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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020



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ISSN 1328-8091

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BILLS DIGEST NO. 38, 2020-21 9 DECEMBER 2020

Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 Paula Pyburne Law and Bills Digest Section

Contents

The Bills Digest at a glance .............................................. 4

Purpose of the Bill ........................................................... 5

Structure of the Bill ......................................................... 5

Background ..................................................................... 5

About Australia’s insolvency system ........................... 5

Extent of small and medium insolvency ................... 5 Ombudsman inquiry .................................................... 6

Response to Coronavirus ............................................ 6

Announcement of reforms .......................................... 7

Consultation .............................................................. 8

Committee consideration ................................................ 8

Senate Standing Committee for the Selection of Bills .............................................................................. 8

Senate Standing Committee for the Scrutiny of Bills .............................................................................. 8

Policy position of non-government parties/independents...................................................... 8

Position of major interest groups..................................... 9

Financial implications ...................................................... 9

Statement of Compatibility with Human Rights................ 9

Parliamentary Joint Committee on Human Rights ..... 9 Key issues and provisions—Schedule 1 ............................ 9

Voluntary administration regime .............................. 10

Eligibility for restructuring ........................................ 10

Key issue .................................................................. 11

Duration of restructuring ........................................ 11

About restructuring practitioners ............................. 12

Functions of a restructuring practitioner ................ 12

Date introduced: 12 November 2020

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1-3 on Royal Assent; Schedule 4 on the day after Royal Assent; Schedules 1 and 3 on 1 January 2021; and Schedule 2 immediately after the commencement of Schedule 1.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at December 2020.

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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 2

Scrutiny of Bills Committee comments ................... 12 Scrutiny of Bills Committee comments ................... 13 Removal and replacement ...................................... 14

What happens during restructuring.......................... 14

Key issue—debts arising during restructuring ........ 14 Prohibited transactions ........................................... 14

Scrutiny of Bills Committee comments ................... 15 Permitted transactions ............................................ 15

Effect of restructuring on shareholders .................... 16 Effect on winding up ................................................. 16

Restrictions on third party property rights ............... 16 Nature of security interests .................................... 17

Meaning of decision period .................................... 17

Enforcement before restructuring .......................... 18

Sale of property with possessory security interest .................................................................... 18

Stay on enforcement rights ..................................... 19

Making a restructuring plan ...................................... 19

How the process works ........................................... 19

Rights, obligations and liabilities ............................... 20

Safe harbour .............................................................. 20

Key issues and provisions—Schedule 2 .......................... 21

Form of temporary restructuring relief .................... 21 Eligibility for temporary restructuring relief ............. 21 When eligibility ceases ............................................ 22

Key issues and provisions—Schedule 3 .......................... 23

Choosing the simplified liquidation process ............. 23 Exception ................................................................. 24

Directors’ declaration ................................................ 25

Eligibility criteria ........................................................ 25

Creditors opt-out ..................................................... 25

What is the simplified liquidation process? .............. 26 Ceasing the simplified liquidation process .............. 26 Key issues and provisions—Schedule 4 .......................... 26

New definitions ......................................................... 26

Communications sent and received .......................... 27

When sent and when received ............................... 27

Where sent from and where received .................... 28 Electronic communication of documents ................. 28 Signing the document ............................................. 29

Concluding comments ................................................... 29

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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 3

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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 4

The Bills Digest at a glance The purpose of the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 is to implement insolvency reforms to support small business. The three key elements of the reforms are:

• small business restructuring: a new formal debt restructuring process for eligible incorporated small businesses, which the Government has indicated will apply to businesses with liabilities of less than $1 million, to allow a faster and less complex process to restructure existing debts and maximise their chances of survival

• small business liquidation: a new simplified liquidation pathway for eligible incorporated small businesses, which the Government has indicated will apply to businesses with liabilities of less than $1 million, to provide for a faster and lower cost liquidation process and

• other measures: to provide temporary insolvency relief until 31 March 2021—to address the issue of eligible small businesses not being able to access the process immediately whilst insolvency practitioners become familiar with small business restructuring

The Government estimates that the reforms will cover around 76 per cent of businesses subject to insolvencies—98 per cent of which have less than 20 employees.

Stakeholder comments

An exposure draft of the Bill was circulated for comment by The Treasury during the period 7- 12 October 2020. No submissions in response to that consultation are available. In addition, the Bill was not referred to Committee for inquiry and report.

The reforms have been ‘largely welcomed’ by the Australian Restructuring, Insolvency and Turnaround Association who consider that such reforms are definitely overdue. Industry leaders have described the proposed changes as a lifeline for small business owners.

However, other stakeholders have expressed concern that the measures should not be seen by some directors as an opportunity to keep a bad business going.

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Purpose of the Bill The purpose of the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (the Bill) is to amend a number of statutes—primarily the Corporations Act 2001— in order to implement insolvency reforms to support small business.

Structure of the Bill The Bill comprises four Schedules:

• Schedule 1 amends the Corporations Act to create a debt restructuring process for eligible small companies. Part 2 of Schedule 1 contains consequential amendments to the Banking Act 1959, the Corporations Act, the Insurance Act 1973, the Life Insurance Act 1995, the Payment Systems and Netting Act 1998, the Personal Property Securities Act 2009 (PPSA) and the Taxation Administration Act 1953 (TA Act)

• Schedule 2 amends the Corporations Act to provide temporary relief for eligible companies seeking to enter the formal debt restructuring process established under Schedule 1

• Schedule 3 amends the Bankruptcy Act 1966 and the Corporations Act to create a simplified liquidation process for a creditors’ voluntary winding up of an insolvent company and amends the Insolvency Practice Schedule to refine the registration requirements for a liquidator and

• Schedule 4 amends the Corporations Act to expand the situations where documents relating to the external administration of a company may be given electronically.

Background

About Australia’s insolvency system The Productivity Commission conducted an inquiry into business set-up, transfer and closure in 2015.1 In its inquiry report, the Productivity Commission noted that ‘in comparison to overseas systems, a dominant feature of the Australian system is a focus on the creditor in preference to the rehabilitation of the company’.2 It added:

In particular, the focus on the return to creditors (even in voluntary administration), the degree of reporting to creditors and their ability to challenge various elements of the administration and liquidation processes are seen to favour the interests of creditors over the continuation of the company. Or, as others have put it, in contrast to Australia, systems such as the chapter 11 process in the United States put ‘recovery ahead of burial’.3

Extent of small and medium insolvency On 18 December 2019 the Australian Securities and Investments Commission (ASIC) published its annual overview of corporate insolvencies for the 2018-2019 financial year, which provides an overview of the nature of corporate insolvencies.4 According to ASIC, some key observations from the report were:

• small to medium size corporate insolvencies continue to dominate external administrators’ reports. 85 per cent had assets of $100,000 or less, 76 per cent had fewer than 20 employees and 38 per cent had liabilities of $250,000 or less

1. Productivity Commission (PC), Business set-up, transfer and closure, Inquiry report, 75, PC, Canberra, 30 September 2015. 2. Ibid., p. 351. 3. Ibid., p. 352. 4. Australian Securities and Investments Commission (ASIC), Insolvency statistics: external administrators’ reports (July 2018 to

June 2019, Report, 645, 18 December 2019.

