House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)

Chapter 3 - Simplified Liquidation

Outline of chapter

3.1 Schedule 3 to the Bill establishes 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. The Schedule inserts new rules that apply to elements of the liquidation process for liquidations that are eligible to adopt and have adopted the simplified liquidation process.

Summary of new law

3.2 Schedule 3 establishes a simplified liquidation process for the purpose of winding up the affairs and distributing the property of an eligible company in a creditors' voluntary winding up, as well as the requirements for entering and exiting the process.

3.3 The intention of the simplified liquidation process is to supplement the 'one-size-fits-all' liquidation regime with a regime that has appropriate pathways for less complex liquidations, in particular for incorporated small businesses. By reducing complexity, time and costs in the liquidation process, the simplified liquidation process is intended to ensure greater returns to creditors and employees. These changes are particularly important to support the many small businesses facing an uncertain future because of the economic impact of the COVID-19 pandemic.

3.4 Schedule 3 provides the requirements for adopting the simplified liquidation process, including that the company is insolvent and has entered into a creditors' voluntary liquidation. To make the simplified liquidation process available only to companies that are expected to have relatively simple affairs, the total liabilities of the company must not exceed an amount to be prescribed in the Corporations Regulations.

3.5 Safeguards apply to eligibility for the simplified liquidation process and require that a director of the company, or the company itself, must not have previously used the simplified liquidation process or the debt restructuring process, and that the company has complied with taxation laws. Directors must make a declaration in relation to these matters. Further, creditors remain empowered to opt-out of the simplified liquidation process, through providing a request to the liquidator to not follow the simplified liquidation process. To encourage an efficient process, once a company enters liquidation (after 1 January 2021), the liquidator must adopt the simplified liquidation process within 20 business days.

3.6 The simplified process itself is a modified version of the process for a creditors' voluntary winding up set out in the Corporations Act (in particular Chapter 5 and the Insolvency Practice Schedule), the Corporations Regulations (in particular, Chapter 5) and the Insolvency Practice Rules. The simplified liquidation process modifies the general process by disapplying certain features of the general process relating to reporting to ASIC, meetings, and the appointment of reviewing liquidators and committees of inspection. Further provision for the features of the simplified liquidation process is to be made in the Corporations Regulations. Schedule 3 sets out the scope of these regulations.

3.7 Schedule 3 also provides for the circumstances in which a liquidation will cease to be a simplified liquidation, including where the eligibility criteria are no longer met and in circumstances to be prescribed by the Corporations Regulations.

Comparison of key features of new law and current law

Detailed explanation of new law

The simplified liquidation process

3.8 The liquidation of an insolvent company allows an independent registered liquidator (the liquidator) to take control of the company so its affairs can be wound up in an orderly and fair way to benefit creditors. The most common type is a creditors' voluntary liquidation, which begins when an insolvent company's shareholders resolve to liquidate the company and appoint a liquidator or when creditors vote for liquidation following a voluntary administration or a terminated deed of company arrangement.

3.9 In a liquidation, a liquidator has a duty to all company creditors, their role is to:

•

protect, collect and sell the company's assets;

•

investigate and report to creditors about the company's affairs;

•

inquire into the failure of the company - and possible offences by people involved with the company - and report to ASIC; and

•

distribute money from the collection and sale of assets after payment of the costs of the liquidation - first to priority creditors, including employees, and then to unsecured creditors.

3.10 The liquidation process is set out in Chapter 5 of the Corporations Act and Chapter 5 of the Corporations Regulations, as well as the Insolvency Practice Schedule and the Insolvency Practice Rules.

3.11 Chapter 5 of the Corporations Regulations gives further effect to the provisions of Chapter 5 the Corporations Act. In particular, the Corporations Regulations prescribe rules for the proof and claim of debts by known and unknown creditors, declaring and distributing a dividend, dealing with contributories, and publishing information.

3.12 The Insolvency Practice Schedule, contained in Schedule 2 to the Corporations Act, makes further provision for a creditors' voluntary liquidation. This includes information and reports that must be given by the liquidator, when and how meetings are to be held, and mechanisms to review the conduct of the liquidation. The Insolvency Practice Schedule also sets out the process and requirements for registering liquidators and disciplining registered liquidators.

