A Complete Guide to the Small Business Restructuring Process

The State of Corporate Insolvency in Australia in 2021

Insolvency means the inability of a company to pay its debts as they fall due and payable (see section 95A of the Corporations Act 2001 (Cth)). Insolvency in Australia is commonly dealt with through a ‘formal insolvency appointment’. That is, the appointment of a qualified, registered, insolvency professional to oversee either a liquidation or a voluntary administration process. 

Covid-19, and its associated lockdowns were widely expected to result in a ‘tsunami’ of formal insolvency appointments for 2020. This didn’t happen. In the 2020 calendar year there were 4943 external administrations compared to 8324 in 2019. In addition, the key mechanism for restructuring businesses under the law at the time, voluntary administration, continued its decline in popularity. 

It appears that a range of Government interventions were successful in stopping insolvencies, including: 

• extensive government financial support, especially for small to medium-sized enterprises (SMEs);
• a suspension of normal insolvent trading law through a temporary Covid-19 ‘safe harbour’ for company directors; and
• an extension of the compliance period and increase in the minimum owing amount for statutory demands for payment of debt (the most common mechanism through which creditors can initiate liquidation or another insolvency process). 

These temporary mechanisms largely came to an end on 31 March 2021, as did temporary restructuring relief. 

As the Australian economy is dominated by small and mid-sized businesses it is, perhaps, unsurprising that the majority of corporate insolvencies involve small business. According to the Australian Securities & Investments Commission (ASIC) insolvency statistics, 78 percent of corporate insolvencies involved businesses with less than 20 employees.

In a recent analysis of those statistics by Professor Jason Harris of the University of Sydney Law School, other relevant statistics include:

• 63 per cent of insolvent companies owed less than $250,000 to unsecured creditors, ie. the debts are not large sums of money.
• Most companies (78 percent) have less than $50,000 in assets and a majority (58 percent) have less than $10,000 at the point of a formal insolvency appointment.
• In 92 percent of cases, the estimated return was 0 cents. 

In light of these statistics, a strong case could be made that existing insolvency mechanisms have not been working to the benefit of debtors, creditors and the economy as a whole. 

What is Simplified Debt Restructuring?

Simplified debt restructuring is a new process available as of 1 January 2021 to support financially distressed small businesses. In simplified debt restructuring, an independent professional known as a ‘small business restructuring practitioner’ (referred to either as a ‘SBRP’ or a ‘restructuring practitioner’) is appointed to a distressed debtor company to assist with restructuring the company’s debt via development of a ‘restructuring plan’. 

Debtor companies that are insolvent (or where directors have resolved that they are likely to become insolvent) will be able to appoint a restructuring practitioner and begin the restructuring process where certain eligibility conditions are met. Those eligibility conditions include that the debt not exceed $1 million (more on these conditions below). 

Through this process, the debtor company develops a restructuring plan with the assistance of the restructuring practitioner and, where creditors of more than 50 percent in value agree to the plan, it will be accepted and executed. The restructuring practitioner then supervises the payment of debts under the plan. Once this is done, the company is relieved from all ‘admissible’ debts that it had under the plan.

While the restructuring process is underway, directors are not liable for permitting insolvent trading under section 588G of the Corporations Act 2001 (Cth), and there is a moratorium on unsecured creditors bringing action against the debtor company. 

Which Legislation Sets out the Simplified Debt Restructuring Process? 

The simplified restructuring process was introduced into the law via amendments to the Corporations Act 2001 (Cth) (via the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth)). Within the Corporations Act 2001 (Cth), a new Part 5.3B ‘Restructuring a Company’ was added.

Amendments were also made to the Insolvency Practice Rules by the Insolvency Practice Rules (Corporations) Amendments (Corporate Insolvency reforms) Rules 2020 (Cth). 

In addition, considerable detail on the process is included in the Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 (Cth).

What is Voluntary Administration? 

