December 14, 2020

State of Play – Insolvency Update

As we slide into the end of the calendar year, a year that has seen unprecedented events, I thought it prudent to provide an update on matters from the world of insolvency that may have an impact on your clients or someone you might know. This update is provided under the following headings:

A. Superannuation Guarantee Amnesty

B. Insolvent Trading moratorium comes to an end

C. New Restructuring and Insolvency Processes for Small Businesses

i. Debt Restructuring Process

ii. A New Liquidation Pathway


A)     Superannuation Guarantee Amnesty

The super guarantee amnesty ended on 7 September 2020. If you didn’t apply for super guarantee amnesty and you have any unpaid or late paid super to disclose, you will need to lodge a Superannuation Guarantee Charge Statement and pay the super guarantee charge (SGC).

If you were advised by the ATO that your disclosure was eligible for the amnesty, to remain eligible, you must either:

  • Pay the SGC amount in full
  • Enter into a payment plan to pay the SGC amount and comply with the terms of your payment plan.

It is timely to remind Company Directors that unpaid superannuation guarantee charges are covered by the ATO’s Director Penalty regime, meaning that directors are personally liable for a penalty (equal to the charge) if the company has not lodged its superannuation guarantee statement and paid the corresponding guarantee charge by the due date.


B)     Insolvent Trading Moratorium Comes To An End

On 7 September 2020 the Government announced an extension of the temporary amendments to the insolvency laws until 31 December 2020.

The temporary COVID-19 safe harbour defence for directors from civil insolvent trading liability (s 588GAAA of the Corporations Act 2001 (Cth)(Act), which can make directors personally liable for debts incurred when they should have suspected their company to be insolvent) applies to debts incurred during a period of at least six months from 25 March 2020 to 31 December 2020 in the ‘ordinary course of the company’s business’.

It is important to note that the debts must be incurred in the ‘ordinary course’ of the company’s business, that is, necessary to facilitate the continuation of the business during the COVID-19 safe harbour period.

Whilst not a moratorium, we have seen a curtailment of debt recovery action through the use of statutory demands and bankruptcy notices whereby the period of compliance has been extended from 21 days to 6 months.

Further, we have seen companies struggling due to Coronavirus be placed under less pressure from the ATO who have assisted to ‘tailor solutions for their circumstances, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups’.

With the likely return of pre-COVID debt recovery practises by trade creditors and the ATO, it is important for Directors to assess the financial position and future profitability of their Company to ensure that they are able to meet debts as and when they fall due, not to mention having arrangements in place to deal with historical debt. Failing that, Directors may fall foul of trading whilst insolvent rendering them personally liable.

For example, let’s say a company owes $250,000 to creditors as at 31 December 2020 that was incurred during the period 25 March 2020 to 31 December 2020. Whilst a Director may not be personally liable for such debts, to ensure the ongoing operation of the Company, there will need a plan to repay this debt from the ongoing profitability of the business operations. If a Company is unable to pay the debts, it will face debt recovery action initiated by a creditor.


C)     New Restructuring and Insolvency Processes

On 24 September 2020 the Australian Federal Government announced significant insolvency law reforms that will affect small businesses with liabilities of less than $1 million that find themselves in financial difficulties. The changes are expected to commence on 1 January 2021 in response to the economic downturn caused by COVID-19.

With legislation having passed on the 10th of December,

The reforms introduce a new debt restructuring process and liquidation pathway for small businesses and, with legislation having passed on the 10th of December, associated regulations will provide ‘devil in the detail’ as to the ultimate operation of the legislation.

View the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 here for more information.

i) Debt Restructuring Process

A new “debtor-in-possession” debt restructuring process is intended to be a simpler, more flexible and efficient voluntary administration and which aims to maximise small businesses’ chances of survival.

Under this process, the directors of the company will work with a small business restructuring practitioner (SBRP) to develop and implement a debt restructuring plan. Whilst the plan is being developed, directors will retain control of the company, a moratorium will prevent creditor enforcement and the company will be permitted to trade in the ordinary course of business.

The plan is circulated by the SBRP for creditors to vote upon and is approved if more than 50% of the company’s creditors by value vote in favour of the plan.

According to the Governments fact sheet, the debt restructuring process will operate as follows:

a. Initial contact with SBRP: The directors of the company approach an SBRP (who must be independent) to discuss the company’s eligibility for the new debt restructuring process and the SBRP’s fees for helping the company develop a debt restructuring plan (this must be a flat fee).

b. Appointment of SBRP: The directors of the company pass a board resolution to appoint the SBRP.

c. Notice to Creditors: A notice of commencement if the debt restructuring process is provided to creditors.

d. Moratorium: On commencement of the debt restructuring process a moratorium begins:

      • unsecured creditors and “some” secured creditors are prohibited from taking action against the company;
      • personal guarantees cannot be enforced against the directors or their relatives; and
      • there is a restriction on the operation of ipso facto clauses similar to that applying in voluntary administration.

e. Develop a Restructuring Plan: over 20 business days a plan is developed by the directors and the SBRP. During this time, the directors retain control of the company and may continue to trade in the ordinary course of business. The SBRP also develops a remuneration proposal to cover the administration of the debt restructuring plan once in place (which operates as a percentage fee of disbursements made under the plan).

f. Payment of employee entitlements: The company must pay any employee entitlements which are due and payable before the restructuring plan is circulated to creditors.

g. Circulation and certification of the debt restructuring plan: The SBRP circulates the debt restructuring plan and supporting documents to creditors, and certifies whether or not the company can meet the proposed repayments under the plan and whether the company has properly disclosed its affairs.

h. Creditors vote on the debt restructuring plan: Creditors have 15 business days to vote on the debt restructuring plan with all creditors voting as one class. Related party creditors are not entitled to vote. The plan is approved if more than 50% of creditors by value vote in favour of the debt restructuring plan. If approved, the plan binds all unsecured creditors and secured creditors to the extent that their debt exceeds the realisable value of their security.

i. Outcomes for the company: If approved – the company continues to trade in the ordinary course of business and the SBRP administers the debt restructuring plan according to its terms. If the plan is not approved, the debt restructuring process ends and the company may elect to enter voluntary administration or liquidation.     

Transitional Relief

It would appear that given the number of companies in a current state of flux, the Government has proposed a temporary transitional regime under which an eligible company could declare its intention to access the debt restructuring process and then obtain a further 3 month period of protection in respect of insolvent trading liability and statutory demands.

A company would be able to make such a declaration between 1 January 2021 and 31 March 2021.


ii) A New Liquidation pathway

A new streamlined liquidation pathway is intended to reduce time and cost in the liquidation process and which aims to ensure better returns for creditors.

Under the new liquidation pathway, a small business may still appoint a liquidator to take control of the company and realise the company’s assets for the benefit of creditors and other stakeholders.

The key modifications include:

  • reducing the circumstances in which a liquidator can seek to recover an unfair preference payment from a creditor that is not related to the company;
  • only requiring the liquidator to report to ASIC on potential misconduct where there is reasonable grounds that misconduct has occurred;
  • removing requirements to call creditor meetings and the ability to form committees of inspection;
  • simplifying dividend and proof of debt processes;
  • 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 are not affected.

A Liquidator once appointed will need to seek approval from creditors to conduct the Liquidation in accordance with the new streamlined pathway.

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