3.13 The Insolvency Practice Rules are a legislative instrument made under the Insolvency Practice Schedule. The Insolvency Practice Rules provide specific rules relating to matters contained in the Insolvency Practice Schedule.

3.14 The simplified liquidation process for a creditors' voluntary winding up does not create a new liquidation process, or disturb the framework established by the Corporations Act and the relevant subordinate instruments. Rather, the simplified liquidation process preserves and applies most of the existing framework and adopts small changes for a more fit-for-purpose and efficient process.

3.15 Where the simplified liquidation process departs from the regular process, it does so:

•

by providing in the Corporations Act that particular aspects of the regular process do not apply to the simplified process; and

•

through supporting regulations that create specific rules relevant to the simplified process.

3.16 The simplified liquidation process is only available in a creditor's voluntary liquidation. Therefore, a liquidator will be unable to adopt the simplified liquidation process in a member's voluntary winding up or a winding up ordered by the Court.

3.17 Schedule 3 provides for parts of the process where the simplified liquidation departs from the regular process as well as the requirements for entering and exiting the process.

Entry into the simplified liquidation process

3.18 Where a liquidator believes on reasonable grounds that a company in a creditors' voluntary winding up meets the eligibility criteria, the liquidator may adopt the simplified liquidation process instead of the regular liquidation process. [Schedule 3, item 8, section 500A(1) of the Corporations Act]

3.19 The eligibility criteria for the simplified liquidation process will be met for a company if:

•

a triggering event has occurred - that is, the company has passed, or is taken to have passed, a special resolution that the company be wound up voluntarily;

•

the directors have given the liquidator a report about the company's affairs and a declaration that the company will be eligible for the simplified liquidation process;

•

the company is insolvent;

•

the total liabilities of the company do not exceed the amount to be prescribed in the regulations;

•

no director (or previous director who left the company within the preceding 12 months) has been a director of a company that has previously used the simplified liquidation process or a debt restructuring process, and the company itself has not previously used the simplified liquidation process or a debt restructuring process; and

•

the company's tax lodgements are up to date.

[Schedule 3, item 8, section 500AA of the Corporations Act]

3.20 However the liquidator must not adopt the process if any one of the following exclusions apply:

•

more than 20 days have passed since the relevant triggering event that brought the company into liquidation;

•

the liquidator has not notified members and creditors of the company that they have a reasonable belief that the company is eligible for the simplified liquidation process and provided an opportunity for creditors to opt-out of the simplified liquidation process; or

•

creditors of the company have requested the liquidator not adopt the simplified liquidation process.

[Schedule 3, item 8, sections 500A(2) and (3) of the Corporations Act]

3.21 These matters are discussed in further detail below.

Eligibility criteria for entering the simplified liquidation process

The company has resolved to be wound up voluntarily

3.22 To be eligible for a simplified liquidation, the company must have resolved to wind up and enter into a liquidation process. Where this has occurred, it is known as a triggering event. [Schedule 3, items 5 and 8, sections 489F and 500AA(1)(a) of the Corporations Act]

3.23 Generally, a company resolves to wind up under section 491 of the Corporations Act. This involves a company resolving to wind up by special resolution (requiring that the resolution has been passed by at least 75 per cent of the votes cast by members entitled to vote on the resolution).

3.24 However, in other circumstances, a company is taken to have resolved to wind up because the Corporations Act treats the company as having made a resolution under section 491. These other triggering events also satisfy the requirement that the company must have resolved to wind up. These other triggering events occur where:

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the creditors of a company under administration resolve that the company be wound up (see paragraphs 439C(c) and 446A(1)(a) and section 446A(2) of the Corporations Act);

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a company under administration fails to execute a deed of company arrangement in the time required (see paragraph 446A(1)(b) and sections 444B(2) and 446A(2) of the Corporations Act);

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the creditors of a company under administration pass a resolution terminating a deed of company arrangement executed by the company and resolve that the company be wound up (see section 445E, paragraph 446A(1)(c) and section 446A(2) of the Corporations Act);

•

the Court orders the termination of a deed of company arrangement (see section 445D, paragraph 446AA(1)(a) and section 446AA(2) of the Corporations Act);

•

a company has executed a deed of company arrangement that specifies circumstances in which the deed is to terminate and those circumstances exist (see paragraph 446AA(1)(b) and section 446A(2) of the Corporations Act); and

•

the Corporations Regulations prescribe circumstances in which a company under administration or that has executed a deed of company arrangement (even if the deed has terminated) is taken to have passed a special resolution that the company be wound up and those circumstances exist (see section 446B of the Corporations Act);

•

the Corporations Regulations prescribe an event in which a company is taken to have passed a special resolution that the company be wound up and that event occurs.