Until the introduction of simplified restructuring, voluntary administration was the primary formal mechanism available for insolvent companies to avoid being wound up. Once the voluntary administration process is under way, creditors are prevented from bringing an action, or continuing an action against the debtor company for payment of its debts. Furthermore, for the duration of the voluntary administration, directors are not liable under section 588G of the Corporations Act 2001 (Cth) for permitting the company to trade while insolvent. 

The voluntary administration process, which continues to be available for all businesses, begins with directors of a debtor company making a determination that the business is insolvent or likely to become insolvent (as with simplified restructuring). The directors then seek the consent of a registered liquidator to be appointed as a voluntary administrator.

Once the voluntary administrator has agreed to appointment, and been appointed, control of the business is transferred to the voluntary administrator who now becomes the agent of the company. From that point, the primary obligation of directors is to support the voluntary administrator.

The voluntary administrator investigates the affairs of the business and meets with creditors to determine the process moving forward. The voluntary administrator then makes a recommendation to the creditors whether to proceed with a ‘deed of company arrangement’ (DOCA), go into voluntary liquidation or hand the business back over to directors. 

The DOCA will set out the proposed payments to creditors and the obligations of the directors going forward. If creditors agree to the DOCA, it is executed, and once the obligations under the DOCA have been fulfilled, the process will be complete.

However, if we assume that the purpose of voluntary administration is to ‘save the business’ so that it can continue to trade, it is very rarely successful. Based on ASIC statistics, it has been estimated that less than 1 percent of voluntary administrations result in a successful DOCA and the continued trading of the business. Furthermore, where a DOCA is successfully executed, the average return is 5-8 cents on the dollar. 

Besides their poor rates of return, other features that make voluntary administrations unappealing to small businesses include: 

• Expense – Voluntary administrators usually charge by the hour and it has proven difficult for creditors to place an effective cap on voluntary administrator costs.
• Reputation – Voluntary administration seems to have a ‘chilling effect’ on the business as a trading entity due to the public perception in Australia that voluntary administration is tantamount to liquidation.
• Control – It removes directors from control of their business. This may go some way to explaining the poor public perception of the process as well (the public assume that the business is winding up its trading). 

What is the Difference Between Simplified Debt Restructuring and Voluntary Administration? 

Simplified debt restructuring has been introduced in order to remedy some of the perceived problems with voluntary administration, particularly for small businesses or SMEs. 

As with simplified restructuring, voluntary administration begins with an independent registered liquidator being appointed by resolution of the directors of the company. In both cases, this occurs only where the directors have resolved that the company is insolvent, or is likely to become insolvent. As with simplified restructuring, the goal of voluntary administration is an agreement on payment with creditors and the continued trading of the business. However, there are key differences: 

• ‘Debtor-in-possession’ – In simplified restructuring, the directors of the company remain in control and can continue trading while the restructuring process is under way.
• Director-driven process – Simplified restructuring gives more control to directors in coming to an agreement with creditors. In simplified restructuring, it is the directors of the company, not the insolvency professional (in this case, the restructuring practitioner), that develop a restructuring plan and submit it to creditors. By contrast, in voluntary administration it is the voluntary administrator alone who proposes a DOCA to creditors.
• Speed – In simplified restructuring, a restructuring plan must be submitted to creditors within 20 business days. Voluntary administrators have up to 35 business days to propose and recommend that a DOCA be executed.
• Voting – In simplified restructuring the majority in value passes the vote on a restructuring plan. By contrast, a voluntary administration requires that a majority of creditors in both value and number agree to a DOCA. This feature of simplified restructuring gives individual creditors who are owed large amounts far more power over the process. 

What is the Difference Between Simplified Debt Restructuring and Liquidation? 

For various reasons it can become necessary to end or ‘wind up’ a company. Sometimes directors choose to do this even though the company is in a healthy state and is solvent. This is known as a ‘members’ voluntary liquidation’. Note, the terms ‘winding up’ and ‘liquidation’ are used interchangeably.

Where the directors consider that the company is insolvent, they can initiate a ‘creditors’ voluntary winding up’. In this process a registered liquidator is appointed to ‘liquidate’ assets and distribute any remaining amounts to unsecured creditors in a priority order set out in the Corporations Act 2001 (Cth). 

