Australia’s largest corporate insolvency reform in 30 years came into effect in January 2021. These reforms aim to replace a rigid insolvency model with a more flexible regime for small businesses that will reduce complexity, time and costs.
These reforms are designed to enable more small businesses to quickly restructure and survive the economic impact of COVID-19. Where restructure is not possible, businesses will be able to wind up faster with lower liquidations costs, enabling greater returns for creditors and employees.
Liquidators and Administrators will undeniably continue to play an important role in managing and restructuring companies that face financial and legal difficulties. To help us gain a better insight into these considerable changes, we are joined by Bradd Morelli, Partner at specialist insolvency and business recovery practice, Jirsch Sutherland, for this two part series, which examines these reforms and their potential impact on the business community.
The reforms introduced as at 1 January 2021 include:
- Simplified Liquidation Process (SLP) introduced as a streamlined alternative to the standard Creditor’ Voluntary Liquidation (CVL) process.
- Debtor in Possession Model Restructuring (DIPM Restructuring) as a simple and low-cost alternative to traditional insolvency appointments.
In the first part of this series, we discuss the SLP with regards to eligibility criteria, limitations, the main differences between the SLP and CVL and whether these reforms will have the intended consequences for businesses.
Q1. What is your opinion on the eligibility requirements (outlined below)? Do you feel that it casts a wide enough net?
Streamlining the liquidation process for smaller business
1. An insolvent company must meet the following eligibility requirements for a liquidator to adopt the SLP:
a. The event that triggers the start of the winding up occurs on or after 1 January 2021.
b. Liabilities not exceeding $1 million (not including contingent liabilities).
c. Tax lodgements up to date (but not necessarily payment of tax).
d. Directors must prepare a report on the company’s business affairs.
e. Directors cannot be a director or former director of another company that has been subject to the SLP or ‘debtor in possession’ model restructuring within the previous seven years (unless the other company is a related company that is simultaneously being liquidated or restructured).
A. Whilst I appreciate the Government’s logic in wanting to simplify the liquidation process, I, like many of my colleagues, are concerned at the speed with which the legislation was drafted, as well as the limited consultation with industry. I feel that it is hard to see many companies being eligible for the SLP. These reforms are definitely aimed at the smaller end of the market, and unfortunately it is these SMEs that tend to be less sophisticated and have poor statutory compliance. From experience, it is not uncommon for companies to have multiple outstanding tax lodgements, a factor I feel will be a substantial hurdle for many SME’s looking to utilise the SLP as it will constitute a cost and time disincentive for directors to meet this compliance requirement.
Q2. There are numerous steps (outlined below) required before a company can adopt the SLP, including first entering the standard CVL process. Do you agree with the process prescribed under the legislation?
The liquidator in the creditors’ voluntary winding up may adopt the simplified liquidation process if:
- They believe on reasonable grounds the eligibility criteria are met
- Not more than 20 business days have passed since a liquidator was first appointed in the creditors’ voluntary winding up
- The liquidator has given each member and creditor, at least 10 business days before adopting the simplified liquidation process, written notice of:
- A statement that they believe on reasonable grounds the eligibility criteria for the simplified liquidation process will be met
- An outline of the simplified liquidation process
- A statement they will not adopt the simplified liquidation process if at least 25% in value of creditors direct the creditor in writing not to adopt the simplified liquidation process
- Prescribed information, if any, on how the creditor may give the direction in writing not to adopt the simplified liquidation process.
A. While Simplified Liquidation is a new process within the existing CVL process, it is not a ‘new’ law. Put simply, it is a streamlined CVL for companies that have liabilities less than $1 million. At this stage, it is difficult to understand, in practice, how this process will significantly benefit the debtor, creditor or practitioner. But it is certainly possible that the legislation will be refined down the track.
Q3. What significance do you draw from the distinctions that can be drawn between CVL and SLP (outlined below)?
Some noticeable differences in the process of SLP compared to a CVL are:
- No creditors meetings
- Creditors will not be able to appoint a Committee of Inspection
- A simplified three month statutory report to creditors
- Simplified proof of debt and dividend process
- Only if there are reasonable grounds to believe that the director may have committed an offence that has had, or is likely to have, a materially adverse effect on the interests of creditors will the liquidator be required to prepare an investigation report to ASIC
- Unfair preference payments in the 3 months prior to winding up will only be recoverable if more than$30,000 and is a related creditor.
A. There is clear attempt to streamline thing so that costs are kept to a minimum. Some make sense, such as no committee of inspection and simplifying the dividend process. I am also supportive of the limitations around the liquidator’s ability to recover preference payments where the SLP is utilised.
However not having creditors meetings is an interesting concept. Whilst convening creditors meetings is definitely time consuming and costly from the Liquidator’s perspective, it creates a beneficial dynamic when creditors are in a room (or on the same platform) and can converse directly. I feel these meetings (at least the opportunity to have an initial meeting) are necessary and are the appropriate forum for creditors to engage with the liquidator, have their views heard by all, and they also provide a platform for the director to provide their story. Not having meetings will result in creditors powers being diminished.
The simplified investigation and reporting requirements also concern me. The liquidator is still required to undertake the necessary investigations in order to identify any voidable transactions (although the scope of this has been reduced), insolvent trading and identify any misconduct or dishonesty and issue (again reduced scope) a 3-month statutory report to creditors. As such, I can’t really see how there will be any significant cost savings.
There is also an additional layer of reporting to creditors in order to initiate a simplified liquidation. This is also likely going to increase costs, particularly if it were to stimulate further interaction with creditors.
Q4. The Federal Government’s objective is to significantly reduce the costs of a CVL. Do you think that these reforms will achieve this desired outcome?
Whilst there are certain aspects of the overall process, which have been simplified that may lead to a potential reductions in costs, I do not believe that these will be as substantial as anticipated. A lot of the work that needs to be completed is in the investigations area and any resulting actions that become available as a result are the same. This work will still need to be done and if it is not, or not undertaken at an adequate level then the insolvency practitioner puts themselves at risk from the regulator and potentially aggrieved creditors.
In part two of this special series on the insolvency reforms, we will once again be fortunate enough to have Bradd Morelli of Jirsch Sutherland with us as we explore the next part of these reforms: the Debtor in Possession Model Restructuring (DIPM Restructuring).
Join us as we delve into the details of the DIPM Restructuring with regards to eligibility, directors, restructuring practitioners and whether these new laws will have the intended consequences.
If you have any queries or would like further information please contact our team today.
About Jirsch Sutherland
Jirsch Sutherland is a specialist insolvency and business recovery practice offering expert insolvency and turnaround management services across Australia. Since 1984, Jirsch Sutherland has built a business based on empathy and integrity – qualities that have led to them being recognised as one of Australia’s leading national insolvency players.
At Jirsch Sutherland, their focus is on making a difference to our clients, their clients, and the local communities in which we live and work.
Their head offices are located in Sydney, Melbourne, Brisbane, Newcastle and Perth, with a supporting network of regional offices. Their national reach combined with their local presence underpins the success of our specialist services.
To find out more simply visit their website: https://www.jirschsutherland.com.au/