[Schedule 3, item 5, section 489F of the Corporations Act]

3.25 A triggering event does not occur where a company is taken to have passed a resolution under section 489EB of the Corporations Act (relating to where ASIC has ordered the winding up of a company). [Schedule 3, item 3, section 500AA(1)(a) of the Corporations Act]

The directors have given a report and a declaration to the liquidator

3.26 Within 5 days following the triggering event, the directors must provide the liquidator with:

•

a summary of the company's affairs; and

•

a declaration for eligibility for the simplified liquidation process.

[Schedule 3, items 7 and 8, sections 498(1) and (2)(a) and 500AA(1)(b) of the Corporations Act]

3.27 The summary of the company affairs must include information relating to the company's business, property, affairs and financial circumstances. This is required under section 497(4) of the Corporations Act, in the report known as the Report on Company Affairs and Property. The Corporations Act requires that the report is also lodged with ASIC. [Schedule 3, item 8, section 500AA(1)(b)]

3.28 Following certain triggering events, a company is taken to have complied with section 497 of the Corporations Act - see, for example, section 446A(3). In these instances, the company is taken to have provided the summary on the company affairs required by section 497.

3.29 The directors must also provide the liquidator with a declaration that they reasonably believe that the company will meet the features of the eligibility criteria for entry into the simplified liquidation process. The purpose of the declaration is to provide the liquidator with a degree of assurance that the directors have inquired into the key elements of the eligibility criteria for the simplified liquidation process and have a reasonable belief that the company will meet those criteria. [Schedule 3, item 7, sections 498 and 500AA(1)(b) of the Corporations Act]

3.30 Particularly, if the directors believe on reasonable grounds that the eligibility criteria for the simplified liquidation process will be met, they must declare that:

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a triggering event has occurred;

•

the company is insolvent;

•

the liabilities of the company do not exceed the amount to be prescribed in the regulations;

•

no director (or previous director who left the company within the preceding 12 months) has been a director of a company that has previously used the simplified liquidation process or a debt restructuring process;

•

the company has not previously undergone restructuring, or been the subject of the simplified liquidation process; and

•

the company's tax lodgements are up to date.

3.31 If a director provides false or misleading information in the declaration, the director may be subject to civil or criminal penalties under section 1308 of the Corporations Act. These are existing penalties within the Corporations Act penalties framework, and provide an appropriate level of deterrence in relation to directors providing information to the liquidator that may be false or misleading.

3.32 ASIC is empowered to prescribe a form in which the directors' declaration is to be contained. If a form is not prescribed for this purpose, the declaration must be made in writing. [Schedule 3, item 7, section 498(2)(b) of the Corporations Act]

3.33 Regulations may also be made that prescribe further information that must be given in the directors' declaration. [Schedule 3, item 7, sections 498(2)(c) and (3) of the Corporations Act]

The company is insolvent

3.34 The eligibility criteria requires that the company must not be able to pay its debts in full within a period not exceeding 12 months after the day of the triggering event. [Schedule 3, item 8, section 500AA(1)(c) of the Corporations Act]

3.35 The simplified liquidation process provides a time and cost efficient process for winding up a company in financial distress, such as a creditor's voluntary winding up. Therefore, the simplified liquidation process is not appropriate for a member's voluntary liquidation which allows a solvent company's affairs to be wound up.

The liabilities test

3.36 The eligibility criteria requires that if the regulations prescribe criteria that must be satisfied in relation to the liabilities of the company, then those criteria must be satisfied. [Schedule 3, item 8, section 500AA(1)(d) and 500AA(2)(a) of the Corporations Act]

3.37 The Corporations Regulations may provide, for example, the amount of the debt of a company seeking to enter into the simplified liquidation process that is due and payable. This will be assessed on the particular day that the triggering event occurred.

