Yesterday Treasury released an Exposure Draft of the much anticipated Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 (Draft Regulations) and Insolvency Practice Rules (Corporations) Amendment (Corporate Insolvency Reforms) Rules 2020 which give us the first real insight into how the new small business restructuring process is intended to work in practice.
The new reform, which is the subject of the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) (Bill) currently before Parliament, is intended to become law on 1 January 2021, less than two months away.
We set out our analysis of the Draft Regulations below, focusing on the key areas of concern for secured creditors and insolvency practitioners that were left unanswered by the Bill.
Submissions in response to the Draft Regulations are due by 24 November 2020.
Key issues for secured creditors
1. Clarity on proposed liabilities test for eligibility criteria
The Draft Regulations propose that total liabilities of the company on the day the restructuring begins (being the date of the SBRP’s appointment) must not exceed $1m.
‘Liability’ is proposed to be defined as any liability or obligation that is not contingent.
It appears that it is intended that secured debt and related-party debt will count towards the $1m threshold.
2. Voting rights
It appears that secured creditors will be entitled to vote for the full amount of their debt as at the date of the appointment of the SBRP.
3. Disputes about value of admissible debts or claims
The ‘restructuring proposal statement’ that the company must prepare and which accompanies the restructuring plan, must contain a schedule of debts and claims of the company’s creditors.
If a creditor disagrees with the company’s assessment of the creditor’s admissible debts or claims, it must notify the SBRP within 5 business days of receiving the restructuring plan.
While the consequences of failing to dispute the assessment within that time are unclear, it is critical that secured creditors, particularly banks and other large financiers, have appropriate procedures in place to ensure that they can review and, if necessary, dispute the company’s assessment of the value of their debt, within the 5 business day period.
4. Extent to which secured creditors are bound by a restructuring plan
It is proposed that secured creditors will only be bound to the extent of their unsecured debt. If the entire amount of their debt is secured (that is, the value of their security is equal to or greater than the value of their debt), the secured creditor can only be bound to the extent that it consents to be bound by the plan.
Further, it is proposed that the fact that the restructuring plan has been made will not prevent a secured creditor from realising or otherwise dealing with their security interest unless the court makes orders to that effect or:
- the secured creditor accepted the proposal to enter into the plan (i.e. ‘voted’ in favour of the plan); and
- the plan prevents the secured creditor from doing so.
This position is therefore similar to that of a secured creditor in relation to a deed of company arrangement in voluntary administration.
Further, even once the restructuring plan is in place, it is proposed that SBRPs be prohibited from disposing of property of the company that is subject to a security interest unless the disposal is in the ordinary course of the company’s business, with the written consent of the secured party or with leave of the court.
5. Payments under the restructuring plan
It is proposed that restructuring plans be taken to include the ‘standard terms’ and any restructuring plan that is inconsistent with those standard terms will be void to the extent of that inconsistency.
The effect of these standard terms is that the unsecured portion of a secured creditor’s debt will rank equally with all other admissible debts and claims and they are entitled to be paid proportionately from the restructuring ‘fund’.
6. Implicit need for companies to engage meaningfully with secured creditors
It is clear from the Bill that a company seeking to successfully avail of the proposed restructuring process will need to garner the support of key secured creditors. This is reinforced in the Draft Regulations which enable the restructuring plan to be conditional upon the occurrence of a specified event within a specified period which must be no more than 10 business days.
Such a condition might include the company and its financier entering into an appropriate forbearance arrangement which sets out the terms upon which the secured creditor is prepared to forbear from enforcing its security to facilitate completion of the restructuring plan.
Key issues for insolvency practitioners
7. Sub-set of registered liquidators practising only as SBRPs
There has been much talk of the creation of a new ‘sub-set’ of registered liquidators who take only SBRP appointments and having qualification and experience requirements commensurate with the nature of those appointments.
It is proposed that applicants for this new class of registered liquidators must:
- be current members of CAANZ, CPA Australia or IPA;
- have demonstrated the capacity to perform satisfactorily to the functions and duties of a registered liquidator; and
- able to satisfy any conditions to be imposed under the Insolvency Practice Schedule (Corporations) if registered as a liquidator.
