Many have likened the removal of insolvency protection measures to the economy dropping off the edge of a cliff. That will happen on 1 January 2021. But the Government has a plan!
Remember March 2020? A long time ago wasn’t it? The world was full of panic, there were suddenly long queues at Centrelink and businesses were in crisis. Nobody was calling their accountant, because the discussion would be a difficult one – and nobody wanted to lodge the March quarter BAS as it would crystallise a further debt which not be able to be paid.
Then the Government, on the verge of its first surplus in five Prime Ministers, stepped in with the support of the Opposition to save Australian business.
First, there was business welfare in the form of cash flow grants. The Government sensibly did not want to give money to businesses who are already owed it a lot of money. So those grants were linked to getting BAS lodgements up-to-date, and were paid by way of a credit to the business’ running balance account. So if the business owed the ATO a lot of money, it would simply owe a bit less money. At least it got the BAS lodgements going again.
Secondly, there was JobKeeper. A system designed in haste, with some obvious scope for perverse outcomes, and the unfortunate consequence of distorting the relationship between employers and casual employees. But at least there remains a relationship – which was always the plan.
And finally – the insolvency measures. The monetary thresholds and times for response on statutory demands on companies and bankruptcy notices on individuals went up to $20,000 and six (6) months. And there was a pause in liability for insolvent trading – the Liquidator’s action against directors for permitting a company to incur debts – which remain unpaid at liquidation – while the company was insolvent.
It is important at this point to sound a warning about the scope of these measures. Liability for insolvent trading has been paused – but other obligations of directors have not been paused. Directors still have obligations at common law and under the Corporations Act (ss 180-183) to act in the best interests of the company, exercise their powers with care & diligence and in good faith, and not use their position or information from the company to benefit themselves. Directors do not have carte blanche to do what they please with a company’s assets or business.
The Government’s original intention was that these measures would be in place for six (6) months, to 23 September 2020. However, given that in March no-one knew what the Parliament would look like in September, the Government was given the power to extend those measures by proclamation.
That happened – and the measures were extended to 31 December 2020.
The effect of this, and the continuation of JobKeeper (albeit in a “transitioning down” form) means that many businesses which ordinarily would now be in the hands of Liquidators are still operating.
Unfortunately for many businesses there will be no turning back, and when these measures finally cease – whenever that may be – those businesses will fail.
Many have likened this scenario to the economy dropping off the edge of a cliff. The Government has merely, but for good reason, moved the edge of that cliff to 1 January 2021.
But the Government plans to have new insolvency processes in place by that time:
New debt restructuring process
Incorporated business with liabilities of less than $1 million will be able to access this new process – to keep trading while they develop a debt restructuring plan, which is ultimately voted on by creditors.
The proposal is considered to be a debtor-in-possession model, adopting some aspects of the US Chapter 11 bankruptcy process, rather than the creditor-in-possession model of the current voluntary administration regime.
The $1 million threshold covers about 76 per cent of businesses.
The proposed new process will involve a small business restructuring practitioner helping the business prepare the plan, certify the plan to creditors and oversee disbursements once the plan is in place.
A period of 20 business days is proposed to allow for development of the plan.
While the practitioner is engaged in the restructuring process, there would be a moratorium on unsecured and some secured creditors taking actions against the company.
Creditors will then have 15 business days to vote on the plan. Employee entitlements that are due and payable must be paid out in full before the plan is voted on by creditors.
There are also safeguards proposed to prevent corporate misconduct, including phoenix activity, with related creditors prohibited from voting on the restructure plan; and the same company or same directors not being able to use the insolvency process more than once every seven (7) years.
In the event the plan is not approved, the business can go into voluntary administration or enter a proposed new liquidation process with simplified obligations.
New simplified liquidations
The proposed new liquidation process is also to be available to small businesses with less than $1 million in liabilities.
Time and cost savings will be achieved through reduced investigative requirements, requirements to call meetings and reporting functions. Key modifications to the existing liquidation process include:
- reduced circumstances in which a Liquidator can seek to clawback an unfair preference payments from a creditor that is not related to the company.
- only requiring the Liquidator to report to ASIC (under section 533) on potential misconduct where there are reasonable grounds to believe that misconduct has occurred.
- removing requirements to call creditor meetings and the ability to form committees of inspection.
- simplifying the dividend process (where creditors receive a return proportionate to their debt) and the proof of debt process (where creditors provide information as to the debt they are owed, which is assessed and accepted or rejected by the Liquidator).
- maximising technology neutrality in voting and other communications.
The rights of secured creditors and the statutory rules as to the payment of priority creditors such as employees will not be modified.