On 1 January 2021, significant changes to Australia’s restructuring and liquidation regime came into effect for small businesses, including a new restructuring process. These changes were announced on 24 September 2020, however many aspects of the pending changes did not become clear until the bill and associated regulations were released in December 2020. These changes are part of a series of measures introduced in Australia in response to the current and anticipated economic impact of the COVID-19 pandemic. See Jeffrey Black and Nick White’s previous discussion on these issues, here and here.
Now that the legislation has commenced, the Australian measures can be usefully compared with legislative trends in response to COVID-19 in other jurisdictions.
Key features of restructuring
The new restructuring process in Australia allows a company to retain control of its business (limited to the ordinary course of its business). The goal is to propose a restructuring plan for creditor approval. A restructuring practitioner (who is a registered liquidator) is appointed to assist.
Further to the matters previously identified here, we note the following key features of the restructuring process:
- Interested companies must meet the eligibility criteria, which include that their total liabilities (including secured liabilities) do not exceed AUD$1million and neither the company itself, nor a company that any of its directors from the previous 12 months had ever been a director of, had undertaken the restructuring process within the last 7 years (with some exceptions for related entities).
- The restructuring practitioner takes on a safeguarding role, and can terminate the restructuring in certain circumstances. They must make a declaration to creditors about any proposed restructuring plan, which has the benefit of providing creditors with an independent expert opinion. They can also approve dealings outside the ordinary course of business, if in creditors’ interests.
- Similarly to existing insolvency processes, various moratoriums are imposed upon the rights of certain third parties to enforce security, continue proceedings and enforce guarantees against directors and their relatives. The restructuring practitioner can approve actions otherwise precluded by these moratoriums.
- A company is deemed insolvent when it proposes its restructuring plan. This, and the fact of entry into a restructuring, will be significant if the company then enters liquidation – affecting the relation back date and the ability to prove insolvency. Accordingly, claims by liquidators may be easier and more likely to be made, unless the company enters a simplified liquidation process (in which case, clawback provisions are reduced in the case of certain unfair preference claims).
- There is a procedure for disputing debts and claims included in the restructuring proposal prior to entry into the restructuring plan.
- Certain terms of the restructuring plan cannot be contracted out of, and there are specified circumstances in which a restructuring plan may be avoided, contravened, varied or terminated. The plan is binding on the company, its creditors with admissible debts or claims, its officers, members and any restructuring practitioner of the plan. Secured creditors are bound only to the extent that they consent or their debt is unsecured. They, and owners or lessors, are not prevented from enforcing their rights under a restructuring plan unless they have accepted that plan. While there are practical similarities with these requirements and those imposed on deeds of company arrangement, they are far from identical.
- Secured creditors who have perfected PPSA security interests have a ‘decision period’ between the date a notice of appointment is given to them (1 business day after the restructuring practitioner is appointed) and 13 business days later. During this decision period, a secured creditor with security over at least substantially the whole of the company’s property can enforce their interest. Otherwise, the moratoriums discussed above are likely to apply. Additionally, certain enforcement action taken by security interest holders (including those with non-PPSA security interests) prior to the company entering a restructuring are carved out of the moratoriums.
The UK reforms also introduce, relevantly, a restructuring process similar to the Australian one where the directors remain in control while they implement a plan to rescue their company as a going concern, under the supervision of an insolvency practitioner. You can read more about the UK process here.
The new subchapter V to Chapter 11 of the US Bankruptcy Code was effected in August 2019 and came into force in February 2020, before the impacts of the COVID-19 pandemic were fully appreciated. Therefore, it is not properly considered a COVID-19 reform.
However, it is a timely reform as it implements a new small business debt reorganisation process for businesses which have liabilities of less than $7.5 million, a notably larger threshold than Australia’s. This can comprise of up to 50% of non-commercial or business debts (perhaps reflecting the fact that it includes businesses ran by individuals, as well as companies).
US debtors retain the right to operate their business, but a trustee oversees the reorganisation, is heard at hearings concerning property and any plan filed under the subchapter, and ensures that payments are made under the plan in a timely manner.
The trustee cannot terminate the process; this requires the order of a Court in more limited circumstances than the UK or Australia. Indeed, the Court appears to have more guaranteed oversight on the process, including by way of a status conference held 60 days after commencement of the process to facilitate its resolution.
US debtors have 90 days to propose a plan, with the possibility of further extensions. By contrast, Australian SMEs are afforded only 20 business days to propose a restructuring plan, with creditors having 15 business days to vote on it.
It remains to be seen how effective and helpful the Australian small business will be, having commenced on 1 January 2020, and compared to the US approach. Stay tuned for updates.
The author gratefully acknowledges the assistance of Cassie Mortimer, an associate in the firm’s Melbourne office, for her invaluable assistance in preparing this article. Cassie is a member of the firm’s financial restructuring and insolvency group.