suggests the lukewarm attitude could be due to the following reasons. 

1. ASIC found that the eligibility threshold criteria of $1 million owing to creditors was too low for many small COVID-impacted businesses to participate in a SBRP.
2. The processes can be too complex and not provide the simple, reduced cost process as companies are led to believe.
3. The requirement to adhere to taxation law lodgement requirements prevents companies that might otherwise be candidates from trying to enact a SBRP.
4. Concerns surrounding the appointment of a restructuring practitioner may void business insurances and void licences that are required to operate certain businesses in some states and territories.

As the objective of the Australian Federal Government in enacting SBRPs through legislation was to assist small businesses and their continuity, from a statistical standpoint it could be argued that this has been achieved: 87% of processes started transition to a restructuring plan, and 98% of those plans were either effected or are ongoing. However, the number of SBRP appointments is quite underwhelming as 82 restructuring appointments represents less than half of 1% of all insolvencies that have occurred during the same period.

Simplified Liquidation Process

Summary of process

Simplified liquidation reorganises the procedure of creditors’ voluntary liquidation (CVL) in a way that reduces time and cost to the company. The process is streamlined as meetings of creditors are not held, nor can creditors form a committee of inspection, and the liquidator must report to creditors within three months of the appointment. The process is dictated by ss 498 and 500A-500AE of the Act.

For a business to be eligible to adopt the simplified liquidation process, the following criteria must apply:

1. the company must be in a CVL that was triggered by an event that happened on or after 1 January 2021
2. the liabilities of the company must not exceed $1 million on the day the liquidator is first appointed
3. the company will not be able to pay its debts in full within 12 months
4. the company cannot have undergone any liquidation processes or restructuring in the seven years leading up to the simplified liquidation process, and
5. within five days of the board passing the resolution for winding the company up, the directors must provide the liquidator with a report on the company’s business affairs and a declaration that they believe the company meets all above-mentioned eligibility criteria for the simplified liquidation process.

The liquidator must inform all company members and listed creditors that they intend to adopt the simplified liquidation process at least 10 business days prior to adoption. If, during the 10-business day notice period, 25% or more of the creditors request that simple liquidation not be utilised, the liquidator must revert to standard liquidation procedures

The reporting requirements of liquidator to creditor under the regular CVL process are often costly and time consuming. However, under the simplified process, that timeframe is restricted to three months, which provides certainty and efficiency to creditors, as well as helps in keeping liquidator costs down.

The simplified liquidation process was propounded as beneficial to small business also because the recovery of unfair preferences (which under the regular liquidation often requires litigation, increasing cost and time) is restricted, such that unfair preference recoveries are limited to sums greater than $30,000 that occur three months prior to appointment rather than six months. Accordingly, the delay and additional costs of litigation is avoided, meaning the process should take less time and cost less.

Uptake and attitudes to simplified liquidation

According to ASIC’s insolvency statistics, which are updated weekly (two weeks in arrears), it is apparent that the simplified liquidation process has not achieved the goals for which it was implemented.  

According to ASIC as of 8 January 2023, there have been 7,199 CVLs between January 2021 and January 2023. Of these CVLs there have only been 67 simplified liquidation processes effectuated in this same time period, which makes up a mere 0.93% of all voluntary liquidations.

As with the SBRP, the causes of a lack of enthusiasm for the simplified liquidation process can be attributed to matters such as the high barriers to entry imposed on corporations, the low liability threshold of $1,000,000, tough requirements around tax compliance and the somewhat difficult hoops to jump through.

Recent Developments

In the two years since the measures have been introduced by the federal government, the Victorian Supreme Court has dealt with two cases that directly relate to the SBRP in Redhill Bricklaying Pty Ltd v DST Project Management and Construction Pty Ltd (2021) VSC 108 and Davey v Dessco Pty Ltd (2021) VSC 94. In both matters, applications to wind up were initiated and the debtor company then appointed a restructuring practitioner under the SBRP process. In both cases, the Court agreed to adjourn the winding up applications to allow the debtor to pursue the SBRP on the basis of the potential return and opportunity to rescue the company as opposed to winding up. These authorities demonstrate an enthusiasm in the Court, at least in Victoria, to support the implementation of the new insolvency measures.

Where to from here?

In September 2022, the Federal Government launched a committee of enquiry into corporate insolvency in Australia, with the intention to undertake the broadest review of insolvency law in decades. In the face of such a subdued uptake and reception to these measures in the past two years, it remains to be seen whether they will survive the potential overhaul to the system that is on the horizon.

[1] Department of Treasury (Cth) ‘Insolvency Reforms to Support Small Businesses Recovery’ (Media Release 24 September 2020).