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• 96 per cent of creditors in this group received between 0-11 cents in the dollar, reflecting the asset/liability profile of small to medium size corporate insolvencies

• ASIC requested 875 supplementary reports from external administrators where the initial report meets certain thresholds in assessing if further action was warranted

• generally, due to a lack of evidence or because ASIC considered no further action was required given the circumstances, over the last three years on average, fewer than 20 per cent of these supplementary reports resulted in further regulatory action

• external administrators advised that in nearly 50 per cent of reports where they alleged a civil breach for insolvent trading, they had either commenced or were contemplating initiating recovery actions for insolvent trading. External administrators are best placed to assess the available information and determine whether it is in the best interest of creditors to pursue compensation for insolvent trading from directors.5

Ombudsman inquiry On 10 October 2019, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) launched an inquiry into the insolvency system, to investigate whether existing insolvency practices achieve the best possible outcome for small and family businesses in financial trouble.6

The final report by the ASBFEO was published in June 2020.7 One of the findings of the inquiry was:

External administrations are focused on maximising the return to creditors, irrespective of the cost of the process or the effect on the business. However, a restructure of business affairs, managed by the small business owner and with approval from a registered liquidator could have more positive outcomes, including providing a greater return to creditors. Where businesses do need to be wound up, there is a concern that the cost of the process far outweighs any benefit to creditors, even where liabilities are small, and a business structure is simple.8 [emphasis added]

In light of this finding, the ASBFEO recommended, amongst other things, that a form of Directors’ Insolvency Agreement be established for small businesses where owners of a business can provide a proposal to a registered liquidator on the best way to manage the business.9

In addition, the ASBFEO recommended that a simplified liquidation process be introduced for a small business where the deficit of the business (that is, total liabilities less total assets) can be shown to be less than $50,000.10

Response to Coronavirus On 23 March 2020 the Parliament enacted the Coronavirus Economic Response Package Omnibus Act 2020 (Omnibus Act). Schedule 12 of the Omnibus Act contained amendments to put into effect three temporary measures intended to avoid unnecessary insolvencies arising from business closures due to coronavirus. They were:

• amendments to the Corporations Act so that the time within which a debtor must respond to a statutory demand (called the statutory period) will be 21 days or a longer, prescribed period. In

5. Australian Securities and Investments Commission (ASIC), ASIC reports on corporate insolvencies in 2018-19, media release, 18 December 2019. 6. Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Insolvency practices inquiry, ASBFEO website. 7. ASBFEO, Insolvency inquiry report, Australian Government, June 2020. 8. Ibid., p. 7.

9. Ibid., recommendation 4, p. 7. 10. Ibid., recommendation 5, p. 8.

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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 7

turn, the Corporations Regulations 2001 were amended to provide that the prescribed statutory period is six months11

• amendments to ensure that a statutory demand could only be issued when a debt is over the statutory minimum being an amount of $2,000 or a greater amount prescribed by the Regulations. In turn, section 5.4.01AA of the Corporations Regulations inserted the definition of statutory minimum so that the prescribed amount is $20,00012 and

• amendments to the Corporations Act to create a temporary safe harbour in response to the coronavirus. It operates so that a breach of the duty to prevent insolvent trading does not occur if the debt is incurred:

- in the ordinary course of the company’s business - during the six month period starting on 25 March 2020 or a longer period that is prescribed by the Regulations and - before any appointment during that period of an administrator, or liquidator, of the

company.

Subsequently these measures were extended to the end of 31 December 202013 when they will cease.14

Announcement of reforms On 24 September 2020 the government announced the reforms which are the subject of this Bill.15 The key elements of the reforms were said to include:

• The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million, drawing on some key features of the Chapter 11 bankruptcy model in the United States.

• Moving from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model which will allow eligible small businesses to restructure their existing debts while remaining in control of their business.

• A rapid twenty business day period for the development of a restructuring plan by a small business restructuring practitioner, followed by fifteen business days for creditors to vote on the plan.

• A new, simplified liquidation pathway for small businesses to allow faster and lower cost liquidation.

• Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to meet the needs of small business.

The reforms will cover around 76 per cent of businesses subject to insolvencies today, 98 per cent of whom who have less than 20 employees.16

According to Treasurer, Josh Frydenberg:

Small business has been hit hard by COVID-19… we know that in this COVID-induced recession some businesses will not survive in their current form.

For many, through no fault of their own, the insolvency process will be their next and last stop.

11. Corporations Regulations, subsection 5.4.01AA(2). 12. Corporations Regulations, subsection 5.4.01AA(1). 13. By the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020.

14. Corporations Regulations, subsections 5.4.01AA(3) and 5.7B.01 respectively. 15. J Frydenberg (Treasurer) and M Sukkar (Assistant Treasurer), Insolvency reforms to support small business recovery, joint media release, 24 September 2020. 16. Ibid.

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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 8

Under the present system, the majority of businesses that enter voluntary administration are deregistered within three years.

However, many of these businesses could remain viable concerns if they had more flexibility to restructure their affairs.

It is with this objective of keeping more businesses in business and people in jobs that the Morrison government is embarking on the most significant reforms of insolvency law in almost 30 years.17

Consultation Treasury released a draft of the proposed legislation for public comment on 7 October 2020.18 However that consultation was only open for five days. The submissions to Treasury in relation to the draft legislation are no longer available on the Treasury website.

In addition, Treasury commenced a consultation on Insolvency reforms to support small business- subordinate legislation on 17 November 2020.19 The subordinate legislation consists of amendments to the Corporations Regulations 2001 and amendments to the Insolvency Practice Rules (Corporations) 2016.

Committee consideration

Senate Standing Committee for the Selection of Bills At its meeting of 3 December 2020, the Senate Standing Committee for the Selection of Bills considered the Bill but was unable to reach agreement. That being the case the Bill will not be subject to inquiry and report.20

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) has made comments in relation to specific provisions in the Bill.21 These are canvassed under the relevant Schedule heading below.

Policy position of non-government parties/independents Labor supports ‘the key measures contained in this Bill in principle’ … but ‘believe that it's appropriate that there be a statutory review included in the Bill’ … as well as ‘a sunset clause’.22 However, Labor also expressed its concerns about the paucity of formal consultation stating:

The government's claiming these reforms are the most significant for insolvency in 30 years, and yet they appear to have been implemented with very limited consultation. Treasury only had the exposure draft legislation up on their website for five days. When you consider the magnitude of what we're thinking about here, that's clearly not good enough. We still haven't seen submissions in relation to this

17. J Frydenberg, ‘Fighting chance for small business’, Australian Financial Review, 24 September 2020, p. 1. 18. Treasury, Insolvency reforms to support small business: consultation, Treasury website. 19. Treasury, Insolvency reforms to support small business - subordinate legislation, Treasury website. 20. Senate Standing Committee for the Selection of Bills, Report, 11, 2020, The Senate, Canberra, 3 December 2020. 21. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 17, 2020, 2 November 2020, pp. 3-9. 22. D Mulino, ‘Second reading speech: Corporations Amendment (Corporate Insolvency Reforms) Bill 2020’, House of

Representatives, Debates, 7 December 2010, p. 110.

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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 9

legislation. We've done a lot of consultation of our own, though. We know that there is anxiety about the lack of consultation, and people are worried about the detail of the draft laws that are before us.23

Position of major interest groups The Victorian Chamber of Commerce and Industry welcomed the changes to the insolvency laws for small business stating:

… [the] announcement from the Treasurer will be met with sighs of relief from small business owners who have their backs to the wall.