8. Powers and functions of SBRP clarified
The Draft Regulations propose that the SBRP has the power to investigate the company’s business, property, affairs and financial circumstances for the purposes of:
- preparing his or her certificate that will accompany the proposed plan;
- deciding whether to terminate the restructuring of the company;
- resolving a disagreement as to the amount of an admissible debt or claim;
- performing or exercising any other function, duty or power as SBRP.
Further, it is proposed that the functions of the SBRP be to:
- receive money from, and hold money on trust for, the company;
- pay the money to creditors in accordance with the restructuring plan;
- if requested to do so by the directors, realise the property of the company that is available to pay creditors, and distribute the proceeds amongst them, in accordance with the plan;
- answer questions about the performance or exercise of any of the SBRP’s functions and powers as SBRP for the plan;
- do anything incidental to the performance or exercise of those functions and powers; and
- do anything else that is necessary or convenient for the purpose of administering the plan.
9. Certification of the plan
As part of the suite of documents that accompany the proposed restructuring plan provided to creditors, the SBRP is required to prepare and sign a certificate which, it is proposed, must:
- if the SBRP believes on reasonable grounds that:
- the eligibility criteria are met;
- if the plan is made, the company is likely to be able to discharge the obligations created by the plan as and when they become due and payable,
- state that and, if not, identify why it is that such a belief could not be formed;
- if the SBRP believes on reasonable grounds that all information required to be set out in the company’s restructuring proposal statement has been set out in that statement, state that and, if not identify why it is that such a belief could not be formed; and
- disclose various other matters relating to independence of the SBRP including referral relationships that led to the appointment and relationships with affected creditors.
10. Obligations to investigate and verify
There is no positive obligation on the SBRP to investigate the company’s affairs, however, the Draft Regulations propose that the SBRP commit an offence if they prepare a certificate and they do not:
- make reasonable inquiries into the company’s business, property, affairs and financial circumstances; or
- take reasonable steps to verify the company’s business, property, affairs and financial circumstances;
It is also proposed that the SBRP will commit an offence if:
- any time before they prepare a certificate, they:
- become aware that the information in the plan, or in the restructuring proposal statement accompanying the plan, is incomplete or inaccurate; and
- have reasonable grounds to believe that, if the plan is made, the matter to which the incompleteness or inaccuracy relates is likely to affect the company’s ability to meet its obligations under the plan; and
- they do not, as soon as practicable after becoming so aware, notify the company and provide an opportunity for the company to address the incompletes or inaccuracy.
Both offences are proposed as strict liability offences and attributed 50 penalty units.
It is useful to note that the Bill contemplates that the SBRP have the right to inspect and take copies of the company’s books and records (including those held by third parties such as external accountants), and that the directors are obliged to furnish such records in their possession to the SBRP.
11. Right of indemnity and statutory lien
It is proposed that the SBRP be entitled to be indemnified out of the company’s property (other than PPSA retention of title property) for:
- any debts or liabilities incurred, or damages or losses sustained, in good faith and without negligence, by the SBRP in the performance or purported performance of his or her functions or duties or in the exercise of purported exercise of his or her powers; and
- the remuneration to which the SBRP is entitled under the Insolvency Practice Rules made under Schedule 2 of the Act (see further below).
This mirrors the proposed amendments to the Act set out in the Bill. There is also a mirroring of the Bill’s proposed priority for the SBRP’s right of indemnity, which will be afforded priority under section 556(1)(c), and the proposed lien over the company’s property to secure the right of indemnity.
The Draft Regulations mirror the Bill, prescribing that the right of indemnity will have priority over, subject to s 556 of the Act:
- all the company’s unsecured debts;
- any debts of the company secured by PPSA security interests that have vested by virtue of sections 267 or 267A of the Personal Property Securities Act 2009 (Cth) or section 588FL of the Act; and
- subject to the matters set out below, debts of the company secured by a circulating security interest.
The priority of the SRBP’s right of indemnity is affected by an appointment of a receiver, or the entry into possession or control, by a secured creditor whose debt is secured by a circulating security interest.
Essentially, if the appointment of receiver (or entry into possession or assuming of control) occurs prior to the making of the restructuring plan, and the receiver is still in office or the secured party is still in possession or control at the relevant time, the SBRP’s right of indemnity will not have priority over the secured creditor’s debt.
However, if the appointment of the receiver (or entry into possession or assuming of control) occurs after the making of the restructuring plan, the SBRP’s right of indemnity will have priority but only in relation to debts incurred, or remuneration accruing, before written notice of the appointment or entry into possession is given to the SBRP.