Besides members’ and creditors’ voluntary liquidations there are also compulsory liquidations which can be initiated by creditors through the Court. 

You can read more about the liquidation process in Ultimate Guide to Liquidation Part 1: What is Liquidation?

Unlike simplified debt restructuring or voluntary administration, liquidation is intended to end the company and offers no possibility of the company continuing on in its existing form. Sometimes, liquidation or voluntary administration can be part of a re-organisation of the business in what is known as a ‘pre-packaged insolvency arrangement’ (‘pre-pack’), in which case the life of the business can continue in a different corporate form. We discuss this possibility in further detail below. 

By contrast, the goal of simplified debt restructuring is for the business to continue as a going concern with the directors still in control, while settling the debts that are threatening the survival of the company.

Companies that do not have success with the simplified restructuring process are eligible for a new ‘simplified liquidation’ process (see Schedule 3, Division 2, Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 (Cth)). This is a quicker, streamlined, creditors’ voluntary winding up process available only for companies with liabilities not exceeding $1 million and where certain other conditions are met. 

In simplified liquidation there is no requirement to call creditors’ meetings, reduced reporting requirements and no ability for creditors to appoint a committee of inspection or a reviewing liquidator. 

The new simplified liquidation process, as with simplified debt restructuring, has been available since 1 January 2021. 

Note, in order to initiate a simplified liquidation process, the liquidator needs to give notice to creditors and other key parties that a simplified process is being adopted. 25 percent of creditors by value are able to veto this process, by informing the appointed liquidator in writing. 

Is Simplified Restructuring Similar to ‘Chapter 11’ in the United States? 

Other countries have ‘debtor in possession’ restructuring frameworks. For example, Canada has company creditors’ arrangements and the United Kingdom has Company Voluntary Arrangements. Perhaps the most famous debtor in possession scheme, however, is the United States’ ‘Chapter 11’ process. 

Chapter 11 of the United States Bankruptcy Code (or, ‘Title 11 of the United States Code’) is a federal law in the US that provides for a well-known restructuring alternative to traditional corporate bankruptcy (what we call ‘winding up’ or ‘liquidation’ in Australia). Sometimes, Chapter 11 is known as a ‘reorganisation bankruptcy’. 

This process does not carry the same stigma that a voluntary administration does in Australia, with businesses often surviving the process and continuing to trade. It is plausible that, as with simplified restructuring, the debtor in possession aspect helps satisfy customers and suppliers that the company is a going concern. 

It is worth noting, however, that there are significant differences between Chapter 11 and simplified restructuring: 

• Chapter 11 is supervised by the Court (the special purpose ‘United States Bankruptcy Court’), whereas simplified restructuring is supervised by a restructuring practitioner. In principle, this alone should make the simplified restructuring process more timely and cost-effective than Chapter 11;
• Chapter 11 takes up to 120 days. Simplified restructuring has a 20 day time limit; and
• Chapter 11 provides ‘super-priority’ to rescue finance. This means that any lending provided to the business during the Chapter 11 process to support the restructuring will have priority over other creditors. This mechanism makes it much more attractive for financiers to lend money to businesses undergoing a restructuring process. 

Singapore has recently introduced a new formal insolvency tool, also known as ‘simplified debt restructuring’. As with the Australian scheme this is only available for small businesses (up to $2 million in liabilities) and is a ‘debtor in possession’ regime. It streamlines the standard restructuring process in Singapore by only requiring one court application (rather than two), and forgoing the need for creditors’ meetings. 

However, unlike the Australian scheme, simplified debt restructuring in Singapore is still a court-supervised process and requires the appointment of a standard insolvency practitioner. 

What is the Role of the Small Business Restructuring Practitioner?

The SBRP carries out the following tasks (see Part 5.3B of the Corporations Act 2001 (Cth)): 

• provides initial advice to the company directors as to whether simplified debt restructuring is appropriate;
• assists the company in the development of a restructuring plan and restructuring proposal statement;
• submits the restructuring plan and restructuring proposal statement for consideration by creditors
• certifies, and makes a declaration to creditors that:
  • they consider that the business is eligible for the process and that the company is likely to meet its obligations under the plan, and
  • all the required information has been provided in the restructuring proposal statement. The practitioner can only certify to this effect where they have taken reasonable steps to verify that this is the case; 
• manages the distribution of payments under the restructuring plan. 