These unprecedented times call for innovative measures to protect businesses and jobs so we can come out swinging on the other side.24

Similarly, the reforms were ‘largely welcomed’ by the Australian Restructuring, Insolvency and Turnaround Association who consider that such reforms are ‘definitely overdue’.25 Industry leaders have described the proposed changes as a lifeline for small business owners.26

However, other stakeholders have expressed concern that the measures should not be seen by some directors as an opportunity to keep a bad business going.27

Financial implications According to the Explanatory Memorandum, the Bill will have nil financial impact.28

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.29

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights had no comment on the Bill.30

Key issues and provisions—Schedule 1 Quick guide to Schedule 1 The provisions in Schedule 1 to the Bill amend the Corporations Act to: • establish the role and functions of a restructuring practitioner • provide that a company which enters into restructuring remains in the hands of the

directors

23. J Chalmers, ‘Second reading speech: Corporations Amendment (Corporate Insolvency Reforms) Bill 2020’, House of Representatives, Debates, 7 December 2020, p. 107. 24. Victorian Chamber of Commerce and Industry, Insolvency law changes to save small businesses on the brink of collapse, media release, 24 September 2020. 25. G Korporaal and J Lynch, ‘Warning on debts in insolvency reforms’, The Australian, 25 September 2020, p. 17. 26. S Marinos, ‘A lifeline for business’, Sunday Herald Sun, 4 October 2020, p. 62. 27. Korporaal and Lynch, ‘Warning on debts in insolvency reforms’, op. cit. 28. Explanatory Memorandum, Corporations Amendment (Corporate Insolvency Reforms) Bill 2020, p. 7. 29. The Statement of Compatibility with Human Rights can be found at pages 95-104 of the Explanatory Memorandum to the Bill. 30. Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 14, 2020, Australian Parliament, Canberra,

26 November 2020, p. 56.

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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 10

• impose a stay on creditors’ enforcing their rights during the restructure in some circumstances. Importantly, Part 1 in Schedule 1 to the Bill contains framework legislation so that some of the detail of the operation of the new law may be set out in Regulations.

Voluntary administration regime Voluntary administration is designed to resolve a company’s future direction quickly. An independent and suitably qualified person takes full control of the company to try to work out a way to save either the company or its business.

If it is not possible to save the company or its business, the aim is to administer the affairs of the company in a way that results in a better return to creditors than they would have received if the company had been placed straight into liquidation.

After taking control of the company, the voluntary administrator investigates and reports to creditors on the company’s business, property, affairs and financial circumstances, and on the three options available to creditors.31 The meeting with creditors must generally occur within 20 business days of the voluntary administrator being appointed, unless the court allows an extension of time.32 The options that are put to creditors are:

• end the voluntary administration and return the company to the directors’ control

• approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts or

• wind up the company and appoint a liquidator.33

The Bill ‘draws heavily on the established voluntary administration framework which is set out in Part 5.3A of the Corporations Act and shares many of its features’.34

Eligibility for restructuring Item 1 in Part 1 of Schedule 1 to the Bill inserts proposed Part 5.3B—Restructuring a company into Chapter 5 of the Corporations Act. The object of the new Part 5.3B is to provide for a restructuring process for eligible companies that allows the companies to:

• retain control of the business, property and affairs while developing a plan to restructure their debt with the assistance of a small business restructuring practitioner and

• enter into a restructuring plan with creditors.35

The new Part 5.3B comprises sections 452A to 458C.

A restructuring practitioner may be appointed by a company if:

• the eligibility criteria for restructuring are met in relation to the company on the day the appointment is made and

• the board has resolved the company is insolvent or is likely to become insolvent at some future time and a restructuring practitioner for the company should be appointed.36

31. Corporations Act, section 438A. 32. Corporations Act, subsections 439A(5) and (6). 33. ASIC, Voluntary administration: a guide for creditors, INFO 74, ASIC website, last updated 11 August 2020. 34. Explanatory Memorandum, Corporations Amendment (Corporate Insolvency Reforms) Bill 2020, p. 14. 35. Corporations Act, proposed section 452A. 36. Corporations Act, proposed subsection 453B(1).

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The Bill sets out the eligibility criteria for restructuring. They require that on the day that the restructuring practitioner37 is appointed:

• any liability test prescribed by the Regulations is satisfied—the Exposure Draft Regulations propose an amount of liabilities not more than $1 million38

• no person who is a director of the company (or was in the 12 months preceding the date of appointment has been a director of another company that has been under restructuring or been the subject of a simplified liquidation process within a period prescribed by the Regulations—the Exposure Draft Regulations propose a period of seven years39—unless an exemption applies40 and

• the company has not been under restructuring or been the subject of a simplified liquidation process within a period prescribed by the Regulations— the Exposure Draft Regulations propose a period of seven years41—unless an exemption applies.42

Key issue Whilst the Government has announced that the amendments in the Bill are directed towards ‘small business’ the Bill does not define that term.43 There are a number of definitions used to describe a small business including statistical definitions and for other regulatory purposes, for instance:

• Privacy Act 1988—defines a small business as one whose annual turnover for the previous financial year is $3 million or less44

• Australian Securities and Investments Commission Act 2001 (ASIC Act)—defines a small business as a business employing less than 100 people if the business is, or includes, the manufacture of goods, or a business employing less than 20 people otherwise45 and

• Fair Work Act 2009—defines a small business employer as an employer with fewer than 15 employees.46

However, the Bill does not import any of the existing definitions. The Exposure Draft Regulations propose that a business will qualify for restructuring if it has liabilities of less than $1 million.

Duration of restructuring The restructuring of a company begins when a restructuring practitioner for the company is appointed and ends in the circumstances prescribed by the Regulations.47 According to the Exposure Draft of the Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020, there are a number of circumstances in which restructuring ends.48

37. Item 12 in Part 2 of Schedule 1 to the Bill inserts the definition of restructuring practitioner into section 9 of the Corporations Act. 38. Exposure Draft, Corporations Regulation, subsection 5.3B.03(1). 39. Exposure Draft, Corporations Regulation, subsection 5.3B.03(2). 40. Exposure Draft, Corporations Regulation, subsection 5.3B.03(4) sets out the relevant prescribed circumstances. 41. Exposure Draft, Corporations Regulation, subsection 5.3B.01(3). 42. Corporations Act, proposed subsection 453C(1). 43. Frydenberg and Sukkar, Insolvency reforms to support small business recovery, op. cit. 44. Privacy Act, section 6D. 45. ASIC Act, subsection 12BC(2). 46. Fair Work Act, subsection 23(1). 47. Corporations Act, proposed section 453A. 48. Exposure Draft, Corporations Amendment (Corporation Insolvency Reforms) Regulations 2020, proposed section 5.3B.02.

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Essentially, the restructuring process covers the period during which a plan is being developed by the company director(s), following the appointment of a small business restructuring practitioner. The restructuring process ends once creditors vote to accept or reject the plan.

About restructuring practitioners Under the Bill, a restructuring practitioner must be a registered liquidator49 and must consent to his, or her, appointment.50 A person must not consent to be appointed and must not act as a restructuring practitioner unless the person is a registered liquidator. A failure to comply with this requirement is a strict liability offence. The maximum penalty is 50 penalty units—being equivalent to $11,100.51

Functions of a restructuring practitioner The functions of the restructuring practitioner for a company under restructuring are:

• to provide advice to the company on matters relating to restructuring

• to assist the company to prepare a restructuring plan

• to make a declaration to creditors in accordance with the Regulations in relation to a restructuring plan proposed to the creditors and

• any other functions given to the restructuring practitioner under the Corporations Act.52

According to the Explanatory Memorandum to the Bill:

[the declaration to creditors] is a critical component of the new restructuring process. Creditors need to be able to rely on the small business restructuring practitioner’s declaration in order to have confidence that the process has been conducted appropriately, that the proposed debt restructuring plan meets the prescribed requirements, and ultimately to decide whether the proposed plan is the best way forward.53

In addition, the Regulations may make provision about:

• the functions and duties of the restructuring practitioner for a company under restructuring

• the powers of the restructuring practitioner for a company under restructuring and

• the rights and liabilities of a person who is or has been the restructuring practitioner for a company arising out of the performance of the functions and duties, and the exercise of their powers.54

Scrutiny of Bills Committee comments The Scrutiny of Bills Committee noted that the Bill contains a range of powers to prescribe matters in Regulations.

