Update on recent changes to insolvency law

On 24 March 2020, the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (‘Omnibus Act’) was enacted as part of the Commonwealth government’s economic response to the Coronavirus. The Omnibus Act made changes to the Bankruptcy and Corporations Acts and Regulations. These changes were intended to extend for six months, but were later (in September 2020) extended to 31 December 2020.

Bankruptcy – COVID-19 changes

The changes, brought about by the Coronavirus Economic Response Package Omnibus Act 2020, were:

• The prescribed amount for a creditor to apply for a Bankruptcy Notice against a debtor increased from $5,000 to $20,000;
• Correspondingly, the prescribed amount in respect of which a creditor’s petition could be brought increased from $5,000 to $20,000;
• The time for compliance by a debtor with a Bankruptcy Notice was increased from 21 days to up to six months;
• The period of protection given to a debtor after making a declaration of intention to present a debtor’s petition was increased from 21 days to six months;
• A temporary debt protection period procedure – to prevent recovery action by unsecured creditors – was increased from 21 days to six months.

In December 2020, the temporary changes introduced by the Coronavirus Economic Response Package Omnibus Act 2020 were not further extended but an important permanent change was made to the bankruptcy threshhold, with the effect that from 1 January 2001 the following changes apply:

1. The period for temporary debt protection (Statutory Period) for debtors in relation to a Bankruptcy Notice has reverted to 21 days;
2. The minimum debt threshold (Statutory Amount) required for creditors to apply for a Bankruptcy Notice against a debtor has been reduced from the temporary amount of $20,000 to the new permanent amount of $10,000: (Bankruptcy Amendment (Bankruptcy Threshold) Regulations 2020);
3. The minimum debt threshold (Statutory Amount) for the issue of a Creditor’s Petition has reverted to $2,000, effective 1 January 2021;
4. The timeframe for a debtor to respond to a Bankruptcy Notice will revert to 21 days and accordingly if a Bankruptcy Notice is issued on or after 1 January 2021, the debtor will have 21 days to comply with the Bankruptcy Notice; and
5. Because a Bankruptcy Notice does not take any effect until the time of its issue by the Official Receiver, if an application has been lodged with the Official Receiver before 1 January 2001 but not issued until 1 January 2021 or later there will be a 21 day compliance period.

Insolvency – COVID-19 changes

On 25 March 2020, the COVID-inspired legislative amendments in relation to insolvency commenced. These were initially set to expire on 25 September 2020 but were then further extended until 31 December 2020. In summary, they provided that:

1. The prescribed amount in respect of which a creditor could issue a statutory demand was increased from $2,000 to $20,000;
2. The time in which a company was required to comply with a statutory demand was increased from 21 days to six months;
3. the existing Safe Harbour provisions of the Corporations Act 2001 were supplemented by additional temporary relief to directors from personal liability for insolvent trading where the debt was incurred in the ordinary course of business, on or after 25 March 2020 and before the appointment of an administrator or liquidator.

Those changes have now expired, and the situation under the current regime is that:

1. the time for compliance with a Statutory Demand issued from 1 January 2021 is 21 days (i.e. a reversion to the former law);
2. the statutory Minimum has reverted to $2,000; and
3. the additional relief from insolvent trading claims has ended.

Further changes to insolvency

Debt restructuring process and simplified liquidation

In September 2020, the government announced proposed changes which would allow companies with liabilities of less than $1,000,000 to continue to trade while insolvent whilst a debt restructuring plan is determined, rather than having to move into administration. A further ‘simplified liquidation process’ was also proposed.

The Federal Treasurer described the aim of the changes as being to move the system from ‘a rigid, one-size-fits-all creditor in possession model to a more flexible debtor in possession model’. Those proposals have now been enacted, by the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (‘Insolvency Reforms Act’) passed on 10 December 2020, effective from 1 January 2021.

There are two new insolvency processes for companies with liabilities of less than $1m, excluding employee entitlements:

1. a ‘debtor in possession’ debt ‘restructuring process’, and
2. a simplified liquidation process.

Note: At the time of writing, the amendments have not yet been consolidated into the Corporations Act 2001 (the ‘CA’) or the Corporations Regulations 2001 (the ‘CR’). The amendments can be found in the Insolvency Reforms Act 2020 (Cth) and the Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020, which amend both of those instruments and which will be included in the next consolidation.

