COVID-19 Financial Assistance for Small and Medium Businesses in 2021

On 11 March 2021, the Federal Government announced the SME Recovery Loan Scheme (Recovery Loan Scheme), which will come into effect on 1 April 2021 and operate until 31 December 2021 and aims to assist eligible businesses to access financial support.

Similar to the Coronavirus SME Guarantee Scheme (Guarantee Scheme), the Recovery Loan Scheme will offer lenders a guarantee from the government on certain loans to allow distressed businesses to access cheaper credit at a lower interest rate as Job Keeper (and other COVID-19 related government assistance) ends throughout 2021.

Eligibility

The following businesses will be eligible to access the Recovery Loan Scheme:

  • Businesses that have accessed Job Keeper payments between 4 January 2021 and 28 March 2021;
  • Businesses with up to $250 million in turnover; and
  • All business structures, including self-employed individuals as well as non-profit businesses.

Moreover, businesses that have accessed a loan under the Guarantee Scheme are not excluded from accessing assistance under the Recovery Loan Scheme.

Features of the SME Recovery Loan Scheme

From 1 April 2021 until 31 December 2021, eligible businesses will be able to negotiate a loan from a Participating Lender under the following terms under the Recovery Loan Scheme:

  • The Government will guarantee 80% of the loan amount.
  • Lenders are allowed to offer borrowers a repayment holiday of up to 24 months.
  • Loans are for terms of up to 10 years, with an optional repayment holiday period.
  • Loans can be either unsecured or secured (excluding residential property).
  • The interest rate on loans will be determined by lenders but will be capped at around 7.5%.

Loans issued under the Recovery Loan Scheme may be used for a broad range of commercial purposes (including the refinance of existing loans even those from the Guarantee Scheme), but cannot be used for:

  • To purchase residential property (but can be used for purchasing non-residential real property);
  • To purchase financial products;
  • Lending to an associated entity; or
  • Leasing, renting, hiring or hire purchasing existing assets that are more than halfway into their effective life.

SME Recovery Loan Scheme v Coronavirus SME Guarantee Scheme

The Recovery Loan Scheme commences on 1 April 2021 and the Guarantee Scheme ends on 30 June 2021, so there will be a short overlap of access to both schemes. While ultimately the terms of the loan will be negotiated with the lender, it is important to be aware that the Recovery Loan Scheme offers slightly better terms for loan seekers than the Guarantee Scheme. These include:

  • Whereas the Guarantee scheme was only available to businesses with a turnover of $50 million, the Recovery Loan Scheme is available to businesses with a turnover of $250 million;
  • The interest rate under the Recovery Loan Scheme is capped at 7.5%, while the Guarantee Scheme is capped at 10%;
  • The loan limit for the Recovery Loan Scheme is up to $5 million (in addition to any loans under the Guarantee Scheme), while for the Guarantee Scheme it is up to $1 million; and
  • The Recovery Loan Scheme allows a repayment term of up to 10 years with a “repayment holiday” of up to 24 months, while the Guarantee scheme only allows a repayment term of 5 years.

It will be interesting to see the uptake in the new Recovery Loan Scheme and whether the banks will rely on it to finance businesses that they otherwise might not, or if it will mainly be used to support businesses that would already qualify for usual bank finance.

For more information about the SME Recovery Loan Scheme, or if you would like to discuss how we can assist your business post-COVID-19, please contact us here or call (07) 3009 8444.

 

Director Resignations: New Laws Apply from 18 February 2021

From 18 February 2021 a company director will not be able to backdate their resignation more than 28 days or resign and leave a company without a director.

Backdating resignations was a common tactic used by directors who engage in illegal phoenix activity. The reforms and new changes are aimed at further combating such illegal phoenix activity.

Illegal phoenix activity can involve serious breaches of the law that include directors’ duties, fraudulent concealment or removal of assets and fraud by company officers under the Corporations Act 2001. Penalties include large fines and up to 15 years imprisonment for company directors and secretaries and others involved.

Directors will now have 28 days to lodge their notice of resignation with ASIC, otherwise the resignation will take effect from the date that the notice is lodged.

If the notice is lodged outside of the 28 days, application can be made to ASIC (within 56 days of the claimed registration date) or the Court (within 12 months of the claimed resignation date, unless the court allows a longer period) to fix the date that the resignation takes effect.

Directors will also be unable to resign or be removed by a company if that resignation or removal results in the company being without a director. This limitation does not apply if the company is in liquidation.

If you are concerned about your company, or your directors duties, or require clarification in relation to the new reforms, now is the time to get advice. Please contact our experienced restructuring and insolvency lawyers to ensure the best possible outcome for your circumstances. 

Call our Brisbane lawyers on (07) 3009 8444 or our Sydney lawyers on (02) 9307 8900. Alternatively, click here to get started.

 

 

Instalment Contracts and Forfeiture of Deposits

Business Due Diligence

A recent matter reminds us all that in a hot real estate market and rising prices, any delays in settlement can be a fundamental breach. However-not all may be lost if there is an instalment contract.

We recently acted for a buyer of an off the plan property on the Gold Coast who initially signed a contract for $2,000,000 in 2017.

