Proposed amendments to Insolvency Law Reforms
LegalCorporateComplianceFinance3/05/2021 12:00:00 AM

Bankruptcy & Insolvency - Proposed amendments to Insolvency Law Reforms

On 24 September 2020, the Morrison government announced reforms to Australia’s insolvency framework to better support Australian small businesses, their creditors and employees, in particular businesses facing financial difficulties following the COVID-19 pandemic.

The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Act) and Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 commenced on 1 January 2021. The Act introduced a new debt restructuring process designed to reduce complexity, time and costs. This process allows companies to quickly restructure, with the assistance of a small business restructuring practitioner. This is essential for many businesses in the wake of the pandemic. If restructure is not possible, a new simplified liquidation process allows businesses to wind up faster, and reduces the compliance burden on insolvency practitioners, thereby saving costs for creditors and employees, and allowing business owners to move on. You can read more about the new insolvency law reforms on our Pinpoint ® platform here.

Background

Before these reforms came into effect, Australia’s corporate insolvency system was based on a one-size-fits-all model which imposed the same duties and obligations on all companies, regardless of the company size or complexity of the administration. High costs and rigid processes failed to account for the needs of small businesses by depleting their limited resources. These issues became even more pressing in the wake of the COVID-19 pandemic, with a potential increase in the number of businesses facing financial distress, particularly small businesses. The insolvency law reforms are aimed at achieving greater economic dynamism by assisting more small businesses to survive and increasing the efficient reallocation of capital where survival is not possible.

Proposed amendments

On 23 April 2021, the Treasury announced proposed amendments (via a Bill and draft Regulations) to the primary and subordinate legislation in order to further support the intended outcomes of the new debt restructuring and simplified liquidation processes.

The proposed amendments are outlined below.

The proposed Bill

The Treasury Laws Amendment (Corporate Insolvency Reforms Consequentials) Bill 2021 (Bill) will amend a number of Acts, as outlined in the table below:

No. Act Amended  Details
 1 Corporations Act 2001 (Corporations Act), Banking Act 1959, Insurance Act 1973, Life Insurance Act 1995 Clarifies that entities subject to prudential regulation by the Australian Prudential Regulation Authority (APRA) are not eligible to access the new debt restructuring or simplified liquidation processes. These processes are only intended for small businesses i.e. those with a $1M liabilities threshold.

Entities operating within the banking, insurance and superannuation entities are generally large corporations, subject to prudential regulation by APRA. These entities can continue to access existing insolvency processes which are more suited to the complexity and risk profiles of larger corporations.

This means that an individual corporation within a larger corporate group, for example, and regulated by APRA, cannot access the new insolvency processes, even if they have liabilities of less than $1M.

This also applies to any company which is a body-corporate of a body regulated by APRA, for example a non-operating holding company.

The definition of “external administrator” in the Banking Act 1959, Insurance Act 1973 and Life Insurance Act 1995, is amended to remove restructuring practitioners, because entities regulated under those Acts are not eligible to access the new insolvency processes.
 2 Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act)

Amendments to ensure that indigenous companies may utilise the new debt restructuring and simplified liquidation processes, under a new Pt 11-4A and by applying the Corporations Act Pt 5.3B and Sch 2 to the CATSI Act. This ensures that the specially designed powers of the CATSI Act are maintained and that the Corporations Act restructuring provisions are tailored to the specific requirements and risks inherent in the indigenous corporate sector.

The amendments to the CATSI Act also include:

  • Eligible indigenous companies can enter the simplified liquidation process by passing a special resolution under s 526-20 of the CATSI Act.
  • If a special administrator is appointed while an indigenous company is under restructuring, and where a restructuring plan is not yet in place, the restructuring process ends.
  • If an indigenous company is under special administration, a small business restructuring practitioner cannot:
    • Be appointed
    • Exercise any powers or functions, or deal with the company’s property, unless they obtain approval from the special administrator or unless notice of the special administration has not yet been received.
  • The Registrar can determine that an indigenous company be put under special administration, which (for indigenous companies) takes priority over the debt restructuring process.
  • A person aggrieved by a decision, act or omission of a small business restructuring practitioner, either during restructuring or while a restructuring plan is in place, can appeal to the court.
  • Any action taken by the director of an indigenous company in appointing a small business restructuring practitioner, may be a factor in determining that director’s liability for insolvent trading.
  • Extension of the definition of “exempt document” to include liquidator reports made under reg 5.5.05 of the Corporations Regulations. A s 5.5.05 report is a new report under the simplified liquidation process, which replaces the more detailed s 533 report under the full liquidation process. A liquidator must submit a s 5.5.05 report to ASIC if the liquidator has reasonable grounds to believe that offences have been committed. The amendments mean that a person cannot inspect a document, made by the liquidator of an indigenous company which is subject to the simplified liquidation process, if that document contains information about offences or breaches related to the company.
 3 Australian Securities and Investments Commission Act 2001 (ASIC Act), Corporations Act, Superannuation Industry (Supervision) Act 1993

