Simplified Liquidation Process
The simplified liquidation process is a streamlined creditors’ voluntary winding up of companies that have liabilities of less than $1 million. It applies only to a creditors’ voluntary winding up of a company where the event that triggers the start of the winding up occurs on or after 1 January 2021. It aims to reduce time and costs in order to return more money to creditors and, importantly, employees.
On 1 January 2021 a new simplified liquidation process (Simplified Process) came into effect, largely in response to the COVID-19 pandemic, but also because of a shift in thinking surrounding the structure and process of corporate insolvencies generally in Australia. The Simplified Process is intended to supplement the ‘regular’ liquidation regime (Regular Regime) to provide appropriate pathways for less complex liquidations, particularly of small businesses.
The Simplified Process is squarely aimed at small businesses with non-complex affairs. For these businesses, the usual costs of liquidation can consume all, or almost all, the remaining value of a company, leaving little for creditors and employees and involving burdensome reporting requirements. The Simplified Process is intended to streamline the documentation and reporting process to provide time efficiencies and encourage quick compliance with the preliminary steps.
By reducing complexity, time and costs in the liquidation process, the Simplified Process is intended to ensure greater returns to creditors and, most importantly, employees.
The Simplified Process
The Simplified Process mirrors the Regular Regime but with a few key enhancements:
- Reduced Reporting Requirements: Under the Regular Regime a liquidator must provide a report to ASIC pursuant to section 533 of the Corporations Act 2001 (Cth) (Act). These reporting requirements, and the duties that underpin them, often represent a significant cost in the Regular Regime. For smaller businesses, the burden of this requirement is often disproportionate to any benefit gained. Therefore, these investigations are often not fit-for-purpose for small companies with non-complex debts and affairs and are accordingly, not a feature of the Simplified Process. Notably, however, the reporting requirements under section 70-40 of the Insolvency Practice Rules (Corporations) 2016 (Cth) are retained. Those requirements compel a liquidator to provide a report to creditors (a copy of which must be lodged with ASIC), within three months of their appointment. The report to creditors must cover such areas as likely assets and liabilities, details of the liquidator’s investigations to date, and the likelihood of a dividend return.
- Reducing Meetings: The Regular Regime allows a liquidator to convene meetings of creditors for a number of reasons, including to update creditors on the progress of the liquidation and to seek approval of the liquidator’s fees. The Simplified Process removes the obligation to convene meetings and allows the liquidators to fulfill the above requirements electronically.
- Limiting Powers of Review: Under the Regular Regime creditors may appoint a committee of inspection to monitor the liquidation. Similarly, creditors, ASIC or the Court may appoint a registered liquidator to review the liquidation of a company. These processes are costly and time consuming. Committees of inspection and registered liquidator appointments by ASIC and creditors are not features of the Simplified Process. Importantly, however, the Court retains its powers of oversight in the Simplified Process.
- Limit on Recovery of Unfair Preferences: Unfair preferences represent some of the most common types of recoveries that liquidators will pursue in the Regular Regime. Such recoveries often require the liquidators to retain lawyers and, where litigation is involved, can become costly and slow. In the Simplified Process, the scope to recover unfair preferences is limited (discussed below).
A company’s eligibility to enter into liquidation via the Simplified Process is defined in section 500AA of the Act. The primary eligibility for the Simplified Process is that a ‘triggering event’ occurs on or after 1 January 2021. A triggering event includes any of the following:
- the creditors resolve to voluntarily wind up a company;
- the creditors of a company under administration resolve that the company be wound up;
- a company under administration fails to execute a deed of company arrangement (DOCA) in the time required;
- the creditors of a company under administration pass a resolution terminating a DOCA and resolve that the company be wound up; or
- the Court orders the termination of a DOCA.