A deposit was paid of 10% of the purchase price at the time of signing.

4 years later when the developer called for settlement, the buyer’s financier was not ready to settle and sought a short extension to settle.

The developer refused to grant the extension, and purported to terminate and forfeit the deposit of $200,000 on the basis that the contract expressly provided time was of the essence and the failure to settle on the due date was a fundamental breach of the terms of the contract. The developer then offered to re-sell the property to the buyer at what it considered to be the current market value of $2,500,000-an increase of $500,000 ! Clearly, the developer had simply sought to take advantage of the market conditions and the increased value.

Naturally the Buyer was less than impressed and sought our advice.

Upon further investigation, it transpired that some months before the settlement was due, the developer’s had offered to build an additional storage area for the buyer attached to its basement carpark for $3,500. This additional storage area was offered on the basis that it would be “on title” and that the buyer would have exclusive use, and the CMS would reflect the additional space.

This offer was accepted and the additional storage area fee was paid.

Instalment Contracts definition

Was the additional storage space fee payment a payment “other than a deposit”?

In our view, this additional storage fee triggered the instalment provisions of the Property Law Act.

Under the Property Law Act 1974 (Qld) (PLA), section 71 defines:

a “deposit” as follows:

deposit” means a sum—

(a) not exceeding the prescribed percentage of the purchase price payable under an instalment contract; and

(b) paid or payable in 1 or more amounts; and

(c) liable to be forfeited and retained by the vendor in the event of a breach of contract by the purchaser.”

an “instalment contract” as follows:

“instalment contract” means an executory contract for the sale of land in terms of which the purchaser is bound to make a payment or payments (other than a deposit) without becoming entitled to receive a conveyance in exchange for the payment or payments.

a “prescribed percentage” as:

“prescribed percentage” means—

(a) for a contract for the sale of a proposed lot—20%; or

(b) otherwise—10%. 

30 days notice to terminate required

The effect of this was that the Developer had failed to terminate in accordance with S 72 which provides:

S71 (1) An instalment contract shall not be determinable or determined because of default on the part of the purchaser in payment of any instalment or sum of money (other than a deposit or any part of a deposit) due and payable under the contract until the expiration of a period of 30 days after service upon the purchaser of a notice in the approved form.

Following our robust representations to the developer’s legal representatives and threats of court action, the developer relented it position and offered to re-sell the unit at the original contracted price and credit the forfeited deposit to the new contract.

Our client buyer refused this kind offer and sought an immediate refund of the deposit, storage fee and interest. This was agreed upon and paid.

But for the fact that the additional storage fee made the contract an instalment contract, the developer was entitled to terminate and forfeit the deposit.

The matter was a timely and stark reminder that in a rising market with property values rapidly escalating, buyers must have their finance in order to settle on time or face the possible termination and loss of their deposits. However-in certain circumstances, and with the benefit of good legal advice, it may be possible to avoid the drastic consequences of a purported termination. It also emphasises the need for developers to  be aware of the consequences of accepting additional payments “other than” deposit monies before deciding to terminate.

If you have any queries on these matters-please contact us;

QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]

 

Small Business Restructuring Reforms Now in Effect

On 1 January 2021, a number of amendments to Chapter 5 of the Corporations Act (2001) (Cth) came into effect, establishing a new framework of Australian insolvency law to better serve small businesses as they try to cope with the economic impact of COVID-19. 

Takeaways

  • Businesses with liabilities of less than $1 million will be entitled to a new debt restructuring and liquidation process, aimed at providing faster and lower cost pathways for businesses in financial distress. 
  • The reforms introduce a debt restructuring process that allows business owners to retain control of their company while a restructuring practitioner develops a debt restructuring proposal. 
  • The small business insolvency reforms are aimed at increasing the rate of successful restructures as well as reducing the number of financially distressed businesses entering voluntary administration and liquidation. 

Overview

Small businesses experiencing financial distress should note three key reforms to the Australian insolvency law that might be available to them:

  1. A new debt restructuring process to provide small businesses with a faster and less complex mechanism for financially distressed, but viable, companies to restructure their existing debts;
  2. A new simplified liquidation process for small businesses to allow faster and lower-cost liquidation, increasing returns for creditors and employees; 
  3. Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to the needs of small business. 

Small Business Debt Restructuring Process

The most significant insolvency law reform is the introduction of a new debt restructuring process for small businesses (Restructuring Process). Under the new debt restructuring model, eligible companies are able to approach a registered small business restructuring practitioner (Restructuring Practitioner) to assist in reviewing the business’ financial affairs and developing a restructuring plan to be put forward to the creditors within 20 days of their appointment. 

Once the plan is put forward, creditors are given 15 days to vote on the plan, after which the plan is either implemented and distributions are made according to the plan’s terms, or the company may resolve to go into some other form of external administrations (voluntary administration or the small business liquidation process, as discussed below). 

Eligibility

A company will be eligible for the Restructuring Process where:

  • Its liabilities are than less than $1 million (any liability that is not contingent)
  • It has not been the subject of a separate Restructuring Process in the past 7 years
  • It is not currently the subject of other forms of external administration. 