The committee's view is that matters which may be significant to the operation of a legislative scheme should be included in primary legislation unless a sound justification for the use of delegated legislation is provided. The committee has generally not accepted a desire for administrative flexibility to be a sufficient justification, of itself, for leaving significant matters to delegated legislation. In this regard, the committee notes that while some of these matters have been addressed in the explanatory

49. Corporations Act, proposed section 456B. 50. Corporations Act, proposed section 456A. 51. Corporations Act, Schedule 3, table is amended by item 109 in Part 2 of Schedule 1 to the Bill. 52. Corporations Act, proposed subsection 453E(1). 53. Explanatory Memorandum, Corporations Amendment (Corporate Insolvency Reforms) Bill 2020, p. 23. 54. Corporations Act, proposed subsection 453E(2). Proposed sections 456J and 456L provide that the small business

restructuring practitioner has a lien on the company’s property to secure a right of indemnity.

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memorandum the information provided is generally insufficient to justify the prescription of so many delegated legislation making powers.

The committee notes that a legislative instrument, made by the executive, is not subject to the full range of parliamentary scrutiny inherent in bringing proposed changes in the form of an amending bill.55

Accordingly, the Scrutiny of Bills Committee has requested further detailed advice from the Treasurer about ‘why it is necessary and appropriate’ to deal with the relevant matters in delegated legislation.56

Once a restructuring practitioner has been appointed, a director of the relevant company must provide assistance to the restructuring practitioner by giving information about the company’s business, property, affairs and financial circumstances and allowing him, or her, to inspect and take copies of the company’s books. This must be done at the times and in the manner reasonably required by the restructuring practitioner.57 A failure to do so gives rise to an offence of strict liability,58 the maximum penalty for which is 120 penalty units.59

Scrutiny of Bills Committee comments The Scrutiny of Bills Committee noted that a failure to comply with proposed subsection 453F(1) is a strict liability offence stating:

When a Bill states that an offence is one of strict liability, this removes the requirement for the prosecution to prove the defendant's fault. In such cases, an offence will be made out if it can be proven that the defendant engaged in certain conduct, without the prosecution having to prove that the defendant intended this, or was reckless or negligent. As the imposition of strict liability undermines fundamental criminal law principles, the committee expects the explanatory memorandum to provide a clear justification for any imposition of strict liability, including outlining whether the approach is consistent with the Guide to Framing Commonwealth Offences.60

The Scrutiny of Bills Committee was not satisfied that the Explanatory Memorandum to the Bill provides a sufficient explanation. That being the case, the Committee has requested advice from the Treasurer as to:

• why it is proposed to use an offence-specific defence (which reverses the evidential burden of proof) in proposed subsection 453F(4), and whether general defences in the Criminal Code apply to an offence under proposed section 435F or regard was given to providing for a more specific defence than that of a reasonable excuse and

• the justification for providing, in proposed subsection 453F(3), that the offence is an offence of strict liability.61

55. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 17, 2020, op. cit., pp. 7-9. 56. Ibid., p. 9. 57. Corporations Act, proposed subsection 453F(1). 58. The imposition of strict liability means that a fault element does not need to be satisfied, but the offence will not criminalise

honest errors and a person cannot be held liable if he, or she, had an honest and reasonable belief that they were complying with relevant obligations. 59. Crimes Act 1914, section 4AA and the Notice of Indexation of the Penalty Unit Amount provide that a penalty unit is equivalent to $222. This means that the maximum penalty is $26,640. 60. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 17, 2020, op. cit., pp. 3-4. 61. Ibid., p. 5.

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Removal and replacement The appointment of a person as a restructuring practitioner for a company or for a restructuring plan cannot be revoked.62 However, where a restructuring practitioner dies, becomes prohibited from acting in that role or resigns by notice in writing to the company a replacement may be appointed.63

If the restructuring practitioner was appointed by the Court—then the Court may appoint a replacement. Otherwise the company may appoint a replacement restructuring practitioner by resolution of the Board.64

What happens during restructuring The Bill provides that while a company is under restructuring the company has control of the company’s business, property and affairs.65

Key issue—debts arising during restructuring This is in stark contrast to the existing process of voluntary administration which is designed to resolve a company’s future direction quickly. An independent and suitably qualified person takes full control of the company to try to work out a way to save either the company or its business.66 In addition, the administrator is personally liable for the debts incurred during the voluntary administration process.67 Those debts are provable in any subsequent liquidation and are afforded priority.68

Prohibited transactions There are some limits as to what the directors of the company may do during the restructuring period. A director of the company under restructuring commits an offence in either of the following circumstances:

• the company purports to enter into a transaction or dealing affecting the property of the company and the director approves of that action or

• the director purports to enter into a transaction or dealing affecting the property of the company on behalf of the company.69

Such a transaction or dealing is void, unless the Court orders otherwise.70 In addition, where a court is satisfied that the company or another person has suffered loss or damage because of the act or omission constituting the offence the court may order the director to pay compensation.71

62. Corporations Act, proposed section 456D. 63. Corporations Act, proposed subsection 456E(1). 64. Corporations Act, proposed subsection 456E(2). 65. Corporations Act, proposed subsection 453K(1). 66. Corporations Act, subsection 437A(1). 67. Corporations Act, section 443A. 68. Corporations Act, sections 443D and 443E. 69. Corporations Act, proposed subsection 453L(1). Section 1311 of the Corporations Act is a general offence provision. It states

that a person who does an act or thing that the person is forbidden to do under a provision of the Corporations Act or does not do an act or thing that the person is required to do or who otherwise contravenes a provision of the Corporations Act is guilty of an offence. 70. Corporations Act, proposed subsection 453L(5). 71. Corporations Act, proposed subsection 453M(1).

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For the purposes of new Part 5.3B the term property means any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description.72 It includes any PPSA retention of title property.73

Scrutiny of Bills Committee comments The Scrutiny of Bills Committee noted that proposed subsection 453L(1):

… provides that a person who is a director of a company contravenes this section if the company is under restructuring and the company purports to enter into a transaction or dealing affecting the property of the company and the director approves that action. It is also a contravention for a director of a company under restructuring to purport to enter into a transaction or dealing affecting the property of the company on behalf of the company.

Proposed subsections 453L(2) and (3) provide for specific circumstances in which there will not be a contravention of proposed section 453L. These proposed subsections appear to provide offence-specific defences which appear to reverse the evidential burden of proof.74

According to the Scrutiny of Bills Committee neither the Bill nor the Explanatory Materials address this issue. The Committee has, therefore, requested further advice from the Treasurer about ‘whether proposed subsections 453L(2) and (3) provide for offence-specific defences which reverse the evidential burden of proof, and if so, why this is necessary and appropriate’.75

Permitted transactions The Bill provides that the following dealing and transactions may occur:

• transactions or dealings entered into in the ordinary course of the company’s business

• transactions or dealings to which the restructuring practitioner has consented—on the basis that there are reasonable grounds to believe that it would be in the interests of the creditors for the company to enter into the transaction or dealing76 and

• transactions or dealings which were entered into under an order of the Court.77

The prohibition on transactions and dealings does not apply to a payment made by an Australian ADI out of an account kept by the company with the ADI and in good faith and in the ordinary course of the ADI’s banking business.78

In addition, the Regulations may prescribe circumstances in which entering into a transaction or dealing is, or is not, to be treated as in the ordinary course of a company’s business.79 By way of example, a transaction or dealing which relates to the payment of the entitlements of the company’s employees would be treated as in the ordinary course of business.80

A payment made, transaction entered into, or any other thing done, is valid and is not liable to be set aside in a winding up of the company provided it is done in good faith by:

72. Corporations Act, section 9. 73. Corporations Act, proposed section 452B. 74. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 17, 2020, op. cit., p. 5. 75. Ibid., p. 6. 76. Corporations Act, proposed paragraph 453L(2)(b) and proposed subsection 453L(6). 77. Corporations Act, proposed subsection 453L(2). 78. Corporations Act, proposed subsection 453L(3). 79. Corporations Act, proposed subsection 453L(4). 80. Exposure Draft Corporations Regulation, subsection 5.3B.04(3).