Who Can Register as a Small Business Restructuring Practitioner?

The intention with the new role of the SBRP was that it would open up the insolvency profession to a wider class of individuals than can currently oversee voluntary administration and creditors’ voluntary liquidation processes. 

The SBRP must be a registered liquidator (section 456B Corporations Act 2001 (Cth)). However, a new category of registered liquidator has been created, and any individual operating under that classification will not be able to carry out voluntary administrations or creditors’ voluntary liquidations. 

The committee that oversees registration solely as a SBRP considers significantly fewer factors than they would for registration as a liquidator in general categories (see paragraph 20-1 of the Insolvency Practice Rules (Corporations) 2016 (Cth)). For registration purposes, the committee need only consider whether the individual:

• is a recognised accountant (that is a member of CAANZ, a member of CPA Australia or a member of the IPA);
• has demonstrated the capacity to perform satisfactorily the functions and duties of the role; and
• is able to satisfy any conditions imposed under the Insolvency Practice Schedule (Corporations) 2016 (Cth). 

Does the Small Business Restructuring Practitioner Need to be Independent?

As with liquidators in creditors’ voluntary liquidations and voluntary administrations, there is a requirement that the SBRP be ‘independent’. For SBRPs, this means that someone who is ‘connected’ to the company cannot seek to be appointed as a practitioner, except with leave of the Court. Any individual who is connected to the company but consents to be appointed as a practitioner has committed a strict liability offence – that is, they have committed the offence whether they intended to or not.  

A ‘connected individual’ (see section 456C Corporations Act 2001 (Cth)) includes those who: 

• have a debt of greater than $5,000 to the debtor company; 
• have substantial holdings in a body corporate which has a debt to the debtor company of greater than $5,000; 
• are a creditor of the debtor company, or a creditor of a related body corporate for an amount greater than $5,000;
• are a director, senior manager, secretary or employee of the company of a related body corporate that is a secured creditor of the debtor company;
• are an auditor of the company; or 
• are an employee or partner of the above directors, senior managers, secretary, employees or auditor of the debtor company. 

Note, there are certain debts which will not exclude an individual from being appointed as the SBRP, including where that debt in excess of $5,000 is a result of a previous appointment as a SBRP, liquidator or voluntary administrator. 

Can the Small Business Restructuring Practitioner Be Removed or Replaced? 

Yes, but only under very limited circumstances (see section 456D-456F Corporations Act 2001 (Cth)). The directors can resolve to appoint a new practitioner where the original practitioner has died, becomes prohibited from continuing or has resigned. 

Unlike a voluntary administrator, or a liquidator in the case of a creditors’ voluntary liquidation, the practitioner cannot be removed and replaced by resolution of the creditors. 

What is the Process for a Simplified Debt Restructuring?

The simplified debt restructuring process begins with a resolution of the directors. Directors must resolve on reasonable grounds that the company is, or is likely to become insolvent. Once they have done so, they can resolve to appoint a restructuring practitioner. Before doing so, the directors of the company must check that the business is eligible to participate in the process (see section 453B(1) of the Corporations Act 2001 (Cth)). 

In order to consider whether the company is eligible for simplified debt restructuring, directors must consider: 

• Whether the company will, at the time of the submission of any potential restructuring plan will be in full compliance, or substantial compliance, with the requirement to pay entitlements of employees that are due and meet tax reporting obligations under the Income Tax Assessment Act 1997 (note, these tax reporting requirements are not, in themselves, a requirement to pay all tax debts); and
• Whether another formal insolvency appointment prohibits participation in simplified debt restructuring. The restructuring practitioner must not be appointed where the business is already undergoing a simplified restructuring, or a restructuring plan is already in existence and has not yet terminated. Similarly, if a voluntary administration is ongoing, or a DOCA has been executed, but its terms have yet to be fulfilled, simplified restructuring cannot begin. If a liquidator, provisional liquidator or voluntary administrator has been appointed the directors are also prohibited from initiating simplified debt restructuring. 