Additionally, before a Restructuring Practitioner may propose a restructuring plan to the company’s creditors, they must ensure the company:

  • Has paid its employee entitlements due (including its employees’ superannuation); and 
  • Has its tax lodgements up to date (this includes returns, statements applications and any other documents required under the taxation law, but this does not require all tax debts to be paid where the lodgements are up to date). 

Who May Act as a Restructuring Practitioner?

As the law currently stands only registered liquidators are permitted to consent to an appointment as a Restructuring Practitioner. However, it is the intention of the legislation to create a new class of registered small business Restructuring Practitioner, under the Insolvency Practice Rules, that solely focuses on small business restructuring.

Additionally, certain classes of persons are excluded from acting as a Restructuring Practitioner, including creditors of the company over the value of $5,000, related entities or auditors of the company. 

Powers of the Restructuring Practitioner and the Company

The small business restructuring process allows the company to continue trading in the ordinary course of business under the control of its owners, which is overseen by the Restructuring Practitioner while a debt restructuring plan is developed and proposed to the Company’s creditors. Any trading outside the company’s ordinary course of business requires the prior approval of the Restructuring Practitioner. 

The role and function of the Restructuring Practitioner include: 

  • Examining the company’s financial records and determining if the business is viable;
  • Assisting the company in developing a debt restructuring plan to restructure its debts; 
  • Proposing the plan to the company’s creditors; and 
  • Managing the disbursements if the plan is approved. 

It is the Restructuring Practitioner’s responsibility to remain as an independent third party and to ensure that the creditor’s rights are represented and protected, this includes preserving the rights of secured creditors and treating similarly ranking creditors consistently. 

Only creditors who are not related entities may vote on the restructuring plan, and in order for it to be approved, the plan requires the majority of value of the creditors to vote in favour. If the proposal is successful it binds all creditors. 

Once the plan is approved, the practitioner remains in his position and administers the plan according to its terms. If the plan is voted down, the process ends and the company may proceed in an alternative form of external administration – this may include the simplified liquidation process set out below. 

New Small Business Simplified Liquidation Process

The second key reform which came in effect on 1 January 2021 is the new small business simplified liquidation process, which gives eligible companies access to a faster and cheaper alternative to the standard large scale, complex liquidation process. 

Details of the Simplified Liquidation Process

Where a liquidator has been appointed pursuant to a creditor’s voluntary liquidation and they consider on reasonable grounds that the company meets the eligibility criteria, the liquidator may choose to adopt the small business liquidation process rather than the standard creditor’s voluntary liquidation process. 

The simplified liquidation process is faster and simpler than the standard process, with the aim of a greater return to the company’s creditors and employees. Under the new process:

  • the liquidator is not required to submit a section 533 report to ASIC on potential misconduct unless there are reasonable grounds that misconduct has occurred. 
  • the liquidator is not required to hold formal creditor’s meetings and can instead distribute information to creditors, and proposals for voting, electronically. 
  • The unfair preference voidable transaction provisions are restricted to prevent the liquidator pursuing claims against unrelated entities.
  • The system of dividend distribution and proof of debt submission is simplified. 

Eligibility

In order for a company to be eligible for the simplified liquidation it must satisfy a number of requirements under the legislation including:

  • The company must already be in liquidation pursuant to a creditor’s voluntary liquidation.
  • The company must have liabilities less than $1 million.
  • The company must have its tax lodgements up to date (returns, notices, statements and applications as required by taxation laws). 

Creditors may also request in writing that the liquidator not follow the simplified liquidation process within 20 days of the event triggering the simplified liquidation process, and the liquidator must cease the simplified liquidation process if the eligibility criteria are no longer met. 

Complementary Provisions to Support the Insolvency Reforms

In addition to the debt restructuring process and the simplified liquidation process, a number of other amendments have been made to the Corporations Act to assist insolvency practitioners and distressed companies to transition into these reforms. 

Temporary Relief for Companies Seeking a Restructuring Practitioner

To assist in the transition into the small business reforms and as insolvency practitioners become more familiar with the processes, from 1 January 2021 until 31 March 2021 eligible companies are able to declare their intention to utilize the small business restructuring process through ASIC’s published notices website. 

If a company declares their intention to access the Restructuring Process with ASIC, the insolvency relief that applied in 2020 (extended compliance period for statutory demands and temporary protection from insolvent trading liability) will continue to apply until they are able to engage an eligible Restructuring Practitioner before 31 March 2021.

New Small Business Restructuring Practitioner

As the law currently stands, only registered liquidators are eligible to act as Restructuring Practitioners, however, under the insolvency practice rules a new classification of insolvency practitioner will be created that will solely focus on small business restructures.

To streamline the small business restructuring process, the new classification of practitioner will have their practice limited to small business restructurings only and will be offered to registered chartered accountants, in addition to insolvency professionals. It would seem the aim of this new classification is to try to increase accessibility and supply of available practitioners to meet potentially higher demand for small business debt restructuring. 

More Reforms

Other complementary provisions include:

  • Key sections of Chapter 5 of the Corporations Act have been made “technology neutral” so to allow external administrations to be carried out without a formal meeting of creditors.
  • Fees associated with registration as a registered liquidator are waived until 30 June 2022.

