Simplifying the liquidation process: new laws for small businesses

The traditional winding up process is often criticised for being too slow and ineffective. In the vast majority of liquidations, there is little or no return to unsecured creditors, who only receive a dividend after the liquidator's fees and priority creditors have been paid in full.

 

In an attempt to make the winding up process more efficient for smaller companies and address the increasing pressures of Covid-19 on small business, on 1 January 2021 the Federal Government implemented a series of law reforms targeted towards small businesses that are either insolvent or at risk of becoming insolvent.

The reforms are two-fold: (1) the introduction of Small-Business Debt Restructuring (SBDR) which is discussed in detail here and (2) the implementation of a Simplified Liquidation Process (SLP). This article will focus on the SLP.

What is it?

Following the enactment of the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) from 1 January 2021, the SLP has been introduced with the intention of providing liquidators of eligible companies with a less complex and more efficient means of conducting a creditors voluntary liquidation (CVL), with a view to keeping fees to a minimum and maximising the chance of a dividend being paid to creditors and employees.

As the name suggests, SLP is designed to simplify the CVL process. The SLP is not available for compulsory/Court appointed liquidations. It is only available for voluntary liquidations.

Which companies are eligible?

Under this new regime, a company will be eligible to undergo the SLP if it satisfies the following criteria:

  • The resolution to wind up the company occurred on or after 1 January 2021.
  • The company has total debts of less than $1 million (this includes secured and related party debts but excludes contingent debts or employee entitlements).
  • The company has not used the SBDR process or the SLP process within the last seven years.
  • The company has no current or former directors who have used either of these processes within the same timeframe.
  • All tax lodgements of the company are up to date.
  • The company will be unable to repay its debts within 12 months.
  • The directors have provided the liquidator with a report on the company's affairs and property (ROCAP) and an executed declaration of the company's eligibility within 5 days of passing the resolution to wind up the company.

How does this process differ from a traditional CVL?

If the SLP is adopted by the liquidator during a CVL, the liquidation process will be streamlined in the following ways:

  • reducing ASIC reporting requirements;
  • reducing reporting requirements to creditors. Only one report to creditors is required;
  • removing creditor meetings. Matters determined by creditors are decided without a meeting via the ‘proposal without a meeting process';
  • removing the right of creditors to appoint a committee of inspection;
  • removing the right of creditors to appoint a reviewing liquidator to review the renumeration of the appointed liquidator;
  • reducing rights of a liquidator to clawback unfair preference payments from unrelated creditors;
  • simplifying the process for creditors to lodge a claim or dividend payment;
  • only one dividend can be paid to creditors, which is likely to occur towards the end of the liquidation process.

Timing

A liquidator may adopt the SLP if, within 20 business days of their appointment, the liquidator decides that the eligibility criteria for a SLP is satisfied. If so, the liquidator must issue a notice to creditors and provide them with 10 business days' notice of the liquidator's intention to adopt the SLP regime.

The proposal will be defeated if at least 25% in value of creditors object to the use of the SLP.

Takeaways

It remains to be seen whether the SLP will be popular amongst liquidators and whether it will in fact address some of the inefficiencies of the traditional CVL process. The challenge will be to ensure that the SLP does not obscure or prevent scrutiny of directors' conduct leading up to the company's insolvency, and that it does not discourage liquidators from pursuing directors for breaches of directors' duties and voidable transactions.

Liquidators and directors should carefully assess the company's situation when deciding, on a case by case basis, whether the SLP is in fact suitable. If in doubt, early legal advice is key.

Get in touch

If the simplified liquidation process might apply to your business or you are looking for advice, please get in touch with our Litigation and Dispute Resolution team today. We have extensive experience in advising large to small companies as well as directors, liquidators, creditors and other stakeholders of companies in an insolvency context and would be more than happy to assist.

Contributors

Danyal Ibrahim Senior Associate
Emma Connolly Lawyer