Work done after appointment but prior to implementation of plan
It is proposed that, on or prior to the appointment of the SBRP by the company, the board passes a resolution specifying an amount of remuneration that the SBRP is entitled to receive for necessary work properly performance by the SBRP in relation to the restructuring of the company. It appears intended that this be a fixed fee.
Work done in implementing plan
In relation to remuneration for necessary work properly performed by the SBRP in relation to an accepted restructuring plan, the plan must specify that remuneration as a percentage of payments made to creditors in accordance with the plan.
13. Notices required to be given
The Draft Regulations propose that the SBRP be required to give notice to ASIC, “as many of the company’s creditors as reasonably practicable” and, in certain circumstances, the company, in relation to:
- the SBRP’s appointment – within 1 business day;
- lapsing of the proposal to make a restructuring plan (that is, the restructuring of the company coming to an end prior to a plan being presented to creditors) – within 5 business days;
- the making of a restructuring plan – within 5 business days;
- actual or likely contravention of a restructuring plan – as soon as practicable after becoming aware;
- termination of a restructuring plan – within 5 business days.
14. Importance of contemporaneous notes
The Bill sets out the circumstances in which the SBRP may provide his or her consent to transactions or dealings affecting the company’s property.
The Draft Regulations prescribe that:
- any such consent given by the SBRP must be given in writing (unless the SBRP is satisfied that the delay caused by giving written consent would not be in the interests of the company, in which case the consent may be oral); and
- the SBRP must, within 2 business days of giving the consent, make a written record of the consent and any conditions imposed on the consent and provide a copy of the written record to the company, which the company must keep for 5 years.
Failure to comply with that requirement is an offence.
15. Qualified privilege
The SBRP has qualified privilege in respect of statements made, orally or in writing, in the course of exercising any of his or her functions and powers and SBRP for the company and while SBRP for an accepted restructuring plan.
Key issues for all stakeholders
16. Corporate groups can avail of the restructuring process concurrently
It is proposed that a company will not be ineligible for restructuring simply because a related body corporate is already under restructuring or the subject of a simplified liquidation process.
However, the corporate group must move quickly. In those circumstances, the company will only be able to appoint an SBRP if no more than 20 business days has passed since its related body corporate appointed an SBRP or begun to follow the simplified restructuring process.
17. What debts or claims are admissible for the purposes of restructuring
Generally, if a debt or claim would be admissible to proof against a company in liquidation, it is proposed that it will be admissible for the purposes of a restructuring plan. A notable exception is that contingent debts or claims are not admissible for the purposes of a restructuring plan.
18. What are creditors presented with, by whom and when?
As soon as practicable after the restructuring plan is executed by the company, as many as of the company’s “affected creditors” as reasonable practicable are given the following by the SBRP:
- the restructuring plan prepared and signed by the company;
- the restructuring plan standard terms which are specified in the Draft Regulations;
- a ‘restructuring proposal statement’ prepared by the company; and
- a certificate prepared and signed by the SBRP.
These may only be presented to the creditors if, immediately prior to doing so:
- the company:
- has paid the entitlements of its employees that are payable, other than contingent entitlements (the definition of employee entitlements in section 596AA of the Corporations Act 2001 (Cth) (Act) is relied upon and includes superannuation contributions); and
- is up to date on all tax reporting obligations; or
- the company is substantially complying with the above.
19. What does the restructuring plan look like?
|The plan must:||The plan may:||The plan must not:|
20. What does the restructuring proposal statement look like?
The restructuring proposal statement must accompany the restructuring plan and must:
- include a schedule of debts and claims;
- be in the prescribed form and contain the information that that form requires.
The prescribed form is not set out in the Draft Regulations.
21. What does the SBRP’s certificate look like?
The SBRP will commit a strict liability offence (50 penalty units) if they prepare a certificate and do not:
- make reasonable inquiries into the company’s business, property, affairs and financial circumstances; or
- take reasonable steps to verify the company’s business, property, affairs and financial circumstances.
It is useful to recall that the Bill proposes that the SBRP have the right to inspect and take copies of the company’s books and records, and that the directors are obliged to furnish such records in their possession to the SBRP.