Speak with one of Rostron Carlyle Rojas Lawyers’ qualified restructuring and insolvency lawyers today, at:

QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]

 

Update to Ending of COVID-19 Relief Measures

 

Overview

On 22 March 2020 the Government announced temporary insolvency relief for financially distressed companies, to help businesses get to the other side of the Coronavirus crisis. 

The temporary insolvency relief increased the thresholds at which creditors could issue a statutory demand (or a bankruptcy notice) and the compliance time for debtors to respond to statutory demands and bankruptcy notices. 

As a result of the temporary relief measures, creditor enforcement action (to recover debts) effectively graded to a halt. Businesses that would otherwise have failed (and entered External Administration) were kept alive through a combination of lack of creditor debt recovery action and other Government relief incentives. Such as JobKeeper – which was intended to give temporary support to viable businesses during a period of broader mandatory restrictions and shutdowns. 

Consequently, the number of businesses entering External Administration (liquidation or voluntary administration) dropped over 50%. This compared to the same period last year and, in the September quarter 2020, bankruptcy numbers were at their lowest level since AFSA records began in 1986. 

Temporary relief was also given to directors of companies from any personal liability for trading while insolvent, with respect to debts incurred by the company in the ordinary course of the company’s business. Provided that an external administrator was appointed to the company before the moratorium’s expiry, being before 31 December 2020.

The temporary insolvency relief measures expired on 31 December 2020 (while JobKeeper currently has a scheduled end date of 28 March 2021).

Insolvent trading moratorium ends

  • Many people appear to be operating under the misunderstanding that the insolvent trading moratorium (in effect during the March – December 2020 period) provides a complete shield from personal liability for insolvent trading. That is simply not the case.

  • Directors trading-on a business beyond 31 December 2020 will be exposed to the insolvent trading provisions of the Corporations Act 2001 throughout any period that the company was insolvent—including the March-December 2020 period—should the company later end up in liquidation.

  • Directors should be aware that they would only be afforded protection under the temporary relief measures IF they appointed an external administrator to the company before the moratorium’s expiry, i.e., before 31 December 2020.

  • For the avoidance of doubt, directors of companies who are still trading now that were trading insolvent during the March – December 2020 period, and that later end up in liquidation, will be exposed to personal liability for insolvent trading.

Where are we now?

On 1 January 2021 (following the expiration of the temporary insolvency relief measures) the Government’s insolvency reforms to support small businesses commenced. 

The reforms introduce new insolvency processes suitable for small businesses aimed at reducing the complexity, time and costs required to quickly and efficiently restructure their affairs. Where restructure is not possible, businesses can wind up faster via the simplified liquidation process, designed to enable greater returns for creditors and employees. 

The new small business insolvency reforms (see link below) include:

  • A new Debt Restructuring Process for small businesses;

  • Temporary restructuring relief; and

  • A new Simplified Liquidation Process for small businesses.

For more information about the Small Business insolvency and restructuring reforms, please access our separate article HERE

Personal Insolvency and Bankruptcy Notices

  • Changes to Bankruptcy laws:

    • In March 2020, the Australian Government announced a series of changes to bankruptcy law, as part of the wider economic response to the COVID-19 pandemic.

    • Those temporary changes included:

      • an increase in the debt threshold, which enabled creditors to apply for a bankruptcy notice;

      • an increase to the timeframe for a debtor to respond to a bankruptcy notice; and

      • an increase to the temporary debt protection period available to debtors. 

    • As of 1 January 2021, those temporary changes have ceased, however, an amendment has been made to adjust the bankruptcy threshold amount. 

    • Relevantly:

      • the minimum amount of debt that can trigger bankruptcy is now $10,000 (down from $20,000 under temporary changes). Before the temporary changes, the minimum amount of debt that could trigger a bankruptcy was prescribed at $5,000.

      • The timeframe for a debtor to respond to a bankruptcy notice has reverted to 21 days (from 6 months under temporary changes). This means if a bankruptcy notice is issued on or after 1 January 2021, the debtor will have 21 days to comply with the bankruptcy notice.

      • The period for temporary debt protection for debtors has reduced from six months (under temporary changes) to 21 days.

      • Two or more creditors can combine their judgement debts to meet that minimum amount and together apply to court to petition to have a mutual debtor declared bankrupt

    • Back on the discussion table for government is the potential permanent bankruptcy reform to reduce the default bankruptcy period from three years to one year. That potential reform had stalled previously, but it may become a reality 2021.

Statutory Demands

Effective as at 1 January 2021, for creditor’s statutory demands against companies:

  • the minimum amount of debt for a statutory demand, that can trigger a winding up application, is now $2,000 (down from $20,000 under temporary changes), which is back to the way it was before the temporary changes.

  • The timeframe for a debtor to respond to a statutory demand has reverted to 21 days (from 6 months under temporary changes). This means if a statutory demand is issued on or after 1 January 2021, the debtor will have 21 days to comply with the statutory demand.

Update on JobKeeper

  • Ends 28 March 2021.

  • According to Federal Treasurer the Hon Josh Frydenberg MP, JobKeeper has costs $77 BILLION to date and at its peak was supporting 3.6 million Australian workers and around 1 million Australian businesses.