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• the restructuring practitioner for a company under restructuring

• a company under restructuring with the consent of the restructuring practitioner or

• a company under restructuring in compliance with an order of the Court.81

Effect of restructuring on shareholders Generally speaking, a transfer of shares in a company that is made while the company is under restructuring is void unless:

• the restructuring practitioner gives written and unconditional consent the transfer

• the restructuring practitioner gives written, but conditional consent to the transfer and the relevant conditions have been satisfied or

• the Court makes an order authorising the transfer.82

Importantly, the restructuring practitioner may only give consent to the transfer of shares if he, or she, believes on reasonable grounds that the transfer is in the best interests of the company’s creditors as a whole.83 The Bill sets out the rights of a prospective transferor, a prospective transferee or a creditor of the company to apply to the Court for an order in relation to the giving of consent or the conditions of consent.84

The alteration of the status of members that is made while the company is under restructuring is void, except in circumstances that are in near equivalent terms to those set out above relating to the transfer of shares.85

Effect on winding up Two immediate protections arise from restructuring:

• the Court must adjourn the hearing of an application for an order to wind up a company which is under restructuring where the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under restructuring rather than be wound up and

• the Court must not appoint a provisional liquidator of a company which is under restructuring where the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under restructuring.86

Restrictions on third party property rights As a general rule, property rights cannot be exercised by third parties in relation to property of the company or property used, occupied by or in the possession of the company during the debt restructuring period—unless the small business restructuring practitioner has given his, or her, written consent or leave has been granted by the Court to exercise such a right.87

Enforcement proceedings are stayed and enforcement proceedings in relation to the property of the company are suspended during its restructure.88

81. Corporations Act, proposed section 453N. 82. Corporations Act, proposed subsection 453P(1). 83. Corporations Act, proposed subsection 453P(2). 84. Corporations Act, proposed subsections 453P(3) and (5). 85. Corporations Act, proposed subsections 453P(8), (9), (11) and (13). 86. Corporations Act, proposed section 453Q. 87. Corporations Act, proposed subsections 453R(1) and (2). 88. Corporations Act, proposed sections 453S and 453T.

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In addition, a guarantee of a liability of the company cannot be enforced, during the restructuring of a company against a director of the company or a spouse or relative of such director. Nor can a proceeding in relation to such a guarantee be commenced against a director, spouse or relative— except with the leave of the Court.89

However, property that is subject to a banker’s lien is exempt from the restrictions that apply to third party property rights during the restructure of the company—provided that the property is subject of a possessory interest by an ADI or a clearing and settlement facility.90 This exemption applies to the following:

• cash in the form of notes or coins

• negotiable instruments

• securities91 and

• derivatives.92

Nature of security interests A security interest means an interest in personal property93 provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).94 By way of example, a security interest includes an interest in personal property provided by a fixed charge, a floating charge or a hire purchase agreement.95

Under the PPSA, when more than one secured party has a security interest in the same property, there are rules about who has priority.96 A ‘perfected’ security interest normally has priority over an ‘unperfected’ one. In most cases a perfected security interest is one that is registered on the Personal Property Securities Register.97

Meaning of decision period The Bill provides that a secured party with a security interest over the whole or substantially the whole of the company’s property in one or more securities can enforce their security interest if they act before or during the decision period.98

89. Corporations Act, proposed subsection 453W(1). The term guarantee in proposed subsection 453W(4) in relation to a liability of a company, includes a relevant agreement (as defined in section 9) because of which a person other than the company has incurred, or may incur, whether jointly with the company or otherwise, a liability in respect of the liability of the company.

90. Corporations Act, proposed section 453X. 91. Corporations Act, subsection 92(1) defines securities as debentures, stocks or bonds issued or proposed to be issued by a government; shares in, or debentures of, a body; interests in a managed investment scheme; and units of such shares, but does not include a derivative or an excluded security.

92. Corporations Act, section 761D contains the meaning of the term derivative. Broadly speaking, a derivative is a tradeable security whose value is derived from the actual or expected price of some underlying asset, which may be a commodity, a security, or a currency. Source: J Black, N Hashimzade and G Myles, Oxford dictionary of economics, 5th edn, Oxford University Press, Oxford, 2017, p. 138.

93. PPSA, section 10 defines personal property as property (including a licence) other than: land; or a right, entitlement or authority that is granted by or under a law of the Commonwealth, a State or a Territory and declared by that law not to be personal property for the purposes of the PPSA.

94. PPSA, subsection 12(1). 95. PPSA, paragraphs 12(2)(a), (b) and (e). 96. Australian Financial Security Authority (AFSA), Which security interest has priority?, AFSA website. 97. PPSA, section 33. 98. Corporations Act, proposed section 454C.

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The decision period, for a secured party in relation to a security interest in the property of a company under restructuring is the period:

• beginning on the day when a notice of appointment of the restructuring practitioner is given to the secured party as required by the Regulations (if any have been made) or on day the restructuring begins and

• ending at the end of the thirteenth business day after that day.99

Enforcement before restructuring Before the beginning of the restructuring of a company, a secured party, receiver or other person may take any of the following actions for the purpose of enforcing a security interest in that property:

• enter into possession, or assumed control, of property of the company

• enter into an agreement to sell the property

• make arrangements for such property to be offered for sale by public auction

• publicly invite tenders for the purchase of such property

• exercise any other power in relation to such property.

In that case the Bill explicitly states that nothing in sections 453K, 453R, 453T, 453U or 454N, or in an order made under subsection 454P(1), prevents the secured party, receiver or other person from enforcing their security interest in relation to that property.100

Under proposed subsection 454F(2), the restructuring practitioner may apply to the Court for an order that a secured party, receiver or other person not perform specified functions, or exercise specified powers. The Court may make such an order.

However, the Court must first be satisfied that the secured party’s interests are adequately protected during the restructuring process. Importantly, this provision does not apply in relation to a security interest over the whole or substantially the whole of the company’s property, where that security interest is enforced before or during the decision period (as set out in proposed section 454C).101

Sale of property with possessory security interest If the property of a company under restructuring is subject to a possessory interest102 and is in the possession of the secured party then the property may be sold by the secured party—provided there is no other security interest in the property.103 In that case, the Bills sets out the manner in which the proceeds of sale are to be distributed.104

Importantly, the Bill provides for the Court, on application from the restructuring practitioner, to make an order to limit the powers of a receiver or other person seeking to enforce a right of an

99. Corporations Act, section 9, inserted by item 4 of Part 2 in Schedule 1 to the Bill. 100. Corporations Act, proposed section 454D. 101. Corporations Act, proposed section 454F. 102. Corporations Act, section 51D defines the term possessory security interest in relation to property, as a security interest that

is a PPSA security interest in the property that is perfected by possession or control, within the meaning of the Personal Property Securities Act 2009; or a lien or a pledge in relation to the property. A possessory security arises when there is a transfer of possession, either in law or in fact, of the property intended to constitute the ‘security’ for the payment of a financial obligation, without there being any other transfer of ownership rights. Source: Butterworths Concise Australian Legal Dictionary, 3rd ed., LexisNexis Butterworths, Australia, 2004, p.334. 103. Corporations Act, proposed subsection 454H(1). 104. Corporations Act, proposed subsection 454H(2).

