Overhaul of Insolvency Laws – Part 2: The impact on creditors

Following the Treasury’s delivery of the 2020-21 Federal Budget, more information has come to light regarding ‘the biggest changes to insolvency laws in 30 years’.

In this article, we look to build on our previous update of 24 September 2020 (https://www.cornwalls.com.au/overhaul-of-insolvency-laws/) and dive deeper into the new debt restructuring process, how the proposed reforms will operate and what it might mean for creditors.

Debt Restructuring Process 

From 1 January 2021, eligible companies can resolve to appoint a small business restructuring professional (SBRP) to help them restructure their business. The SBRP will assist the company to formulate a restructuring plan and will make a declaration to creditors about it.

The requirements for an eligible company will be prescribed by the regulations (which have yet to be published). It is expected that the liabilities for an eligible company will be capped at $1 million, and that prior to submitting a restructuring plan to creditors, a company will need to have its tax lodgements and payment of all employee entitlements up to date.

Unlike the existing voluntary administration process, a secured creditor cannot commence the debt restructuring process and appoint an SBRP.

Effect of Debt Restructuring Process on Creditors 

Unsurprisingly, the regime looks to give an eligible company some breathing room to explore its restructuring options. Once the debt restructuring process has commenced, the proposed legislation will prevent creditors from:

• beginning or continuing with court proceedings against the company without leave of the court;
• enforcing director guarantees without leave of the court;
• relying on ipso facto clauses in their commercial contracts to exercise termination or enforcement rights triggered by virtue of the company entering the debt restructuring process; or
• enforcing any security interest, subject to certain exceptions, consistent with the existing voluntary administration regime. For example, a secured creditor with security over all or substantially all of a company’s assets can enforce that security interest, provided the secured party took enforcement action before or during the ‘decision period’ (commencing on the day the restructuring begins and ending on the 13th business day after that day).

Any winding up application already on foot against a company is to be adjourned to allow the company to exhaust the debt restructuring process, unless the court is satisfied it is in the best interest of creditors for the company to be wound up.

A creditor with security over specific assets of the company will not be able to enforce over such assets unless it has received prior approval from the SBRP or leave from the court.

Dealings with a Company during the Debt Restructuring Process 

The company directors will remain in control of the company’s business during the debt restructuring process. In doing so, however, the directors must not enter into any transaction or dealing affecting the property of the company unless it is in the ordinary course of the company’s business, or with the consent of the SBRP.

Any payment or transaction entered into by or with the consent of the SBRP is not liable to be set aside in the winding up of a company. For this reason, notwithstanding that the legislation allows the directors to make decisions for the company in the ordinary course of business, a prudent creditor would still seek written confirmation from the SBRP of its consent to any transactions and payments made to it throughout the debt restructuring process. This may well impede the directors’ ability to trade on the business as usual throughout the process, restrict creditor support and ultimately impact the viability of any impending restructure.

It also remains unclear whether the SBRP will be personally liable for any debts incurred by the company during the debt restructuring process. This is to be addressed in the regulations. If liability is linked to whether the SBRP has consented to the transaction, the company may face even further difficulty conducting its business, for the reasons outlined above.

Restructuring Plan 

A company may propose a restructuring plan to creditors, the content of which will need to provide sufficient information to enable the creditors to decide whether to accept or reject the plan. Beyond this, little detail is yet known about what will need to be included in a restructuring plan.

Regulations to accompany the new legislation are intended to contain much of the detail regarding the restructuring plan, including critical details of interest to creditors such as its contents, the debts to which it will apply, a creditor’s eligibility to vote on the plan, the process for admitting and valuing creditor’s claims, and the effect of the plan on the rights of creditors and the liabilities of the company.

It is widely expected that at least 50% of creditors will need to approve the restructuring plan for it to proceed. Related party creditors will be unable to vote on the plan.

In an attempt to minimise cost, there will be no requirement for creditor meetings during the debt restructuring process. Creditors will be able to vote to accept or reject the plan electronically or via technology.

Comment 

The reforms are intended to provide companies with a simplified process to restructure their debt and maximise their opportunity for survival. However, much of the detail around how that process is intended to operate (and the necessary consequences for stakeholders) has not yet been provided.

While these matters have deliberately been omitted from the draft legislation to be dealt with by the regulations, notionally to allow the government to be more nimble in dealing with any unforeseen or unintended consequences of the new regime on specific scenarios, it has left creditors with significant uncertainty about the effects of the new regime.

Further, as we have identified, various facets of the legislation in its current form may well limit the effectiveness of the reforms to achieve its purpose. With the success of the regime reliant on creditors continuing to support a company as it undertakes a restructure, it is disappointing that further detail is yet to be forthcoming to give creditors more clarity to help shape the company’s commercial dealings.

In the interest of certainty, creditors may wish to act early where possible to recover their debts and enforce any securities prior to the commencement of the reforms on 1 January. While this no doubt flies in the face of the intention of these reforms, in an already difficult economic environment, it may be a case for creditors of better the devil you know.

Queries 

For more information please contact an author or any member of our  Restructuring, Turnaround & Insolvency team. 

Disclaimer 

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.