  • JobKeeper has now entered the second phase of its extension (from 4 January 2021). 

    • In this current phase, eligible businesses receive $500 per week for each staff member working at least 20 hours per week, down from $600. Other employees attract a payment of $325 per week, down from $375.

    • The tier 1 rate applies to eligible employees who worked for 80 hours or more in the four weeks of pay periods before either 1 March 2020 or 1 July 2020, and eligible business participants who were actively engaged in the business for 80 hours or more in February and provide a declaration to that effect.

    • The tier 2 rate applies to any other eligible employees and eligible business participants.

  • We anticipate that a significant number of businesses currently being kept alive solely by JobKeeper, will enter External Administration sometime after 28 March 2021.  

Practical tips & takeaways

  • Use the correct and updated Statutory Demand and Bankruptcy Notice forms to avoid challenges relating to material deficiencies in light of the above changes effective from 1 January 2021. 

  • Directors who think their companies were trading insolvent prior to 1 January 2021 (or since) should seek professional advice urgently to consider the options for their business and their personal position. 

  • Pressure from creditor enforcement being able to resume, and from JobKeeper coming to an end, will see an increase in companies entering External Administration and personal bankruptcies, likely from about March 2021. Business owners, directors and creditors should prepare themselves for new waves of insolvency and restructuring coming soon.

If you have felt the effects of the pandemic on your business or require assistance or clarification in relation to the ending of the temporary relief for financially distressed companies and businesses, now is the time to get advice on how to structure your company’s affairs or recovery activities.

Speak with one of Rostron Carlyle Rojas Lawyers’ qualified restructuring and insolvency lawyers today, at:

QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]

 

SHAREHOLDER DISPUTES-The consideration of the practical implications of buying out another party and a when winding up may be preferred.

Shareholder disputes considerations

Shareholder disputes often arise in private companies where there is a breakdown in relationships between shareholders. Often these disputes arise from assertions of oppression of a minority shareholder and the court is asked to exercise its broad discretion to make orders under S233 of the Corporations Act 2001 either wind up the company or to order a buy- out.

The question as to whether or not a buy-out order is practicable or would only give rise to further complications and potential forensic challenges to and for the party in obtaining meaningful relief needs to be considered.

The general principles were summarised in Re Hollen Australia Pty Ltd, Robson J:

(1) Generally, the purpose of granting a remedy under s 232 is to bring an end to the oppression and to fairly compensate the person oppressed.

(2) Typically, the oppression can be ended and the oppressee properly compensated by the oppressor being ordered to acquire the oppressee’s shares at a fair value.

(3) Generally, the order should seek to put the company back on the rails and avoid the causes of conflict and oppression.

(4) Winding up is a remedy of last resort.

(5) Winding up a profitable and operating company is an extreme step and requires a strong case to be make.

(6) In choosing a remedy under s 233 the Court is exercising a discretion.

(7) In exercising that discretion, the Court should keep in mind the above principles.

(8) Bearing in mind those principles, circumstances may dictate that the most appropriate remedy to bring an end to oppression and to fairly compensate the person oppressed is a winding up.” (emphasis added).

 

In the recent decision of Snell v Glatis (No 2) [2020] NSWCA 166, the primary judge found oppression of the applicant shareholder and ordered that $66 million be paid within 30 days without any evidence as to Mr Snell’s capacity to raise those funds.

The primary judge relied on the absence of any evidence of hardship and the fact that compulsory buy-out was the plaintiffs’ preferred remedy. Her Honour expressly appreciated that “finding the sums sought by the plaintiffs to buyout their shares may well not be easy”, but nonetheless ordered a compulsory buy-out on the basis that it was the appropriate relief in order to prevent oppression in the future.

The Court granted the appeal and ordered the winding up of the Company.

Relevantly, the companies’ main assets in this matter were tenanted property and loans which may be more or less readily realised by a liquidator. The relevant companies were for the large part not actively conducting a business, but rather collecting rents on leased property and repayments of secured and unsecured loans, and the Court considered that winding up was a realistic means of securing to the plaintiffs their share of the value of the companies which would also prevent ongoing oppression.

 

The case highlights the fact that the context in which the particular company or companies operate together with their structure and history will always be relevant to the fashioning of appropriate discretionary relief and the usual view that winding up is a last resort (particularly for trading and solvent companies do not mean that that remedy should not be considered, in an appropriate case, even if neither party in fact seeks it.

If you are a shareholder of a company and have a dispute with other shareholders, and want assistance and advice to resolve the dispute, please contact us:

Insolvency reforms to support small business

Insolvency reforms to support small business

On 24 September 2020, Federal Treasurer the Hon Josh Frydenberg MP along with the Michael Sukkar MP, Minister for Housing and Assistant Treasurer, announced significant reforms to Australia’s corporate insolvency laws as part of the Federal Government’s economic recovery plan.

The reforms are said to be the most significant reforms to Australia’s insolvency framework in 30 years and draws on key features from US Chapter 11 style Bankruptcies.

The reforms will cover around 76% of Companies subject to insolvencies today, 98% of whom who have less than 20 employees.