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owner or lessor of property where that property is used or occupied by or in the possession of the company under restructuring.105

Stay on enforcement rights A right cannot be enforced against a company that has come under restructuring if the right arises by reason of an express provision of a contract, agreement or arrangement which provides for the right based on the company’s financial position or entering restructuring.106 The stay period starts when the restructuring of the company begins and ends at the later of the following:

• when the restructuring ends

• if one or more court extension orders are made for the company as the result of an application made before the restructuring ends—when the last made of those orders ceases to be in force

• if the company ceases to be under restructuring because of a resolution or order for the company to be wound up—when the company’s affairs have been fully wound up.107

The Court may order an extension of the stay period108 or may lift the stay if it is satisfied that either is appropriate in the interests of justice.109

Making a restructuring plan A company may propose a restructuring plan to its creditors.110 The Regulations may make provision for various matters including, but not limited to, the following:

• proposing a restructuring plan

• making, varying and terminating a restructuring plan

• debts and claims that must be dealt with in the restructuring plan

• identifying contributories of the company and

• the circumstances in which a restructuring plan is void.111

According to the Explanatory Memorandum to the Bill:

Given that the company directors retain control of the company during restructuring, the role of the small business restructuring practitioner is largely advisory and supportive in nature - providing advice to the company directors during the debt restructuring process and assisting the company directors to develop a restructuring plan.112

How the process works The Exposure Draft of the Corporations Amendment (Corporate Insolvency Reforms) Regulation 2020 proposes that the following steps are to be followed:

• the company must execute a restructuring plan during the proposal period—that is, the period of 20 business days beginning on the day the restructuring begins.113 The period may be extended by no more than 10 business days if the restructuring practitioner is satisfied on

105. Corporations Act, proposed section 454M. 106. Corporations Act, proposed subsection 454N(1). 107. Corporations Act, proposed subsection 454N(2). 108. Corporations Act, proposed subsection 454N(3). 109. Corporations Act, proposed section 454P. 110. Corporations Act, proposed section 455A. 111. Corporations Act, proposed subsections 455B(3)-(5). 112. Explanatory Memorandum, Corporations Amendment (Corporate Insolvency Reforms) Bill 2020, p. 23. 113. Exposure Draft, Corporations Regulation, paragraph 5.3B.12(1)(b); subsections 5.3B.13(1) and 5.3B.15(1).

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reasonable grounds that it would not be reasonable in the circumstances to require the company to prepare the restructuring plan within the original timeframe

• the restructuring plan must be in the approved form. It must identify the company’s property that is to be dealt with and how it will be dealt with, provide for the remuneration of the restructuring practitioner and specify the date on which the restructuring plan was executed114

• a restructuring plan must be accompanied by a restructuring proposal statement which includes a schedule of debts115

• as soon as practicable after the restructuring plan is executed, the restructuring practitioner prepares and signs a certificate either endorsing the plan or not116

• the restructuring practitioner gives the restructuring plan and certificate to as many of the company’s affected creditors as reasonably practical117

• the acceptance period for the plan is 15 business days118 and

• a company’s restructuring plan is accepted if a majority in value of the company’s affected creditors who reply before the end of the acceptance period state that the restructuring plan should be accepted.119

Rights, obligations and liabilities The Bill sets out a broad Regulation-making power which may be made in relation to the rights, obligations and liabilities of a company, its officers and former officers in relation to a person who is a restructuring practitioner.120

The Bill also provides that the restructuring practitioner has a right of indemnity in relation to their remuneration and any debts or liabilities incurred and damages or losses sustained so long as they have acted in good faith and without negligence.121 The right of indemnity has priority over other debts.122

Safe harbour Subsection 588G(1) of the Corporations Act applies where:

• a person is a director of a company at the time when the company incurs a debt

• the company is insolvent at that time, or becomes insolvent by incurring that debt and

• at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent.

Under subsection 588(2), a person contravenes section 588G by failing to prevent the company from incurring the debt if:

114. Ibid., subsection 5.3B.13(2). 115. Ibid., subsection 5.3B.14(1). 116. Ibid., section 5.3B.16. 117. Ibid., section 5.3B.19. 118. Ibid., subsection 5.3B.19(3). 119. Ibid., subsection 5.3B.23(1). 120. Corporations Act, proposed section 456G. Item 94 in Part 2 of Schedule 1 to the Bill inserts proposed section 60-18 into the

Insolvency Practice Schedule (located in Schedule 2 of the Corporations Act) so that the Insolvency Practice Rules may provide for the remuneration of a restructuring practitioner for a company; and a restructuring practitioner for a restructuring plan. 121. Corporations Act, proposed section 456J. 122. Corporations Act, proposed section 456K. See also Corporations Act, Schedule 2 (called the Insolvency Practice Schedule (Corporations), Division 60 which sets out the rules about remuneration and other benefits received by external administrators. Item 94 in Part 2 of Schedule 1 to the Bill inserts proposed clause 60-18 which states that the Insolvency Practice rules may provide for the remuneration of a restructuring practitioner for a restructuring plan that has been made in relation to a company to be dealt with wholly or partly under the restructuring plan.

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• the person is aware at that time that there are such grounds for so suspecting or

• a reasonable person in a like position in a company in the company’s circumstances would be so aware.

Item 65 in Part 2 of Schedule 1 to the Bill inserts proposed section 588GAAB into the Corporations Act to create a ‘safe harbour’ for companies under restructuring. The effect of the provision is that subsection 588(2) of the Corporations Act will not apply where the relevant company has incurred a debt during restructuring provided that the debt is incurred:

• in the ordinary course of the company’s business

• with the consent of the restructuring practitioner or

• by order of the Court.

Key issues and provisions—Schedule 2 Quick guide to Schedule 2 The amendments in Schedule 2 to the Bill provide temporary relief for eligible companies seeking to enter into the formal debt restructuring process. An initial period of three months applies—with the possibility that the relief can be extended for a further month. The temporary relief period begins on 1 January 2021 and ends on 31 March 2021. The amendments • set out the eligibility criteria for access to temporary restructuring relief and • the circumstances in which the relief will cease.

Form of temporary restructuring relief Item 3 in Schedule 2 to the Bill inserts proposed section 588GAAC into the Corporations Act to create a ‘safe harbour’ for companies which are looking for a restructuring practitioner. The effect of the provision is that subsection 588G(2) of the Corporations Act (discussed above) will not apply in relation to a person and a debt incurred by a company if:

• the company is eligible for temporary restructuring relief when the debt is incurred

• the debt is incurred in the ordinary course of the company’s business and

• the company has taken all reasonable steps to appoint a restructuring practitioner before the debt was incurred.

In a proceeding for, or relating to, a contravention of subsection 588G(2) of the Corporations Act the person bears an evidential burden in relation to the matters comprising the ‘safe harbour’.

However, the ‘safe harbour’ does not apply to a person and a debt in circumstances which may be prescribed by the Regulations.123

Eligibility for temporary restructuring relief The Bill provides that a company is eligible for temporary restructuring relief if all of the following are satisfied:

• before 31 March 2021, the directors of the company make and publish a declaration setting out the company’s eligibility124

• the directors declare that there are reasonable grounds to believe that the company is insolvent or likely to become insolvent and that the eligibility criteria for restructuring would be

123. Corporations Act, proposed subsections 588GAAC(2) and (3). 124. Corporations Act, proposed paragraph 458E(1)(a).

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met on any day on or after the day the declaration is first published and before the declaration expires125

• the board has resolved to the effect that a restructuring practitioner for the company should be appointed126

• the company has not already entered into a form of external administration127

• the declaration has not expired128

• the company has not ceased to be eligible129 and

• the company was not previously eligible for temporary restructuring relief that has since ceased.130

A declaration as set out above expires three months after notice of the declaration is first published in the prescribed manner (called the initial relief period).131

A further one month of relief is available provided that:

• there are reasonable grounds to believe that the company is insolvent or likely to become insolvent and that the eligibility criteria for restructuring would be met on any day after the declaration is published and before the temporary relief expires

• the board has resolved to the effect that a restructuring practitioner for the company should be appointed and

• the company has not already entered into a form of external administration132

• the directors of the company have taken all reasonable steps to appoint a restructuring practitioner but have been unable to do so133

• the directors of the company make and publish a further declaration in the prescribed manner134 and

• notice of the further declaration is published no later than two weeks before the end of the initial relief period.135

Where the directors of a company publish notice of a declaration as set out above, they must send a copy of the declaration to ASIC no later than five business days after doing so.136

When eligibility ceases A company ceases to be eligible for temporary restructuring relief if any of the following occurs:

• the declaration under which the company was eligible for temporary restructuring relief expires

• the directors of the company fail to give ASIC a copy of the declaration within the relevant time frame

125. Corporations Act, proposed paragraph 458E(1)(b). 126. Corporations Act, proposed paragraph 458E(1)(c). 127. Corporations Act, proposed paragraph 458E(1)(d). 128. Corporations Act, proposed paragraph 458E(1)(e). 129. Corporations Act, proposed paragraph 458E(1)(f). 130. Corporations Act, proposed paragraph 458E(1)(g). 131. Corporations Act, proposed paragraph 458E(2)(a). 132. Corporations Act, proposed subparagraph 458E(2)(b)(i). 133. Corporations Act, proposed subparagraph 458E(2)(b)(ii). 134. Corporations Act, proposed subparagraph 458E(2)(b)(iii). 135. Corporations Act, proposed subparagraph 458E(2)(b)(iv). 136. Corporations Act, proposed subsection 458E(4). Failure to comply with this requirement is an offence under

subsection 1311(1) of the Corporations Act.

