This is a brief review, in two parts, of the small corporate business restructuring process under Part 5.3B of the Corporations Act. Some articles and on-line comment give a more detailed and critical coverage of the process than is available from firms’ marketing. A report from ASIC also gives some useful statistics. More is needed from the ATO if the proposed SBR review is to proceed.
When the then government saw the need to improve the effectiveness and efficiency of our insolvency system for small businesses, it limited its consideration to corporate small business, and further limited it to that small group of companies with liabilities under $1 million and meeting tax and employee compliance criteria.
It did say that the new corporate processes under Part 5.3B would be subject to ongoing monitoring to ensure they operate effectively, one option being a post-implementation review, and that it would continue to engage with stakeholders to determine the effectiveness of the SBR processes.[1] It otherwise left the SME insolvency system the same, evident from the PJC Report of 2023.
There has been no talk of a Part 5.3B review, consistent with there being no response to the recommendations of the PJC Report, including from the industry.
Reports on SBR
Academic papers and a report from ASIC give some insights which may assist in any review.
One early paper (2021) was critical of the process and the lack of transparency.[2] The authors noted the small take-up at the time of writing, even now quite limited. It contemplated that tax and employee compliance would mean that many/most MSMEs would be unable to use the new procedure given the “notoriously low” levels of compliance in that sector.
Another paper (2023) compared overseas laws – India and the US covering both corporate and individual debtors; and the UK’s creditors’ voluntary arrangement for companies, (and the individual voluntary arrangement, discussed below). The author says that none are currently operating at an optimal level and that we should await the outcome of overseas reviews before contemplating adjustments here.[3] However, this would pre-empt the PJC’s various threshold recommendations for the purposes and pathways of insolvency law to be determined in the proposed comprehensive review of insolvency law.
The third [4] article (2021) raises legal issues with the duties of the restructuring practitioner, including the practitioners’ independence. Given the relative newness of the regime, and the lack of regulatory guidance, independence requirements are rather at large. This article suggests they lack clarity, given the collaborative but also regulatory working relationship contemplated between the directors and the RP. While that might support
“a broader interpretation of a practitioner’s independence obligations [under the] existing legislation, … Australian courts take a traditional strict approach to the independence requirements of other insolvency practitioners, especially in the context of pre-appointment work”.
ASIC’s Report 756 – Review of small business restructuring process, of January 2023 usefully reviews SBRs in detail. Perhaps significantly, 66% of companies where a restructuring plan was effectuated or was ongoing appeared to have been continuing to operate their business (why wouldn’t they? having written off much of their debt); and the Australian Taxation Office (ATO) was a creditor in 89% of companies which entered a restructuring plan and was a major creditor in 79% of those companies.
In any review of SBR, we would need to know from the ATO the extent to which tax debts are written off, consistent with its legal obligations to pursue tax debts owing. As one commentator has said,
“until some transparency regarding statutory or tax debts v other creditors is published for SBRs to demonstrate the taxpayer is bearing the same burden in losses from SBR’s as other creditors, I consider we should not become too excited by the number of appointments”.[6]
Role of the practitioner
The role of the RP is a little unique among the liquidators, trustees, Part X trustees, and other such appointments. It is based upon the existing Part 5.3A regime as well as the debt agreements framework in Part IX of the Bankruptcy Act, but it is a debtor in possession process with the company continuing to run the business, though under some control by the RP who must be a registered liquidator: s 456B.
The sections of Part 5.3B give a reasonable description of the tasks and duties involved, but in the absence of case law and much commentary, the Explanatory Memorandum to the Bill (EM) provides some colour to what the process is about. In particular it emphasises the role of the IP in ensuring the integrity of the process on behalf of creditors and the importance of the RP’s independence throughout.
The role of the RP is initially largely to assist the company develop a restructuring plan, but the role then changes to assume legal control over the SBR process including, as may be required, over the wishes of the directors. As the EM explains, this is
“vital to ensure the integrity of the restructuring process and to ensure that the creditors are not disadvantaged…”.[7]
The RP must give a compliance declaration, with a penalty for breach. The RP must report potential misuse of the SBR process: s 458H.
“Creditors need to be able to rely on the RP’s declaration in order to have confidence that the process has been conducted appropriately, that the proposed debt restructuring plan meets the prescribed requirements, and ultimately to decide whether the proposed plan is the best way forward”.
The RP has a right to inspect company books; and may terminate the restructuring process and allow transactions not in the ordinary course of business.
“This provides the small business restructuring practitioner with appropriate oversight powers to protect creditors against potential misuse of the debt restructuring regime”.
The RP is protected from liability, and has a right of indemnity for remuneration, supported by a lien.
The RP must make and file a declaration of relevant relationships [s 453D, s 60] and must give copies of the declaration to the company’s creditors and to ASIC. A high penalty of 20 penalty units is set for a false declaration, [6.12] consistent with existing penalties in the Corporations Act for similar offences in the voluntary administration framework: [6.15] EM.
As the EM says,
“this penalty is appropriate, as failure to comply can raise doubts about [the RP’s] independence and undermine the integrity of the debt restructuring process”.
That declaration must be kept up to date for changes in the RP’s circumstances, and any replacement declarations must again be provided to creditors and ASIC, with 20 penalty units for failure.
“This ensures that creditors can continue to rely on the independence of the small business restructuring practitioner following a change in their circumstances”.
Independence
The test for independence of an administrator, as for a liquidator, is the conventional ‘double might’ test, that apprehended bias is established if a fair‑minded lay observer might reasonably apprehend that the RP might not bring an impartial mind to the resolution of questions that the RP may be called upon to decide. The way in which that test is applied differs from one statutory context to another, for example in relation to the differences in the functions and duties of liquidators and of administrators.[8]
Similarly, and perhaps more so, the differences in the functions and duties of RPs must be borne in mind when assessing independence. Their role is mixed, on the one hand assisting, on the other oversighting and regulating.
While the relative newness of the regime, and the lack of regulatory guidance, might mean that independence requirements are unclear, as registered liquidators, practitioners will be well aware of the limits on the extent of pre-appointment advice that can be provided before their independence is compromised. Industry guidance on the particular appointment issues with SBRs may be useful.
In that respect, full objective advice on the merits or otherwise of Part 5.3B is also necessarily available to debtors from lawyers and accountants, and from the services provided through small business helplines.
Note: none of this is to be relied upon as being legal advice. You need a practising lawyer for that.
Next
Part II – soon
- Advice needed by small business debtors
- Reputational issues
- Code requirements for UK CVAs
- Need for comparable guidance here?
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[1] Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020, Explanatory Statement
[2] The chimera of restructuring reform: An opportunity missed for MSMEs in Pt 5.3B Jason Harris and Christopher Symes (2021) 36 Australian Journal of Corporate Law 1
[3] Bull, Amanda (2023) Small business restructuring: Lessons from the US, UK and India (2023) 22(9-10) Insolvency Law Bulletin 139-145.
[4] The UK Rescue Moratorium and the Australian SBR, Felicity Toube QC and Hilary Stonefrost, together with Scott Atkins and Kai Luck, South Square Digest, July 2021.
[6] David Kerr
[7] CORPORATIONS AMENDMENT (CORPORATE INSOLVENCY REFORMS) BILL 2020 Explanatory Memorandum
[8] In the Matter of Globaltech Corporation Pty Ltd (Administrators Appointed) [No 2] [2024] WASC 259