THREE key elements of the proposed insolvency reforms:

  1. A new formal debt restructuring process for small businesses (with liabilities of less than $1 million) to provide a faster, less complex and cost-effective mechanism to restructure their existing debts.
  2. A new, simplified liquidation pathway for small businesses (with liabilities of less than $1 million) to allow faster and lower-cost liquidation, resulting in increased returns for creditors and employees.
  3. Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to the needs of small business.

Brief Overview and Summary of the Proposed Reforms

Who Will Be Able to Use the New Processes?

An Incorporated business (Pty Ltd company) with liabilities of less than $1 million.

*We note that the reforms do not currently appear to foreshadow changes to the personal insolvency regime (Bankruptcy laws).

When Will the New Processes Be Available for Small Business?

From 1 January 2021 (subject to the drafting and passing of legislation)

How is the New Formal Debt Restructuring Process Said to Operate?

  • The proposal adopts a ‘debtor in possession’ model. That means that the business can keep trading under the control of its owners/Directors, who is said to know the business best.
  • Directors of a small business facing financial distress approaches a Small Business Restructuring Practitioner.
  • The Small Business Restructuring Practitioner’s role is to:
    • Help determine if the company is eligible for the new debt restructuring process
    • Support the company to develop a plan and review its financial affairs
    • Certify the plan to creditors
    • Manage disbursements once the plan is in place
  • If the Small Business Restructuring Practitioner advises that the new debt restructuring process is the most appropriate option Company, the practitioner proposes a flat fee for the practitioner’s work in helping the business develop a restructuring plan.
  • The company Directors decide to accept the advice and pass a company resolution to appoint the Small Business Restructuring Practitioner.
  • Notably, it is proposed that all current employee entitlements must be paid before a plan can be put to creditors.
  • On commencement, unsecured and some secured creditors are prohibited from taking actions against the company, personal guarantees cannot be enforced against the Director(s) (or one of their relatives), and a protection from ipso facto clauses (that allow creditors to terminate contracts because of an insolvency event) apply (with the same protections applying as during voluntary administration).

 

  • 20 business-day period commences:
    • The Directors work with the practitioner to develop a plan to restructure the company’s debts and provide supporting documents for creditor consideration.
    • During this time, the Directors continue to control the business and can trade in the ordinary course of business.
    • The practitioner develops a remuneration proposal to cover their management of the plan once in place, which will operate as a percentage fee of disbursements made under the plan.
    • The practitioner certifies whether they consider the business can meet the proposed repayments and has properly disclosed its affairs.
    • The practitioner sends the plan and supporting documents to creditors.
  • 15 business-day period commences:
    • Creditors have 15 business days to vote on the plan, including the proposed remuneration for the practitioner.
    • If more than 50 per cent of creditors by value approve the plan, it is approved and binds all unsecured creditors.
    • Secured creditors are bound by the plan only to the extent their debt exceeds the realisable value of their security interest.
    • Related-party creditors are not entitled to vote.
    • If the plan is approved, the business continues and the practitioner administers the plan by making distributions to creditors according to the terms of the plan.
    • If voted down by creditors (being if more than 50 per cent of creditors by value do not approve the plan), the process ends and the Directors may opt to go into Voluntary Administration or to use the new simplified liquidation pathway proposed by the reforms.

How is the New Simplified Liquidation Pathway Said to Operate?

  • The simplified liquidation process will retain the general framework of the existing liquidation process with modifications to reduce time and cost associated with existing processes.
  • Time and cost savings with the new simplified liquidation pathway are said to be achieved through:
    • reduced investigative requirements,
    • reduced requirements to call meetings, and
    • reduced reporting functions.
  • Under the new simplified liquidation pathway, Directors appoint a liquidator who will:
    • Take control of the company.
    • Realise the company’s remaining assets for distribution to creditors.
    • Investigate and report to creditors about the company’s affairs and inquire into the failure of the company.
  • Key modifications to the existing liquidation process include:
    • Reduced circumstances in which a liquidator can seek to clawback an unfair preference payment from a creditor that is not related to the company.
    • Only requiring the liquidator to report to ASIC (under section 533) on potential misconduct where there are reasonable grounds to believe that misconduct has occurred.
    • Removing requirements to call creditor meetings and the ability to form committees of inspection.
    • Simplifying the dividend process and the proof of debt process.
  • The rights of secured creditors and the statutory rules as to the payment of priority creditors such as employees will not be modified.

Who Will Administer the New Processes?

A new class of Insolvency practitioner called a “Small Business Restructuring Practitioner” whose practice will be limited to the new simplified restructuring processes only.

  • Registered liquidators will also be able to manage the new process.
  • Significantly, we note that a Small Business Restructuring Practitioner will not take on personal liability for a company or manage its day to day affairs.
  • It is unclear what the requirements will be to qualify as a Small Business Restructuring Practitioner.

What Other Reforms Are Proposed?

  • Temporary insolvency relief for eligible companies waiting to access the new restructuring process.
  • When a company announces its intention to access one of the new processes, they will be entitled to benefit from the existing temporary insolvency relief for up to 3 months until the process commences.
  • Temporarily waiving fees associated with registration as a registered liquidator for approximately 2 years until 30 June 2022.
  • Making changes to allow for more flexibility in the registration of insolvency practitioners.
  • Making the key parts of the process set out in the Corporations Act 2001 ‘technology neutral’ so that external administrations can be carried out more efficiently.