3.38 The criteria to be prescribed in the regulations about the liabilities of the company will reflect the intention that the simplified liquidation process is most appropriate for small businesses with non-complex liabilities. For these companies, the costs of the regular liquidation process can consume all or almost all of the remaining value of a company, leaving little for creditors and employees.

3.39 Allowing the threshold amount to be prescribed in regulations is necessary to ensure that the simplified liquidation process is flexible and over time remains available to companies whose liabilities are of a size for which the simplified liquidation process is appropriate.

3.40 A company seeking to enter a simplified liquidation or debt restructuring process (described in Chapter 1) must satisfy criteria to be prescribed in regulations regarding its liabilities. For consistency, it is intended that the relevant criteria for the debt restructuring process and the simplified liquidation process are consistent to the extent that is appropriate.

The company and its directors have not previously used a simplified liquidation process or a debt restructuring process

3.41 The eligibility criteria requires that, subject to any exceptions prescribed in the regulations, no director of the company has been a director of a company that has been the subject of a simplified liquidation process or a debt restructuring process. Similarly, the company itself must not have undergone restructuring or been the subject of a simplified liquidation process. This will be assessed from the day of the triggering event. [Schedule 3, item 8, section 500AA(1)(e) and (f) of the Corporations Act]

3.42 This is an important safeguard for the simplified processes and is targeted at preventing a pattern of behaviour from directors that could indicate illegal phoenixing activity or another form of corporate misconduct.

3.43 The regulations may prescribe circumstances in which a director is exempt from the requirement that they have not previously used either the debt restructuring or simplified liquidation process, and may also prescribe the period of time in which a previous use is relevant for the purposes of the rule. For example, in circumstances where a company was previously in a small business restructuring and then enters liquidation-the regulations may prescribe that a director is exempt from the requirement that they have not previously used a restructuring process or a simplified liquidation process. [Schedule 3, item 8, section 500AA(1)(e) and 500AA(2)(b) of the Corporations Act]

3.44 The regulations may also prescribe circumstances in which a company may be exempt from the requirement that the company has not previously undergone restructuring or been the subject of a simplified liquidation process, and may also prescribe the period of time in which a previous use is relevant for the purposes of the rule. [Schedule 3, item 8, section 500AA(1)(f) and 500AA(2)(c) of the Corporations Act]

3.45 Allowing regulations to prescribe these matters is necessary to ensure that the rule is appropriately targeted and captures the sorts of behaviour that are intended to be excluded from the simplified processes.

3.46 The requirement that no director of the company has, or that the company itself has not, previously used a simplified process is consistent with the criteria for entry into the debt restructuring process and is described in relation to those amendments in Chapter 1.

3.47 A company seeking to enter a simplified liquidation process or debt restructuring process (described in Chapter 1) must satisfy criteria to be prescribed in regulations regarding its previous use of these processes. For simplicity, it is intended that the relevant criteria for both the debt restructuring process and the simplified liquidation process are consistent to the extent that is appropriate.

The company's tax lodgements are up to date

3.48 The eligibility criteria requires that the company's tax lodgements are up to date. Particularly, the company must have given returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act 1997) to the Australian Taxation Office. This is an important safeguard and prevents a company with outstanding tax lodgement obligations from obtaining the benefit of the simplified liquidation process. [Schedule 3, item 8, section 500AA(1)(f) of the Corporations Act]

Exclusions for entering the simplified liquidation process

More than 20 days have passed since the relevant triggering event

3.49 The liquidator must not adopt the simplified liquidation process if more than 20 business days have passed since the day on which the triggering event occurred. The triggering events are described above in relation to the eligibility requirement that the company has passed, or is taken to have passed, a resolution that the company be wound up. This reflects the intention that the simplified process provides time efficiencies for creditors and encourages efficient compliance with the preliminary steps-for example, provision of the directors' declaration if directors intend for the liquidator to adopt the simplified process. [Schedule 3, item 8, section 500A(2)(a) of the Corporations Act]

The liquidator has not notified members and creditors of the company

3.50 The liquidator must not adopt the simplified liquidation process if the liquidator has not given each member and creditor of the company a notice containing information about the simplified liquidation process. [Schedule 3, item 8, section 500A(2)(b) of the Corporations Act]

3.51 The notice must contain the following:

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a statement that the liquidator believes on reasonable grounds that the company meets the eligibility criteria for the simplified liquidation process;

•

an outline of the simplified liquidation process, including any particular information prescribed in the Corporations Regulations;

•

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 to do so; and

•

any information prescribed in the Corporations Regulations about how a creditor may direct the liquidator not to adopt the simplified liquidation process.