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• a small business restructuring practitioner for the company is appointed

• an administrator of the company is appointed

• a liquidator, or provisional liquidator, is appointed to wind up the company

• the company publishes notice that the company is not, or is not to be treated as, eligible for temporary restructuring relief or

• the Court orders that the company is not eligible for temporary restructuring relief.137

The directors of a company must make and publish a declaration that the company is not eligible for temporary restructuring relief if there are not reasonable grounds to believe that the company is eligible for that relief.138 The declaration must be published and a copy of the declaration must be given to ASIC within five business days of the directors becoming aware that there are not reasonable grounds to believe that the company is eligible for temporary relief. A failure to comply with these requirements gives rise to a civil penalty under subsection 1317E of the Corporations Act.139

The Court may make an order that a company is not eligible for temporary restructuring relief upon the application of a creditor of the company or ASIC, or on its own initiative. In that case, the directors of the company must, within five business days after the order is made, publish notice of the order in the prescribed manner and give ASIC a copy of the order.140

Key issues and provisions—Schedule 3 Quick guide to Schedule 3 The amendments in Schedule 3 to the Bill provide for a simplified liquidation process for the purpose of winding up the affairs and distributing the property of a company in a creditors’ voluntary winding up. They operate so that: • the directors of a company may make a written declaration that they believe they meet the

eligibility criteria for the simplified liquidation process • the liquidator may choose the simplified liquidation process where less than 20 business days have passed since the triggering event • creditors retain the right to opt out of the simplified liquidation process.

Choosing the simplified liquidation process Item 8 in Schedule 3 to the Bill inserts proposed Subdivision B—Simplified liquidation process for creditors’ voluntary winding up of an insolvent company into Division 3 of Part 5.5 of the Corporations Act.

Within new Subdivision B, proposed section 500A of the Corporations Act allows a liquidator to adopt the simplified liquidation process for the purpose of winding up the affairs and distributing the property of a company in a creditors’ voluntary winding up, if the liquidator believes on reasonable grounds that the eligibility criteria are met in relation to the company.141

137. Corporations Act, proposed subsection 458E(5). 138. Corporations Act, proposed subsection 458F(1). 139. Item 4 in Schedule 2 to the Bill amends the table in subsection 1317E(3) of the Corporations Act. 140. Corporations Act, proposed section 458G. 141. Corporations Act, proposed subsection 500A(1).

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In that case, the liquidator must give each member and creditor of the company a notice in writing at least 10 business days before adopting the simplified liquidation process. The notice must include the following:

• a statement that the liquidator believes on reasonable grounds that the eligibility criteria for the simplified liquidation process will be met

• an outline of the simplified liquidation process containing the prescribed information (if any)

• a statement that the liquidator will not adopt the simplified liquidation process if at least 25 per cent in value of the creditors direct the liquidator in writing not to do so and

• information about how a creditor may give a direction in writing not to adopt the simplified liquidation process.142

Exception There is an exception to the general rule that a liquidator may adopt the simplified liquidation process. This arises if:

• more than 20 business days have passed since the day on which the triggering event occurred

• the liquidator has not given each member and creditor of the company the written notice which is set out above or

• at least 25 per cent in value of the creditors request the liquidator not to follow the simplified liquidation process.143

The method for working out whether the 25 per cent in value of creditors test is met is contained in proposed section 500AD of the Corporations Act.

What is a triggering event? Each of the following is a triggering event144 in relation to a company: • a special resolution that the company be wound up voluntarily is passed145 • a resolution is passed by the creditors of a company under administration that the

company be wound up146 • a company under administration fails to execute a deed of company arrangement within 15 business days after the end of the meeting of creditors; or such further period as the

Court allows on an application made within those 15 business days147 • the company’s creditors pass a resolution terminating a deed of company arrangement executed by the company and a resolution that the company be wound up is passed148 • the Court makes an order terminating a deed of company arrangement which the company

has executed149 • a company has entered into a deed of company arrangement which specifies the circumstances in which the deed is to terminate and the company is to be wound up—

where those circumstances exist at a particular time150

142. Corporations Act, proposed subsection 500A(3). 143. Corporations Act, proposed subsection 500A(2). 144. Corporations Act, proposed section 489F inserted by item 5 in Schedule 3 to the Bill. 145. Corporations Act, section 491. 146. Corporations Act, paragraph 446A(1)(a). 147. Corporations Act, subsection 444B(2) and paragraph 446A(1)(b). 148. Corporations Act, section 445E and paragraph 446A(1)(c). 149. Corporations Act, section 445D and paragraph 446AA(1)(a). 150. Corporations Act, paragraph 446AA(1)(b).

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• Regulations made for the purposes of section 446B of the Corporations Act have the effect that the company is taken to have passed a special resolution that the company be wound up voluntarily—when that special resolution is taken to have passed151

• any other event prescribed by the Regulations.

Directors’ declaration The directors of a company must give the liquidator of the company a declaration in the prescribed form if the directors believe on reasonable grounds that, on the declaration being given, the eligibility criteria for the simplified liquidation process will be met in relation to the company. That declaration must be given within five business days after the day of the meeting of the company at which the resolution for voluntary winding up is passed.152

Eligibility criteria Proposed section 500AA in Schedule 3 to the Bill sets out the eligibility criteria for the simplified liquidation process. All of the following must be satisfied:

• a triggering event occurs

• requirements to give a report on the company’s business affairs and the declaration of eligibility for simplified liquidation process have been complied with153

• the company will not be able to pay its debts in full within a period not exceeding 12 months after the day on which the triggering event occurs

• if a test for eligibility is prescribed in the Regulations in relation to the liabilities of the company, that requirement is satisfied on the day the triggering event occurs— the Exposure Draft Regulations propose that the total liabilities of the company do not exceed $1 million154

• no person who is a director of the company or was a director of the company within the 12 months immediately preceding the day of the triggering event has been a director of another company that has undergone restructuring or a simplified liquidation process within a prescribed period— the Exposure Draft Regulations propose a period of seven years155

• the company has not undergone restructuring or been the subject of a simplified liquidation process within a prescribed period— the Exposure Draft Regulations propose a period of seven years156 and

• the company has given returns, notices, statements, applications or other documents as required by taxation laws within the meaning of the Income Tax Assessment Act 1997.

Creditors opt-out Importantly, the Bill provides a creditor of a company may, within 20 business days after the day on which a triggering event in relation to the company occurs, give the liquidator of the company notice in writing requesting the liquidator not to follow the simplified liquidation process.157

151. Corporations Act, section 491. 152. Corporations Act, proposed section 498 inserted by item 7 in Schedule 3 to the Bill. 153. Corporations Act, subsection 497(4) and proposed section 498. 154. Exposure Draft, Corporations Regulation, subsection 5.5.03(1). 155. Exposure Draft, Corporations Regulation, subsection 5.5.03(2). 156. Exposure Draft, Corporations Regulation, subsection 5.5.03(3). 157. Corporations Act, proposed section 500AB.