As experienced insolvency and restructuring lawyers, Rostron Carlyle Rojas Lawyers look forward to reviewing the draft legislation along with any further clarification from the Federal Government on the technical details of the proposed insolvency reforms. That being said, the reforms to our corporate insolvency laws are certainly well overdue.

If you have felt the effects of the pandemic on your company or require assistance or clarification in relation to the current temporary relief for financially distressed companies, now is the time to get advice on how to structure your company’s affairs.

Speak with one of Rostron Carlyle Rojas Lawyers’ qualified restructuring and insolvency lawyers today, at:

QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]

JobKeeper 2.0 Changes Effective 28 September 2020

New JobKeeper

The Federal Government’s JobKeeper Payment Scheme, which was announced in March 2020, is one of the most significant business stimulus packages offered by the Government in response to the COVID-19 pandemic. The scheme aims to keep Australians employed, in their pre-pandemic role with their employer.

The original JobKeeper Payment Scheme saw eligible employers receive fortnightly ‘JobKeeper Payments’ of $1,500 per eligible employee. However, from 28 September 2020, payments will decrease and employer eligibility restrictions will tighten. Further changes will also come into effect on 4 January 2021.

New Payment Rates

A new tiered approach will determine an employee’s JobKeeper Payment rate, generally based on their average hours worked.

Tier 1 rates apply to employees who worked 80 hours or more (including paid leave or paid public holidays) over the 4-week pay period preceding either 1 May 2020 or 1 July 2020. Tier 2 rates apply to those who worked less than 80 hours.

New JobKeeper Payment Rates

As per the original JobKeeper eligibility requirements, employees will be eligible if they:
• Are currently employed by an eligible employer (this includes those who have been stood down or re-hired);
• Were employed by the employer on 1 July 2020;
• Are full-time, part-time, or a casual employee who had been employed on a regular basis for longer than 12 months as at 1 July 2020;
• Are 18 years old, or at least 16 years old if independent;
• Are an Australian citizen, the holder of a permanent visa, a Protected Special Category Visa Holder, a non-protected Special Category Visa Holder who has been residing continually in Australia for over 10 years, or a Special Category (Subclass 444) Visa Holder; and
• Are not receiving a JobKeeper Payment from another employer.

The payments are considered taxable income and PAYG income tax must be withheld. It is at the employer’s discretion whether to pay superannuation on any wage increases stemming from the JobKeeper Payment.

New Eligibility Restrictions

Businesses seeking eligibility under the new JobKeeper Payment Scheme will be required to demonstrate an actual decline in turnover of 30% in the September 2020 quarter compared to the same period in 2019 (50% for those with an aggregated turnover of more than $1 billion and 15% for charities and not-for-profits). The further revised JobKeeper Payment Scheme that will come into effect on 4 January 2021 requires reassessment for the December 2020 quarter.

Applications for the JobKeeper Payment Scheme are open and businesses can apply directly via the ATO.

For employers and employees alike, JobKeeper and other stimulus measures are helpful and is undoubtedly a lifeline. For many others, the simple concept of recovering financially from the economic knock-on effect of COVID-19 seems unachievable and quite simply unrealistic.

If these measures have not been effective in assisting your business, and you are facing solvency issues, you should seek early advice from a qualified insolvency practitioner.

Contact our team of qualified legal advisers today.

Federal Government announce extension to insolvency relief

Federal Government announce extension to insolvency relief

On 7 September 2020, Federal Treasurer the Hon Josh Frydenberg MP along with the Hon Christian Porter MP, Attorney General, Minister for Industrial Relations announced in a joint media release that the regulatory relief for businesses that have been impacted by the Coronavirus crisis will be extended to 31 December 2020. This will come as welcome news to directors of impacted businesses, as the temporary relief measures will further extend the moratoriums against personal liability of directors for trading whilst insolvent.

The Federal Government, claim that the measures will help prevent a further wave of failures before businesses have had the opportunity to recover from the effects of the pandemic. In their statement, their Honours say that, “as the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.”

As insolvency and restructuring lawyers, Rostron Carlyle Rojas Lawyers have seen how this regulatory relief can be utilised to protect directors in re-arranging their company’s affairs. The temporary relief measures are extraordinary and unlikely to be replicated once the world moves back to business-as-usual. If you have felt the effects of the pandemic on your business, now is the time to get advice on how to structure your company’s affairs.

Speak with one of Rostron Carlyle Rojas Lawyers’ qualified restructuring and insolvency lawyers today, at:
QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]

Help! I can’t pay my debts: Understanding your insolvency options.

Insolvency Options

While social distancing lockdown measures may be easing across Australia, the economic fallout from COVID-19 is in its infancy. Cashflow for many businesses have dried up, and sadly, for many more their coffers will soon be empty. Undeniably, the financial impact of the lockdown measures is (and will be) immense.

For employers and employees alike, the Jobkeeper payment and other stimulus measures are helpful and is undoubtedly a lifeline. For many others, the simple concept of recovering financially from the economic knock-on effect of COVID-19 seems unachievable and quite simply unrealistic. Getting proper informed advice as to what legal options you may have available to you as an individual, to help you manage your debt, has never been more important.