[Schedule 3, item 8, section 500A(3) of the Corporations Act]

3.52 The notice must be given at least 10 business days before adopting the simplified liquidation process. In effect, because of the requirement that the liquidator must not adopt the simplified liquidation process if more than 20 business days have passed since the day on which the triggering event occurred, the notice must be given no more than 10 business days after the liquidation is entered into. This provides an opportunity for the liquidator to include in the notice other matters that are also required to be provided to creditors no more than 10 business days after the liquidation is entered into - for example, the declaration of relevant relationships and indemnities (under section 506A of the Corporations Act and the initial information required to be given to creditors under sections 70-30 and 70-35 of the Insolvency Practice Schedule). [Schedule 3, item 8, section 500A(3) of the Corporations Act]

3.53 The requirement for the liquidator to provide this notice reflects the intention that creditors are provided with information about what the simplified liquidation process involves and also provided with an opportunity to request the liquidator not adopt the simplified process.

3.54 If a liquidator provides false or misleading information to creditors, the liquidator may be subject to civil or criminal penalties under section 1308 of the Corporations Act. These are existing penalties within the Corporations Act penalties framework, and provide an appropriate level of deterrence in relation to directors providing information to the liquidator that may be false or misleading.

3.55 The Corporations Regulations may prescribe particular information to be included in the notice, including an outline of the simplified liquidation process and information relating to the process to be followed for a creditor to direct the liquidator not adopt the simplified process. It is necessary and appropriate for these matters to be prescribed in regulations because they deal with relevant administrative detail for which the Government requires the flexibility to make timely changes .[Schedule 3, item 8, section 500A(3) of the Corporations Act[

Creditors of the company have requested the liquidator to not adopt the simplified liquidation process

3.56 The liquidator must not adopt the simplified liquidation process if at least 25 per cent in value of the creditors request the liquidator not to follow the simplified liquidation process in relation to the company (the 25 per cent test). [Schedule 3, item 8, sections 500A(2)(c) and 500AB of the Corporations Act]

3.57 In the simplified liquidation process creditors remain empowered to request the liquidator to not adopt the simplified process. For example, creditors may request that the liquidator not adopt the simplified process if they do not think that it is suitable for the company or it would not provide the best outcome for creditors.

3.58 In assessing whether the 25 per cent test is met, the value of the creditors at the time of an assessment is worked out by reference to the value of the creditors' claims against the company that are known at that time. [Schedule 3, item 8, section 500AD of the Corporations Act]

3.59 The Corporations Regulations may also prescribe creditors that are, or are not, to be taken into account for the purposes of the 25 per cent test. The capacity for the regulations to refine the operation of the 25 per cent test is necessary and appropriate to deal with integrity issues. For example where a single large creditor may be able to influence the outcome of the 25 per cent test contrary to the wishes of a large number of smaller creditors. [Schedule 3, item 8, section 500AD(b) of the Corporations Act]

3.60 Where creditors request the liquidator not to adopt the simplified liquidation process and the liquidator ceases to use the simplified process, the company remains in liquidation under the regular process for a creditors' voluntary winding up. The power for creditors to direct the liquidator to not follow the simplified liquidation process is limited to the period before the simplified process is adopted. [Schedule 3, item 8, sections 500A(2)(c) and 500AB of the Corporations Act]

Features of the simplified liquidation process

3.61 The simplified liquidation process preserves and applies most of the framework that applies to a regular liquidation. However, to create a more efficient process that is suitable for the liquidation of small companies, the simplified liquidation process departs from the regular process:

•

by providing in the Corporations Act that particular aspects of the regular process do not apply to the simplified process; and

•

through supporting regulations to provide specific rules relevant to the simplified process.

[Schedule 3, item 8, section 500AE of the Corporations Act]

Reducing investigation and reporting requirements

3.62 Section 533 of the Corporations Act requires a liquidator of a company in the course of winding up the company to report to ASIC about suspected wrongdoing. Particularly, a liquidator must report to ASIC as soon as practicable if it appears to the liquidator that:

•

a person involved with the company may have been guilty of an offence in relation to the company;

•

a person involved with the formation or management of the company may have become accountable for any money or property of the company or may have breached duties owed to the company; or

•

the company may be unable to pay its unsecured creditors more than 50 cents in the dollar.

