Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)Overview and context for corporate insolvency reforms
Context for the reforms
The current insolvency system is a one-size-fits-all system that imposes the same duties and obligations, regardless of the size and complexity of the administration. In this way, the current system lacks the flexibility to accommodate small businesses, for which complex, lengthy and rigid procedures can be unsuitable. The barriers of high cost and lengthy processes can prevent distressed small businesses from engaging with the insolvency system early, which may limit their opportunity to restructure and survive.
The costs incurred under external administration are borne out of the assets of the distressed company and can be greater than the value of the assets of the company. This places undue pressure on the company, potentially forcing it into liquidation at the end of voluntary administration, leaving less returns for creditors and employees.
These challenges are particularly evident in light of the economic consequences of the COVID-19 pandemic and the increase in numbers of businesses facing financial distress. The significant economic consequences have highlighted the need for an efficient external administration process that allows small incorporated businesses to remain viable, and where that is not possible, for a process that encourages a better deal for creditors and employees.
To address these challenges, the Government has announced a package of reforms to the corporate insolvency framework. This package includes major changes to the framework for eligible small companies. This new framework is designed to meet the needs of small business and to support increased productivity and innovation by reducing the complexity and costs in insolvency processes. Further, the reforms are aimed at achieving greater economic dynamism and ultimately helping more small businesses to survive.
Overview of the reforms
The Bill establishes a framework for the reform with more detail to be included in Corporations Regulations and Insolvency Practice Rules, including, for example, rules about the registration and qualifications of small business restructuring practitioners.
The Bill covers some of the key aspects of the reform package. In particular:
- •
- a formal debt restructuring process for eligible companies;
- •
- extended temporary relief for eligible companies intending to undertake a formal debt restructuring process;
- •
- a simplified liquidation process for eligible companies in a creditors' voluntary winding up;
- •
- refinements to the requirements for registration as a liquidator; and
- •
- the greater use of electronic documents and electronic signatures in an external administration.
The formal debt restructuring process allows an eligible company to restructure their debts and maximise their opportunity for survival. The formal debt restructuring process will allow a company director to retain control of their business, and its property and affairs, while developing a plan to restructure their debt with the assistance of a small business restructuring practitioner. More information can be found in Chapter 1.
An eligible company waiting to access the debt restructuring process will be provided with temporary relief from the director's duty, under section 588G(2) of the Corporations Act, to prevent insolvent trading. More information can be found in Chapter 2. An eligible company waiting to access the debt restructuring process will also have relief relating to responding to statutory demands from creditors. This aspect of the reforms will be implemented in the Corporations Regulations.
The simplified liquidation process for eligible companies in a creditors' voluntary winding up is intended to provide a faster and lower cost liquidation, increasing returns for both creditors and employees. The simplified liquidation process preserves and applies most of the existing framework for liquidation in a creditors' voluntary winding up and adopts changes for a more fit-for-purpose and efficient process. More information can be found in Chapter 3.
To support these reforms, there are amendments to the registration of insolvency practitioners. The amendments to the requirements for registration of a liquidator are intended to provide more flexibility to the registration process while maintaining high professional standards. More information can be found in Chapter 4.
The reforms also expand the situations where documents relating to the external administration of a company may be given electronically, and permit the electronic signing of documents relating to the external administration. Future amendments to permit virtual meetings to be held during external administrations will be made by amending related subordinate legislation. More information can be found in Chapter 5.