22. What are the ‘standard terms’?
A restructuring plan is taken to include all of the following terms and will be void to the extent that it is inconsistent with those terms:
- all admissible debts and claims rank equally;
- those debts and claims will be paid proportionately (assuming the total amount to be paid under the plan is insufficient to meet those debts and claims in full);
- a creditor is not entitled to receive, in respect of an admissible debt or claim, more than the amount of the debt or claim;
- the amount of an admissible claim will be ascertained as at the time immediately before the restructuring began (i.e. immediately before the appointment of the SBRP); and
- if a creditor is a secured creditor, for the purposes of working out what they will be paid under the plan, they are a creditor only to the extent that their debt exceeds the value of their security (or, if they realise their security interest while the plan is in force, the extent of their shortfall after net realisations).
23. What are creditors required to do once they receive the restructuring plan?
The SBRP will ask creditors to:
- give a written statement setting out whether or not the restructuring plan should be accepted; and
- with reference to the company’s assessment of the amount of the creditor’s admissible debts or claims (which is set out in the schedule to the restructuring proposal statement), ask the creditor to either:
- verify that amount if they agree with it; or
- dispute the amount by issuing a notice to the SBRP within 5 business days of receiving the restructuring plan.
The consequences of a creditor failing to dispute the assessed amount of their admissible debts or claims within the 5 business day period is unclear.
If the creditor does choose to dispute the amount, the notice that they give to the SBRP must include detailed particulars of the debt or claim sought to be proved, include a statement of account where applicable and specify the vouchers by which the statement can be substantiated.
The SBRP then has a further 5 business days within which to give the company and the creditor recommendation for resolving the disagreement.
24. Voting on the restructuring plan
The restructuring plan is accepted if the majority in value of the company’s affected creditors who reply before the end of the acceptance period state that the plan should be accepted. That is, it is not the majority in value of all affected creditors – only those that reply or ‘vote’ before the end of the acceptance period.
The value of an affected creditor is determined by reference to the creditor’s admissible debt or claims that are known at the time the restructuring began.
Importantly, the company has a right set-off in similar terms to the statutory right of set off in liquidation under s 553C of the Act. Accordingly, where there are mutual debits and creditors, or mutual dealings, the affected creditor’s value is only the net amount (if any).
The acceptance period is 15 business days beginning on the day the SBRP gives the plan and accompanying documents to the creditors, unless there are disputes about the amount of a creditor’s admissible debts or claims which result in the SBRP recommending that the schedule of debts and claims be amended.
In that case, the acceptance period will commence at the same time but will expire only after 5 business days after the notice of the SBRP’s recommendation is given.
25. Termination of plan and effect on creditors
In the usual course, the plan will terminate when the company’s and any other party’s obligations under the plan have been fulfilled and all admissible debts and claims have been dealt with in accordance with the plan.
In that case, the company will be entitled to any property that was subject to the plan but was not required by the plan to be distributed to creditors and the company is released from all admissible debts or claims.
However, there are other ways in which the plan may terminate as follows:
- the Court makes an order terminating the plan which it may make if it is satisfied of various matters mainly concerning malfeasance, including that there was material omissions form the plan or information about the company’s business was false or misleading;
- if the plan was expressed to be subject to the occurrence of a specified event (for example, the entry into a forbearance arrangement with a secured creditor), that event does not occur within the specified period (which must be no more than 10 business days);
- if there has been a contravention of the plan by a person bound by it and the contravention is not rectified within 30 business days; or
- if a voluntary administrator, liquidator or provisional liquidator is appointed to the company.
If the plan terminates for any of those reasons, any admissible debt or claim that has not been dealt with in accordance with the plan is taken to be due and payable on the business day after the termination.
This, coupled with the presumption the company will be taken to be insolvent if it proposes a restructuring plan to creditors, appears intended to force the hand of the directors and precipitate the appointment of a voluntary administrator or liquidator to the company.
Watch this space
The Draft Regulations have given us an insight into how the proposed small business restructuring process is intended to work in practice.
For reform that was expressly intended to be less costly and more accessible than the existing formal insolvency processes, it has revealed itself to be rather complex and it is difficult to predict how SME businesses and other stakeholders will navigate the significant changes that appear on track to commence on 1 January 2021.
We will continue to keep you up to date as the situation evolves. In the meantime, please reach out to us with any queries.
This article was written by Alison Robertson, Partner, Richard Johnson, Partner and Carmen Boothman, Special Counsel.