3.63 Under section 533, the liquidator may also report to ASIC about any other matter that, in the opinion of the liquidator, is desirable to bring to the attention of ASIC.

3.64 These reports, and the investigative duties that underpin them, present a significant component of the costs to a liquidation. In particular, reports lodged under section 533 of the Corporations Act require the liquidator to undertake detailed investigations, which can incur significant costs. For small businesses, these obligations can consume large proportions of remaining assets, potentially leaving creditors with no returns and insolvency practitioners bearing the costs.

3.65 For smaller businesses, this intense investigative requirement will often be disproportionate to any benefit gained by the company or more generally by the regulator. Therefore, these investigations are often not fit-for-purpose for small companies with non-complex debts.

3.66 For these reasons, the section 533 report is not a feature of the simplified liquidation process. The removal of this obligation is expected to result in time and cost efficiencies. [Schedule 3, item 8, section 500AE(2)(a) of the Corporations Act]

3.67 In place of the section 533 report, the regulations will prescribe rules relating to the giving of information, providing reports and producing documents to ASIC. In this way, the regulations will provide for a more fit-for-purpose reporting process which reduces the burden on liquidators without undermining confidence in the insolvency regime.

Reducing meetings

3.68 In a regular liquidation process, a liquidator may convene a creditors meeting at any time. This may be to inform creditors about the liquidation process, to find out the creditors' wishes on a matter or to seek approval of the liquidator's fees. In certain circumstances, the liquidator must convene a meeting, such as when directed to do so by certain creditors or by ASIC. These circumstances are provided for in Division 75 of the Insolvency Practice Schedule.

3.69 The simplified liquidation process removes the obligation for a liquidator to convene these meetings. Instead, the liquidator will continue to provide information to creditors electronically and proposals will be put by giving notice to creditors or contributories (see section 75-40 of the Insolvency Practice Schedule, and sections 75-130 and 75-135 of the Insolvency Practice Rules). [Schedule 3, item 8, sections 500AE(2)(b), (c) and (d) of the Corporations Act]

3.70 The removal of requirements relating to meetings is intended to assist in providing a more cost and time efficient liquidation process.

Committees of inspection and reviewing liquidators

3.71 In a regular liquidation process, creditors may appoint a committee of inspection to monitor the conduct of the liquidation and to give assistance to the liquidator. The committee of inspection plays an advisory and oversight role, including approving the liquidator's fees. Similarly, ASIC, the Court or creditors of a company may appoint a registered liquidator to review the liquidation of the company, including by looking at whether the remuneration of the appointed liquidator is reasonable and whether costs and expenses have been properly incurred.

3.72 While committees of inspection and reviewing liquidators are valuable oversight and advisory mechanisms in more complex liquidations, in less complex liquidations they can increase the cost of a liquidation and lengthen the process. These mechanisms are generally not appropriate for small liquidations with non-complex debts. For these reasons, committees of inspection and reviewing liquidators appointed by ASIC and by creditors are not features of the simplified liquidation process. [Schedule 3, item 8, sections 500AE(2)(e) and (f) of the Corporations Act]

3.73 Importantly, the Court's oversight powers are retained for the simplified liquidation process. This includes the Court's power to appoint a reviewing liquidator. Further, the Court may inquire into a liquidation either on its own initiative or on the application of the company, the liquidator, ASIC or a person with a financial interest in the external administration of the company (such as a creditor of the company). The Court has a wide range of powers to make orders, including an order to replace the liquidator.

Features to be provided in the Corporations Regulations

3.74 Regulations may be made to provide further elements of the simplified liquidation process.

Unfair preferences and voidable transactions

3.75 Part 5.7B of the Corporations Act allows liquidators to recover property or compensation for the benefit of creditors of an insolvent company. Particularly, liquidators can pursue certain types of voidable transactions which were entered into by the company before the winding up which had the effect of conferring a preference on one creditor or providing a benefit on a related party or creditor to the detriment of other creditors. The power to pursue amounts that have been unfairly or incorrectly paid to another party is a valuable tool for a liquidator and can result in more funds for distribution. However, in the liquidation of a small company with limited assets, these proceedings can take up time, money and resources, and have the potential to outweigh any benefit that might flow through to creditors.