Consequential amendments to clarify operation of the new debt restructuring and simplified liquidation processes and ensure that the processes work as intended. This includes clarifying that:

  • A corporate restructuring practitioner has qualified privilege for statements made in the performance of their functions.
  • Any person dealing with a restructuring practitioner, who is acting as an agent of the company, is afforded the same protections as if they were dealing with the company itself.
  • ASIC may investigate offences in a s 5.5.05 report but the report itself is exempt from public disclosure.
  • In the simplified liquidation process, a resolution can be passed by way of a proposal to creditors and contributories, without the need for a meeting of creditors.
  • The appointment of a restructuring practitioner and the making of a restructuring plan is a circumstance which entitles a bidder to withdraw an unaccepted corporate takeover offer.
  • The appointment of a restructuring practitioner is an insolvency event which triggers the disqualification of a corporate trustee, custodian or investment manager of a superannuation entity.
  • Electronic communication is taken to have been sent or received from the principle place of business.
 4 Fair Entitlements Guarantee Act 2012
Amendments to ensure employees who are eligible to receive entitlements can access the Fair Entitlements Guarantee scheme if their employer had been under restructuring prior to being wound up i.e. the amendments apply in relation to an employer that appoints a restructuring practitioner.

The definition of “insolvency practitioner” is amended to include a restructuring practitioner for a company or for a restructuring plan. A company developing a restructuring plan is still controlled by its directors, can continue to trade and remains responsible for paying employees their entitlements throughout the process. Expanding the definition of “insolvency practitioner” will ensure consistent treatment of employees’ eligibility for Fair Entitlements Guarantee advances.
The proposed Regulations

The Treasury Laws Amendment (Corporate Insolvency Reforms Consequentials) Regulations 2021 (Regulations) are made pursuant to s 1364 of the Corporations Act and s 633-1(1) of the CATSI Act. The proposed Regulations will amend the Corporations Regulations 2001 and the Corporations (Aboriginal and Torres Strait Islander) Regulations 2017, as outlined in the table below:
No. Regulations Amended  Details 
 1 Corporations Regulations 2001
  • Remove references to insurance companies in relation to the debt restructuring process. These provisions are no longer required, as entities regulated under the Insurance Act 1973 and Life Insurance Act 1995 are not eligible to access the debt restructuring process.
  • Permit a small business restructuring practitioner to act as a company’s agent when acting in accordance with the restructuring plan.
  • Clarify that a s 5.5.05 report is exempt from public disclosure.
 2 Corporations (Aboriginal and Torres Strait Islander) Regulations 2017
  • Modify the Corporations Act restructuring provisions so that they are tailored to the specific requirements and risks inherent in the indigenous corporate sector/
  • Allow an eligible indigenous company to adopt the simplified liquidation process by passing a special resolution under s 526-20 of the CATSI Act. This is in addition to other triggering events for the simplified liquidation process, as detailed under s 489F of the Corporations Act, including:
    • Passing a special resolution under s 491 of the Corporations Act to wind up a company, or
    • Terminating a voluntary administration process.
  • Sch 1 of the Regulations allows indigenous companies to avail of the debt restructuring process. This is achieved by applying the Corporations Act restructuring provisions (Pt 5.3B and Sch 2) and other relevant provisions to the CATSI Act.
What next?

Public consultation on the draft legislation and explanatory material will close on 7 May 2021.

You can read more about the new insolvency law reforms on our Pinpoint ® platform here.

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Sources: Treasury Department, Consequential amendments to small business insolvency reforms, 23 April 2021, accessed 30 April 2021.

Treasury Department, Treasury Laws Amendment (Corporate Insolvency Reforms Consequentials) Bill 2021, 23 April 2021, accessed 30 April 2021.

Treasury Department, Bill Explanatory Memorandum, 23 April 2021, accessed 30 April 2021.

Treasury Department, Treasury Laws Amendment (Corporate Insolvency Reforms Consequentials) Regulations 2021, 23 April 2021, accessed 30 April 2021.

Treasury Department, Regulations Explanatory Statement, 23 April 2021, accessed 30 April 2021.

Corporations Amendment (Corporate Insolvency Reforms) Act 2020, 1 January 2021, accessed 30 April 2021.

CCH Pinpoint ®, Insolvency Law Reform, accessed 30 April 2021.