Debtor-in-possession restructuring model delivered courtesy of COVID-19.
The proposed new insolvency reforms to support small business look set to be rushed through Parliament, touted to commence 1 January 2021. Details of the proposed changes can be found here: Insolvency Reforms fact sheet.
A new category of insolvency practitioner, a Small Business Restructuring Practitioner (“SBRP”), will help company directors prepare a business restructuring plan, certify the plan to creditors and oversee disbursements once accepted. The new debt restructuring process adopts a ‘debtor-in-possession' model, allowing directors to retain control of the business and assets while creditors consider the restructuring proposal. If more than 50 percent of creditors in value vote in favour, the plan is accepted (related-party creditors are excluded from voting). It is expected this will lead to reduced costs of the process when compared to the current voluntary administration restructuring process.
The new framework will be coupled with an alternative, more cost-effective simplified liquidation pathway, reducing costs by streamlining reporting and investigation obligations and at the same time, protecting unrelated creditors from being pursued by a liquidator for unfair preference claims.
The new insolvency processes will be available to incorporated businesses with liabilities less than $1m. This is a low (or high depending on how you interpret it) threshold considering around 76% of companies entering into external administration in 2018-19 had liabilities of less than $1m. Other qualifying criteria will limit companies that can access the new processes; including all due and payable employee entitlements must be paid in full—this alone will disqualify many businesses—and a director/entity only able to utilise the process once every seven years.
It is surprising (or rather, concerning) that despite the short timeframe until planned commencement, no industry consultation has been held and we are all in the dark about the finer details. Though we do not yet have the benefit of the detail, I for one am interested in more information around the following areas:
- Duties and regulation
- Practical application
- Remuneration and its value
- Rights of secured creditors
- System integrity
Click here for my initial observations.
The last set of substantive changes to Australia's insolvency laws were made via the Insolvency Law Reform Act 2016 (Cth) (ILRA). Several draft versions of the law were issued for public and industry consultation over five years (from 2011 to 2016) with the final version passing Parliament in February 2016 (and only coming into full force from 1 September 2017). Even after this level of planning and consultation, the final product was eloquently described by some industry experts as “a dog's breakfast”, and littered with errors. The ILRA changes have also been the subject of judicial criticism.
Australia's insolvency framework is very complex with many inter-connected parts. Despite some of the proposed reforms making good sense “in principle”, the government is naïve, bordering delusional, if it thinks it can simply overlay Australia's convoluted and complex “creditor-led” insolvency framework with a new “debtor-in-possession” model without proper planning and consultation.
Fundamental changes must be properly considered and measured, with radical legislative change of this magnitude typically taking many years. And even then, we still end up with something as poorly designed as the ILRA.
Legislation for the latest round of reforms is likely to enter Parliament in the next few weeks, and will need to be passed by both houses of Parliament when they sit in early November to achieve the slated commencement date of 1 January 2021. It certainly seems the die has been cast.
At the risk of stating the blatantly obvious—policy “on the run” combined with a lack of industry consultation is a recipe for disaster and will undoubtedly lead to many unintended consequences.
Perhaps the government is forging ahead solely to deal with the pending tsunami of COVID-induced insolvencies. Hopefully they will lock in a future date for review (and in the not too distant future), where cooler policy heads can prevail and fix the inevitable holes that will appear, particularly if the government sticks with its roll out date of 1 January 2021.
As an aside, it is somewhat surprising, despite announcing the most radical changes to the corporate insolvency landscape in the last 30 years, no changes are proposed to personal insolvency laws/processes. Given sole traders also operate businesses, is it a matter of watch this space? Or perhaps the government thinks COVID-19 has not impacted sole traders…