Once the appointment has been made, and a restructuring practitioner accepts that appointment, the restructuring process begins. The company must develop a debt restructuring plan with the assistance of the restructuring practitioner. This plan must be submitted to creditors within 20 business days of the process beginning. The restructuring practitioner is able to apply one extension of up to 10 business days where it is reasonable in the circumstances. 

The restructuring practitioner must submit the following documents to the creditors: 

• the company’s restructuring plan;
• the restructuring plan standard terms;
• the debtor company’s restructuring proposal statement;
• a declaration from the practitioner that the company is likely to be able to discharge its obligations under the plan;
• statements about the practitioner’s belief in the completeness of information in that proposal statement; 
• a request to creditors to give a written statement about whether or not the restructuring plan should be accepted; and 
• a request of creditors whether they agree with the assessment of admissible debts or claims and verify the proposed amounts.

After the plan is submitted to creditors, creditors have 15 business days to accept or reject the plan. 

Note that certain creditors (known as ‘related party’ creditors) are ineligible to vote, even though the restructuring plan will apply to their debts. This includes directors of the company and shareholders. 

Once the plan is agreed to, payments are distributed by the debtor company in the manner set out in the restructuring plan. This process is overseen by a restructuring practitioner who may be the same, or different, than the individual who supervised the creation of the restructuring plan. 

Once the company has fulfilled its obligations under the restructuring plan, the company is released from its obligations under the plan and the restructuring process is complete. The business is then able to continue trading as normal. 

How Much Does Each Creditor Get Under the Restructuring Plan?

Creditors must recover under the plan ‘pari passu’: That is, each unsecured creditor is treated ‘on the same footing’ and is paid the same cents on the dollar relative to their debt. All creditors are paid at the same time. 

What does the ‘Moratorium on Creditor Action’ Mean? 

While a debt restructuring plan is being developed there is a moratorium on creditor action against the debtor company. This means: 

• unsecured creditors cannot begin, nor continue with proceedings to enforce their debt; 
• owners of property used by, or leased to, the debtor company cannot recover that property; 
• secured creditors cannot enforce a security interest in the company’s assets while the restructuring plan is being developed. An exception to this is where there is a security interest over the whole property of the company. In that case, receivers can still be appointed; 
• personal guarantees held by creditors over directors cannot be enforced; and
• ipso facto clauses generally cannot be acted on. These are clauses within contracts that allow individuals (usually suppliers) to end a contract in the case of an insolvency event occurring. 

For the duration of the debt restructuring process, directors will not be liable for permitting insolvent trading under section 588G of the Corporations Act 2001 (Cth), so will not be vulnerable to legal action from ASIC or creditors on this basis. Note, however, that this does not mean directors are ‘free’ to act as they like. They are still constrained by all their other duties and obligations under the Corporations Act 2001 (Cth) (such as the duty to act in the interests of the company).

What Happens if the Plan is Not Accepted by Creditors? 

In this case, the restructuring process ends. This means that creditors are able to enforce their claims (ie. the ‘moratorium’ is over), and that directors can again become liable for permitting insolvent trading. In most cases, this will mean that the directors need to consider liquidation. As mentioned earlier, a new simplified liquidation process is available for small businesses who meet the eligibility criteria.

What Notice is Required by the Debtor Company? 

Every public document of the debtor company must state “restructuring practitioner appointed” after the first use of the company’s name in the company. 

Which Companies Are Eligible for Simplified Debt Restructuring?

The simplified debt restructuring process is not available to any company that: 

• is undergoing a voluntary administration; or 
• has appointed a liquidator or voluntary administrator. 

In addition, companies must meet the ‘liabilities test’. This sets the total amount of liabilities for a company to be eligible for the process. This is set by regulations (so that it can be easily adjusted over time), and is currently set at $1 million. 