Many Australians are now (or will soon be) faced with unmanageable debt. The earlier you seek help, the more informed you’ll be and likely to gain control of your situation.

Insolvency -What are my options?

At the outset, it is important to note that you are deemed to be insolvent under the Bankruptcy Act 1966 if you can’t pay your debts when they fall due. A scary concept given the cashflow constraints faced by so many Australians right now.

If you are insolvent, then you are at risk of being made bankrupt by one of your creditors (if the relevant bankruptcy thresholds are met, and the applicable bankruptcy procedures followed). However, you may have other options available to you, that may see you avoid formal bankruptcy (either now or at some time in the foreseeable future).

If you have unmanageable debt, you generally have four formal insolvency options available to you, or, other informal options such as informal negotiations with your creditors. Regardless of which option you are considering, the consequences of the decisions you make now as to how to deal with your creditors, can be severe.

Overview of formal Insolvency options:

1. Temporary debt protection (TDP) – This option provides you with a six-month protection period from being pursued by unsecured creditors. This is a serious step and advice should be obtained prior to being taken as the consequences can be serious.

*Caution – while creditors may be unable to enforce recovery of unsecured debts from you if you choose this option, they are still able to commence or continue legal action, including to obtain judgment against you. Creditors just won’t be able to enforce that judgment via bankruptcy for six months. Secured creditors on the other hand, can continue recovery of their secured debt. By lodging a temporary debt protection form (formally called a declaration of intention to lodge a Debtors Petition) you are committing an act of bankruptcy and importantly, some debts are not covered by TDP.

2. Bankruptcy – Last for three years and one day and at the end of this period, you are released from most of your debts. Although bankruptcy releases an individual of their debts (or most of their debts), owed at the time of the bankruptcy, there are serious consequences of bankruptcy and you should seek advice if you are considering self-declaring bankruptcy by way of a Debtors Petition.

Consequences of bankruptcy may include impacts on your ability to get credit, restrictions on overseas travel or gaining some types of employment or hold certain licences (such as a builder’s licence). Further, bankruptcy details, such as a bankrupt’s name, address, date of birth and occupation are available to the public via a Government database known as the National Personal Insolvency Index (“NPII”) permanently and usually on databases of credit reference agencies.

3. Debt Agreements – a formal binding agreement between you and all your creditors whereby your creditors agree for you to repay a reduced sum, over a period of time (which you can afford) in final and full satisfaction of the full balance(s) outstanding. These payments are made to your Debt Agreement Administrator, who then distributes the funds to your creditors. Once the agreed payments are made, and the agreement comes to an end, your debts are discharged.

*Caution – There are eligibility criteria for Debt Agreements, for example, you can’t propose a Debt Agreement to your creditors if you owe more than $118,063.40 in unsecured debt, or your after-tax income is more than $88,547.55, or your divisible assets add up to more than $236,126.80. Further, some debts will not be released or included in a Debt Agreement and will still need to be repaid. Additionally, entering into a Debt Agreement may effect your ability to get credit and may appear on the NPII or other public register for a period of time.

4. Personal Insolvency Agreements (PIA’s) – similar to a Debt Agreement and is a formal binding agreement between you and all your creditors whereby your creditors agree for you to repay a reduced sum, over a period of time. However, a PIA involves a trustee taking control of your property and making offers to your creditors on your behalf.

*Caution – There are serious consequences involved in a PIA and by entering into a PIA with your creditors, you are committing an act of Bankruptcy. A PIA may be suitable if you do not qualify for a Debt Agreement, for example if your after-tax income is more than $88,547.55 or your divisible assets add up to more than $236,126.80. Further, some debts will not be released or included in a PIA and will still need to be repaid. Additionally, entering into a PIA will affect your ability to get credit and will appear on the NPII permanently.

If you are considering one of the above four formal insolvency options, it is important that you seek advice as to which option may be best suited to your individual circumstances.

Informal Insolvency options:

Information options that may assist in avoiding one of the four formal scenarios outlined above, include working with your professional advisors (such as an accountant or lawyer), to informally negotiate with your creditors. An experienced practitioner may be able to help you negotiate:

  • More time to pay; Reduced payment amounts;
  • Moratoriums or standstill agreements;
  • Variations (or hardship variations) to your credit contracts;
  • Lower interest rates; and/or
  • Waiver of penalties.

While many people successfully negotiate with creditors themselves, there can be benefits in utilising a professional advisor. One not so subtle benefit of using a lawyer being that you are demonstrating to your creditors that you are seeking advice and that you are serious about reaching a resolution. Quite often, creditors respond more favourably to a letter coming from a lawyer, than for example an email sent from your personal account.

While creditors may seem sympathetic now, that position is likely to change, and change quickly in the coming months. It is therefore becoming increasingly important for individuals who are facing financial difficulties now, to properly inform themselves as to what their legal options are in dealing with their creditors.

Should you require assistance in reviewing your solvency position or would like to discuss what insolvency options may be best suited to your individual needs, please contact our office on 07 3009 8444.