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What is the simplified liquidation process? The simplified liquidation process for a creditors’ voluntary winding up is a modified version of the process for a creditors’ voluntary winding up as currently set out in Chapter 5 and the Insolvency Practice Schedule of the Corporations Act.

Proposed subsection 500AE(2) lists those provisions that do not apply in the simplified liquidation process. The effect of the amendment is:

• a liquidator may not convene a meeting of creditors at any time, cannot be directed to convene a meeting of creditors by ASIC or by creditors, and is not required to convene a meeting of creditors in certain circumstances

• creditors may not appoint a committee of inspection to monitor the liquidation and give assistance to the liquidator and

• ASIC and creditors cannot appoint a reviewing liquidator (although the court retains this power).

In addition, Regulations may provide for further specific rules for the simplified liquidation process.158

Ceasing the simplified liquidation process The Bill provides that the liquidator of a company must cease to follow the simplified liquidation process if the eligibility criteria for the simplified liquidation process are no longer met in relation to a company or in other circumstances prescribed by the Regulations.159

The matters dealt with by the Regulations in relation to a company that has ceased to be subject to the simplified liquidation process may include:

• proofs of debts and claims

• ranking debts and claims

• the identification of contributories

• the declaration and payment of a dividend in the winding up and

• giving information, providing reports and producing documents to ASIC.

Key issues and provisions—Schedule 4 Quick guide to Schedule 4 The amendments in Schedule 4 to the Bill expand the situations where documents relating to the external administration of a company may be given electronically. In addition, documents relating to external administration will be able to be signed electronically by using any reliable method to identify the signatory and indicate the signatory’s intention.

New definitions Item 1 in Schedule 4 to the Bill inserts a number of new definitions into section 9 of the Corporations Act in support of the changes in Schedule 4 to the Bill.

Under the Bill the term document means any record of information, and includes:

158. Corporations Act, proposed subsection 500AE(3). 159. Corporations Act, proposed subsection 500AC(1).

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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 27

(a) anything on which there is writing

(b) anything on which there are marks, figures, symbols or perforations having a meaning for persons qualified to interpret them

(c) anything from which sounds, images or writings can be reproduced with or without the aid of anything else and

(d) a map, plan, drawing or photograph.

An electronic communication is:

(a) a communication of information in the form of data, text or images by means of guided and/or unguided electromagnetic energy or

(b) a communication of information in the form of speech by means of guided and/or unguided electromagnetic energy, where the speech is processed at its destination by an automated voice recognition system.

A nominated electronic address, in relation to the addressee of an electronic communication, is:

(a) the most recent electronic address nominated by the addressee to the originator of the electronic communication as the electronic address for receiving electronic communications; or

(b) if:

(i) the addressee has nominated an electronic address as mentioned in paragraph (a) and the originator knows, or there are reasonable grounds to believe, that the address is not a current electronic address for the addressee or

(ii) the addressee has not nominated an electronic address as mentioned in paragraph (a)

an electronic address that the originator believes on reasonable grounds to be a current electronic address for the addressee for receiving electronic communications.

The term virtual meeting technology means any technology that allows a person to participate in a meeting without being physically present at the meeting.

Communications sent and received

When sent and when received Item 2 in Schedule 4 to the Bill inserts proposed section 105A into the Corporations Act to specify that an electronic communication is sent:

• when the electronic communication leaves an information system under the control of the originator or of the party who sent it on behalf of the originator or

• if the electronic communication has not left an information system under the control of the originator or of the party who sent it on behalf of the originator—when the electronic communication is received by the addressee.160

An electronic communication is received when the electronic communication becomes capable of being retrieved by the addressee at the addressee’s nominated electronic address.161 The Bill

160. Corporations Act, proposed subsection 105A(2). The Note to proposed subsection 105A(2) notes that the last dot point would apply to a case where the parties exchange electronic communications through the same information system. 161. Corporations Act, proposed subsection 105A(4).

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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 28

includes the assumption that an electronic communication is capable of being retrieved by the addressee when it reaches the addressee’s nominated electronic address.162

Where sent from and where received An electronic communication is deemed to have been sent:

• from the address of the originator as contained on the register of members of the company or registered scheme at the time the communication is sent—if the addressee is a company or registered scheme and the originator is a member of the company or registered scheme

• from the registered office of the originator—if the originator has a registered office and the bullet point above does not apply

• otherwise from the most recent physical address nominated by the originator to the addressee or in the absence of such a nomination—from the originator’s usual residential address in Australia.163

An electronic communication is deemed to have been received:

• at the address of the addressee as contained on the register of members of the company or registered scheme at the time the communication is received—if the originator is a company or registered scheme and the addressee is a member of the company or registered scheme

• if there is no address on the register of members of the company or registered scheme—at the registered office of the addressee

• otherwise at the most recent physical address nominated by the addressee to the originator or in the absence of such nomination—at the addressee’s usual residential address in Australia.164

Electronic communication of documents Item 19 in Part 2 of Schedule 4 to the Bill repeals and replaces section 600G of the Corporations Act.

Currently section 600G lists provisions of the Corporations Act under which a person is authorised or required to give or send a notice or other document. Under that section the relevant notices or documents may be provided by electronic means if the recipient consents.

Proposed section 600G applies to any document that is required or permitted to be given to a person (the recipient) or required to be signed by a person:

• under Chapter 5 of the Corporations Act (which relates to external administration) or an instrument made for the purposes of Chapter 5

• a provision of Chapter 10 of the Corporations Act (which contains transitional provisions) relating to the external administration of a company or an instrument made for the purposes of a provision of Chapter 10 or

• Schedule 2—the Insolvency Practice Schedule (Corporations) or an instrument made for the purposes of a provision of Schedule 2.165

In that case, the document may be given to the recipient by means of an electronic communication or by giving the recipient sufficient information to allow the recipient to access the document electronically.166 Importantly though, this should only occur if it is reasonable to expect

162. Corporations Act, proposed subsection 105A(5). 163. Corporations Act, proposed subsection 105B(2). 164. Corporations Act, proposed subsection 105B(3). 165. Corporations Act, proposed subsection 600G(1). 166. Corporations Act, proposed subsections 600G(2) and (3).

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Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 29

that the document would be readily accessible so as to be useable for subsequent reference and there is a nominated electronic address for the recipient. 167

Signing the document If the document is required to be signed by a person, that requirement deemed to have been met in relation to the electronic communication of the document if:

• the person receives a copy or counterpart of the document that is in a physical form or by way of electronic communication

• the copy or counterpart includes the entire contents of the document

• the person indicates, by means of an electronic communication, that the person has signed the document

• a method is used to identify the person and to indicate the person’s intention in respect of the document and

• the method that was used was either as reliable as appropriate for the purpose for which the document was generated or communicated; or the method has been proven to identify the person and to indicate the person’s intention in respect of the document.168

Concluding comments The three key elements of the reforms to small business insolvency are:

• small business restructuring: a new formal debt restructuring process for eligible incorporated small businesses, which the Government has indicated will apply to businesses with liabilities of less than $1 million, to allow a faster and less complex process to restructure existing debts and maximise their chances of survival

• small business liquidation: a new simplified liquidation pathway for eligible incorporated small businesses, which the Government has indicated will apply to businesses with liabilities of less than $1 million, to provide for a faster and lower cost liquidation process and

• other measures: to provide temporary insolvency relief until 31 March 2021—to address the issue of eligible small businesses not being able to access the process immediately whilst insolvency practitioners become familiar with small business restructuring.

Safeguards have been included to prevent companies from using the process to undertake corporate misconduct, including illegal phoenix activity.

167. Corporations Act, proposed subsection 600G(4). 168. Corporations Act, proposed subsection 600G(5).

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