It is also a requirement that no directors of the business have used a debt restructuring process, or entered into simplified liquidation within the last seven years. The company itself must also not have undergone restructuring in the last seven years. 

Note, as well as existing directors, this applies to anyone who was a director within the last 12 months prior to appointment. 

Exemptions to the above criteria are available in very limited circumstances, as set out in regulations. Currently, exceptions apply where the other company is a related body corporate of the debtor company and the process has begun within the prior 20 business days. 

Can Sole Traders Take Part in the Simplified Restructuring Process? 

Many small businesses in Australia are not run as companies, but under ‘sole trader’ or ‘self-employed’ legal arrangements. 2019 statistics analysed by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) found that 62 percent of Australian businesses are sole traders without employees. 

The simplified debt restructuring process is only available for companies. However, there are two processes available under the Bankruptcy Act 1996 (Cth) for insolvent individuals to avoid bankruptcy which have some similarities to the simplified restructuring process. 

A personal insolvency agreement (PIA) is a legally binding agreement between an individual and creditors (see Part X Bankruptcy Act 1996 (Cth)). A trustee is appointed to take custody and control of all of the debtor’s property, and makes a recommendation to creditors as to whether a proposed PIA should be accepted. If the creditors agree, the trustee implements the PIA, and once the process is complete the insolvent debtor is discharged from all provable debts. 

A debt agreement (DA) is another type of compromise that may be available to individuals to avoid bankruptcy (see Part IX Bankruptcy Act 1996 (Cth)). A ‘debt administrator’ oversees an agreement between the debtor and creditors settling existing debts. The key difference from a PIA, is that, with a DA, only some (not all) of the debtor’s property is put up to settle debts. 

The DA process has more stringent pre-conditions than the PIA process, including unsecured debts being under a threshold amount and an income requirement. 

What Does a Restructuring Plan Contain? 

The debt restructuring plan must: 

• be in a form approved by ASIC;
• identify the property of the company that is being dealt with;
• specify how the property is to be dealt with; and 
• set out the remuneration of the restructuring practitioner. 

The plan may also:

• authorise the restructuring practitioner to deal with property in a specific way;
• provide for any matter relating to the company’s affairs; and
• set out obligations expressed in a conditional manner (eg. providing that the restructuring practitioner will do x if y occurs with a certain time period). 

There are certain prohibitions on what can be contained in the plan: 

• payment terms are capped at 3 years;
• there must be some property transferred in the plan; and 
• there must be no discrimination between unsecured creditors (ie. some cannot be given priority over others). 

How is the Company Run Throughout the Process? 

As a ‘debtor in possession’ model, the directors continue to ‘run’ the business throughout the restructuring process. But what does this mean? Transactions ‘in the ordinary course of business’ may be carried out by the company at the discretion of directors and those who run the company on their behalf. 

Transactions that are not in the ordinary course of business must be approved by the restructuring practitioner, this includes the transfer of shares.

When Can the Small Business Restructuring Practitioner Stop the Process? 

Under section 453J of the Corporations Act 2001 (Cth), the SBRP may stop the process if they believe on reasonable grounds that: 

• the company does not meet the eligibility criteria;
• it would not be in the interests of creditors to make a restructuring plan;
• it would be in the interests of creditors for the debt restructuring to end; or
• it would be in the interests of the creditors for the company to be wound up.

What is the Impact of the Restructuring Plan on Creditors?

The plan, once agreed to by creditors, is binding on the company, its officers and members (ie. shareholders), the restructuring practitioner and unsecured creditors. 

The plan is also binding on secured creditors where: 

• the value in the security interest is less than the value of the creditor’s admissible debts; and 
• where the secured creditor agrees to be bound. 

The restructuring plan does not otherwise bind secured creditors unless the secured creditor consents or a Court so orders. 

Until the restructuring plan terminates, those bound by it cannot: 

• apply to the court to wind up the company based on an admissible debt;
• continue with an application made before the plan became binding;
• begin a proceeding in relation to the company to recover an admissible debt; or
• begin or continue with enforcement proceedings in relation to an admissible debt.