Debt Restructuring Process

The Restructuring Process, introduced as new Part 5.3B of the Corporations Act (‘CA‘) will operate in the following way:

1. The directors will resolve that the company is insolvent or likely to become insolvent in the future and that a small business restructuring practitioner (‘SBR Practitioner’) should be appointed (CA, s 453B(1)(b));
2. A new category of registration for SBR Practitioners has been created; currently only registered liquidators can perform the role (CA, s 456B);
3. The company has 20 business days to prepare a plan to restructure the company’s debts (‘the Plan’) (CR, r 5.3B.17), with the assistance of an SBR Practitioner (s 453E);
4. The SBR Practitioner must certify that the Plan, including the company can meet the repayments proposed and that it has properly disclosed its affairs (CR, r 5.3B.18);
5. The Company must pay all of the employee entitlements which are due and payable (CA, s 453C; CR, r 5.3B.24);
6. The SBR Practitioner provides the certified Plan and any necessary supporting documentation to Creditors, who then have 15 business days to accept (CR, r 5.3B.21) or 5 business days to reject (r 5.3B.22) the Plan: no meeting is required to be held;
7. Voting is by a simple majority of creditors by value (CA, s 5; CR, r 5.3B).
8. If creditors vote to approve the Plan the company continues, with the control remaining with the company (CA,s 453K), subject to important limitations as to the transactions which may be entered (s 453L), and the SBR Practitioner administers the Plan (r 5.3B.37);
9. Entry into of transactions which are other than in the normal course of business is restricted and requires the approval of the SBR Practitioner (s 453L(2));
10. During the Restructuring Process the company and its directors (and relatives) have the benefit of some important protections, including (CA, s 453R, 453W):
    • for the company, moratoriums on the enforcement of unsecured (and some secured) debts and on the operation of ipso facto clauses in contracts, and
    • for the directors and their spouses or other relatives, moratoriums on the enforcement of personal guarantees in respect of liabilities of the company;
    • neither of the new processes is available to ‘repeat’ users, i.e., companies who have a current director (or a person who has been a director in the previous 12 months) who has been a director of a company which has undergone restructuring or a simplified liquidation process within a period prescribed by the regulations (s 453B(1)(c));
    • there are some anti-abuse provisions included in the new provisions, including declarations as to phoenixing activity and other measures.

Comments on the Debt Restructuring Plan Process

It is unfortunately beyond the scope of this article to analyse in detail the provisions of the Insolvency Reform Act. However, they are relatively intricate and raise many questions, which will be worked out in due course by the courts. The legislation was enacted with a very short consultation period, especially considering the depth and nature of the changes to existing insolvency law. A preliminary question which arises is whether the new processes will be widely used or whether, like the Safe Harbour reforms, their potential benefit will prove illusory for most companies. A significant eligibility requirement is the requirement to pay all employee entitlements: this will undoubtedly ease the burden on the Fair Entitlements Guarantee Scheme (‘FEG’) but may prove a stumbling block to accessing the new processes. That factor, and others contained in the schemes, raise the issue of abuse of the new regimes.

There are some provisions which appear to be aimed at discouraging abuse but they also have the potential to cut down on the usefulness of the new processes. A further area of complexity likely to arise is the interaction between the new changes and existing provisions and processes under the Corporations Act. One such example is where a secured creditor appoints a receiver: the Court has the power to restrain the receiver from exercising his powers. The legislation clearly points to a move away from the ‘creditor in control’ model which has underpinned Australia’s insolvency regime. That aspect of the changes is one which raises other important considerations.

Retail and commercial leases

Although not a matter of insolvency, the area of retail and commercial leases was also subject to urgent and temporary legislative change in the wake of the pandemic. Under the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (and the Retail and Other Commercial Leases (COVID-19) Regulation (No 2) 2020 and the Retail and Other Commercial Leases (COVID-19) Regulation (No 3) 2020) commercial leases entered into before 24 April 2020 where the lessee:
(a) qualifies for the jobkeeper scheme; and (b) has turnover of less than $50M (subsequently revised down to $5M in Regulation No. 3), are ‘impacted leases’ and a number of important protections were afforded to lessees.
In December these were extended until 31 March 2021, albeit with the lower turnover of $5M.

Summary

Significant changes to the law were brought about as a result of the COVID-19 pandemic: some temporary and some permanent. Practitioners will need to take care to stay up to date.

The impact of the significant changes to the Australia insolvency regime is yet to be experienced but it is hoped that decided cases will help to illuminate their workings.

Michelle Castle is a Barrister in 13th Floor, St James Hall. Jim Johnson is a Barrister in Frederick Jordan Chambers.