3.76 Regulations may be made to provide circumstances in which a transaction is not an unfair preference under section 588FA or a voidable transaction under section 588FE for companies in the simplified liquidation process. For example, regulations could prescribe that, for the purposes of the simplified liquidation process, an unfair preference must relate to a transaction of a certain value or that transaction is voidable only if it occurred in a certain period. The intention of these regulations would be to better target the sorts of unfair preferences and voidable transactions that are available to be pursued in the simplified liquidation process. [Schedule 3, item 8, sections 500AE(3)(a) and (b) of the Corporations Act]

Proofs of debt or claim and payment of dividends

3.77 To provide time and cost efficiencies in the simplified liquidation process, regulations may be made to improve the process for proving debts or claims (currently set out in Part 5.6 of the Corporations Regulations) in relation to a company that is subject to the simplified liquidation process. These regulations may prescribe administrative detail relating to how proofs of debt and claim may be prepared, submitted, withdrawn, and admitted. The regulations may also prescribe administrative detail relating to the identification of contributories and the declaration and payment of a dividend. [Schedule 3, item 8, sections 500AE(3)(c), (d) and (e) of the Corporations Act]

Information, reports and documents

3.78 Regulations may be made to provide for giving information, providing reports and producing documents to ASIC in relation to a company that is the subject of the simplified liquidation process. For example, the regulations may prescribe that certain reports must be made to ASIC in the course of a simplified liquidation process where particular information comes to the attention of the liquidator. The intention of these regulations would be to ensure that ASIC is provided with appropriate information regarding the conduct of simplified liquidations, enabling the regulator to carry out its oversight role. [Schedule 3, item 8, section 500AE(3)(f) of the Corporations Act]

Exiting the simplified liquidation process

3.79 In certain circumstances, the liquidator must cease to follow the simplified liquidation process. These circumstances are where:

•

the eligibility criteria for the simplified liquidation process are no longer met in relation to the company;

•

other circumstances prescribed by the Corporations Regulations exist.

3.80 Where a liquidator ceases to follow the simplified liquidation process, the company remains in liquidation though under the regular process for a creditors' voluntary winding up. The Corporations Regulations may provide for the transition from a simplified liquidation process into the regular liquidation process.

3.81 These matters are described in further detail below.

Ceasing to follow the simplified liquidation process

The eligibility criteria is no longer met

3.82 In the course of undertaking the simplified liquidation process, it may come to the attention of the liquidator that the company does not meet the eligibility criteria. When this occurs, the liquidator must exit the simplified liquidation process. This may occur, for example, because the liquidator becomes aware of a creditor which causes the total liabilities of the company to rise above the threshold amount. [Schedule 3, item 8, section 500AC(1)(a) of the Corporations Act]

Circumstances prescribed by the Corporations Regulations

3.83 The Corporations Regulations may prescribe further circumstances in which the liquidator must cease to follow the simplified liquidation process. This power to make regulations may be used, for example, to prescribe circumstances where wrongdoing in the company is uncovered in the process of the liquidation which would indicate that the company is not of the sort that should be undertaking the simplified liquidation process. It is necessary for the integrity of the simplified liquidation process for the Government to have the capacity to provide for circumstances in which a liquidator must cease to follow the simplified process. [Schedule 3, item 8, section 500AC(1)(b) of the Corporations Act]

Transitioning into another process

3.84 Where a liquidator ceases to follow the simplified liquidation rules because of one of the circumstances described above, the creditors' voluntary winding up is still in progress and the company remains in liquidation - however the liquidator must follow the regular process for a creditors' voluntary liquidation rather than those modified for the simplified liquidation process.

3.85 In addition to providing for circumstances where the liquidator must exit the simplified liquidation, the Corporations Regulations may also provide for the transitional requirements for exiting a simplified liquidation process and entering a regular liquidation process. These regulations may deal with the process to be followed in relation to, for example, proofs of debt and claim, ranking debts and claims, identifying contributories, declaration and payments of dividends, and reports and information to be provided to ASIC.