In the latter two cases, the individual creditor may apply to the court, and if the court approves, proceed under any terms imposed by the Court. 

Once all obligations under the plan have been fulfilled, and all admissible debts or claims have been settled as provided for in the plan, the plan will terminate. At this point, the company is released from all admissible debts and can act with its property as it sets fit. 

If the plan terminates other than for those reasons, and admission debt is due and payable on the day of termination of the process. 

What Other Types of Company Restructuring May be Available? 

If a company is ineligible for the simplified debt restructuring process, or directors consider that it is otherwise inappropriate, it is worth considering whether an informal process might be appropriate. 

There are various informal options that are not set out in legislation, but are facilitated by various sections of the Corporations 2001 (Cth). 

Perhaps the most obvious option is for a business to engage with creditors voluntarily to agree to a payment plan for the payment of debt. This could be aided by seeking ‘rescue finance’ from a third party to support that payment. 

Two problems arise for that approach: 

• There is no moratorium on creditor claims. This means that unless all the creditors agree, the company will be vulnerable to ongoing or future claims from unsatisfied creditors; and
• The directors may be liable throughout the process as they may be allowing the company to trade while insolvent which is a breach of section 588G of the Corporations Act 2001 (Cth). 

The ‘safe harbour’ mechanism is an informal business recovery process which means that directors can, if they follow the process set out in legislation, be ‘safe’ from liability for permitting insolvent trading. 

Section 588GA of the Corporations Act 2001 (Cth) provides that directors are not liable under section 588G where, after the directors suspect the company is insolvent or may become insolvent

• the director starts developing a course of action;
• that course of action is reasonably likely to lead to a better outcome for the company; and
• the debt is occurred directly or indirectly in accordance with that course of action. 

If carrying out this process, directors need to, as set out in the Corporations Act 2001(Cth): 

• inform themselves of the company’s true financial position;
• take steps to prevent misconduct by officers and employees;
• keep appropriate books and records;
• obtain advice from an ‘appropriately qualified’ individual or entity; and
• develop or implement a plan for restructuring the company. 

This safe harbour might be used to investigate and/or arrange the process that we referred to earlier, known as a ‘pre-pack’. 

This is an organised plan to sell assets of the company which is then presented to a voluntary administrator or liquidator as part of a formal insolvency appointment. Generally speaking, assets of the original company are transferred to a new company, at fair market value, allowing the business to continue on in some form. Note, when executed carefully, under the guidance of professionals, this will not constitute ‘illegal phoenix activity’, as assets are transferred at fair market value and there is no attempt to defeat creditors. 

In some cases, this results in a better outcome for both the business and creditors than moving straight to liquidation or voluntary administration. 

When Does the Simplified Debt Restructuring Process End? 

The process ends when one of the following situations applies: 

• the directors make a declaration that it is to end on a specified day;
• the company does not propose a restructuring plan within 20 business days, or within the extension period where an extension has been granted;
• the proposed plan is not accepted by creditors;
• the restructuring practitioner terminates the process on one of the allowable grounds for doing so;
• the Court orders that the process end;
• a voluntary administrator, liquidator, or provisional liquidator is appointed; or
• in certain circumstances, where the company is a general insurer or a life company. 

When Does the Restructuring Plan End? 

The plan is ‘completed’ and automatically terminates: 

• on the day that all the company’s obligations under the plan, or any other obligations under the plan have been fulfilled, and all admissible debts or claims have been settled under the plan; 
• if the Court terminates the plan, on the day of that termination;
• if the plan is expressed subject to a specified event occurring and that event has not occurred, on the next business day;
• if an obligation in the plan has been contravened and the person bound has not rectified the situation within 30 business days of that occurring, on the next business day; or
• on the day a voluntary administrator, liquidator or provisional liquidator is appointed. 

Useful Further Resources on Simplified Debt Restructuring 

 To find out more about simplify debt restructuring, check out: 

• ASIC’s Resources for Directors
• Treasury’s Fact Sheet for Small Businesses
• Explanatory Memoranda accompany the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020