3.86 Where the regular and simplified processes differ, it is necessary for regulations to deal with circumstances where elements of the liquidation process may have been completed or underway at the time the liquidation left the simplified process and to provide for how the liquidation is to proceed under the regular process. In this way, regulations providing for the transition between the simplified process and the regular process may provide that the Corporations Act has effect with any modifications prescribed by the regulations. Providing for these transitional matters in the regulations is necessary to provide a smooth transition into the regular liquidation process. Further, it is appropriate to provide for these matters in regulations as they relate to administration and detail for which the Government requires the flexibility to make timely changes. [Schedule 3, item 8, sections 500AC(2) and (3) of the Corporations Act]

Corporations Regulations

3.87 The Bill provides a range of regulation-making powers to provide flexibility and specificity for the simplified liquidation process.

3.88 As described above, for entry into the simplified liquidation process, the regulations may provide for:

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information that must be contained in a directors' declaration prior to entering into a simplified liquidation process;

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information about the simplified liquidation process that must be given to members and creditors of a company prior to entering into a simplified liquidation;

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information about how a creditor may give a direction to a liquidator not to adopt the simplified liquidation process, and prescribe classes of creditors that are, or are not, taken into account for this purpose;

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criteria that must be satisfied in relation to the liabilities of the company;

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the period of time in which a director of a company or a company must not have been through a simplified liquidation or debt restructuring process, and circumstances in which a director or company is exempt from this requirement.

3.89 For the simplified liquidation process itself, the regulations may provide for:

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circumstances in which a triggering event occurs;

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circumstances in which a transaction is not an unfair preference;

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circumstances in which a transaction is not voidable;

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proofs of debt or claim;

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declaration and payment of a dividend;

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identification of a contributory; and

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giving information, report or documents to ASIC.

3.90 For exiting the simplified liquidation process, the regulations may provide:

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circumstances in which the liquidator of a company must cease to follow the simplified liquidation process;

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for transitional rules where a simplified liquidation moves into a regular liquidation process; and

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that the Act has effect with any modifications prescribed by the regulations.

3.91 In relation to the power for the Corporations Regulations to provide for cases where a liquidation moves from a simplified to a regular liquidation process, and to the extent that this power constitutes a power to modify the operation of the Corporations Act - the power is necessary to deal with the situations where the operation of the Act may produce unintended or unforeseen results that are not consistent with the policy intention for the new regime. Issues may arise that were not contemplated at the time of drafting because the simplified process is a new regime. Further, because this new regime has been developed in response to the significant and continuing economic consequences of the COVID-19 pandemic, there is greater than usual need for the Government to be empowered to deal with unintended or unforeseen consequences, particularly those that risk undesirable outcomes for companies and creditors. In this context, it is appropriate for the Government to be able to address these potential consequences where the issues are too specific to be dealt with adequately, and in a timely manner, in the primary law.

3.92 The range of regulation-making powers provides the Government with the appropriate and necessary flexibility to make timely changes to support external administrators to complete liquidations that are cost and time efficient. The economic uncertainty of the COVID-19 pandemic places particular pressure on small businesses, and providing specificity in regulations allows the process to respond quickly to developments that occur from the expected increase in the number of insolvencies. In this way, regulations are appropriate to ensure that the simplified liquidation process best reflects the needs of small businesses.

3.93 The regulations would be subject to disallowance, and therefore, subject to the appropriate parliamentary scrutiny.

Consequential amendments

3.94 Definitions for the terms eligibility criteria and simplified liquidation process are inserted into dictionary in section 9 of the Corporations Act. The terms have the meanings given by sections 500AA and 500AE respectively, which are described above. [Schedule 3, items 3 and 4, section 9 of the Corporations Act]

3.95 Other minor consequential amendments are made to create new headings in Chapter 5 of the Corporations Act to reflect the creation of the new simplified liquidation process .[Schedule 3, items 5 and 8]

Application and transitional provisions

3.96 The amendments in Schedule 3 apply in relation to a triggering event that occurs on or after 1 January 2021. The effect of this is that a liquidator cannot adopt the simplified liquidation process where the company being wound up entered liquidation before 1 January 2021. [Schedule 3, item 9, section 1681 of the Corporations Act]

Commencement provisions

3.97 Schedule 3 to the Bill commences on 1 January 2021. [Item 2 of the Bill]