Once the triggering event has occurred, it is a matter of evaluating whether the company fits all of the eligibility criteria, those being:
- on the day of the triggering event, the company’s liabilities did not exceed $1 million;
- the company will not be able to pay those liabilities in full within 12 months;
- the company has complied with all its lodgement requirements under the Income Tax Assessment Act 1997 (Cth) before the date on which a liquidator is appointed;
- no director of the company, or person who has been a director of the company in the 12 months prior to the triggering event, has been a director of another company that has undergone the Simplified Process or restructuring pursuant to part 5.3B of the Act in the seven years prior to the triggering event; and
- the company has not undergone the Simplified Process or restructuring pursuant to part 5.3B of the Act in the seven years prior to the triggering event.
There are a number of exceptions to items 4 and 5, but they generally only apply in circumstances where the disqualifying criteria has occurred no more than 20 days prior to the triggering event.
If it has been determined that the company fulfills all the eligibility criteria, the directors must provide to the liquidator, generally within five days of the triggering event, two documents. The directors must provide a report, pursuant to section 497 of the Act, as to the company’s business, property, affairs and financial circumstances. The directors must also provide a declaration, pursuant to section 498, that they have reasonable grounds to believe that the eligibility criteria will be met in relation to the company.
Regulation 5.5.02 of the Corporations Regulations 2001 (Cth) (Regulations) sets out the prescribed information that must be contained in the directors’ declaration. In that respect, there are only two classes of information required. Firstly, that the directors set out the reasons they hold the belief that the company meets the eligibility criteria. Secondly, that the directors provide their opinion as to the reasonable grounds they have to believe that the company has not entered into voidable transactions. Notably, however, they do not have to provide their opinions on transactions that would be unfair preferences.
If a liquidator reasonably believes that the company has met the eligibility criteria and has received the documents required from the directors, they may adopt the Simplified Process. In order to adopt the Simplified Process, the liquidator must comply with their obligations pursuant to section 500A of the Act.
Those obligations require the liquidator to provide a notice, in writing, to each member and creditor of the company. That notice must provide an outline of the Simplified Process and a statement that the liquidator reasonably believes the company is eligible for the Simplified Process. The notice must also set out that the liquidator will not adopt the Simplified Process if at least 25% of the creditors in value elect not to liquidate the company through the Simplified Process, as well as how the creditors might provide that election. Importantly in that respect, regulation 5.5.09 of the Regulations sets out that creditors that are also related entities of the company are not taken into account when calculating that 25%.
If the liquidator proceeds with the Simplified Process, pursuant to regulation 5.5.06 of the Regulations, they must lodge a notice and a copy of the directors’ declaration with ASIC within two business days.
If, at any time, the liquidator believes that the company no longer meets the eligibility criteria, then pursuant to section 500AC of the Act, they must cease to follow the Simplified Process. The liquidator must also cease to follow the Simplified Process if they have reasonable grounds to believe that the company or its directors have engaged in fraudulent or dishonest conduct that is likely to have a materially adverse impact on the interests of the creditors.
Unfair Preferences in the Simplified Process
The directors’ declaration, discussed above, requires the directors to set out their opinion that, other than unfair preferences, the company has not entered into any voidable transactions. What constitutes a voidable transaction is set out in section 588FE of the Act, but in short includes transactions such as unfair preferences, uncommercial transactions and creditor-defeating dispositions. Accordingly, there is effectively no scope to recover voidable transactions, other than unfair preferences, in the Simplified Process.
Furthermore, pursuant to regulation 5.5.04 of the Regulations, under the Simplified Process, only two classes of unfair preference transactions are able to be recovered, those being unfair preferences that were:
- made to related entities; or
- entered into during the three months ending on the relation-back day, or after that day but before the day when the winding up began and resulted in the entity receiving more than $30 thousand from the company.
In regard to item 2 above, the calculation may be taken on aggregate where the multiple transactions form part of a series of related transactions.
Accordingly, while the Simplified Process excludes recovery of most voidable transactions, there is still some limited scope to recover unfair preferences.
The Simplified Process mirrors the Regular Regime but with some time-consuming and costly processes removed. In particular, reporting and reviewing requirements are severely reduced.
There are a number of strict eligibility criteria that a company must meet in order to elect to use the Simplified Process. Primarily, the company must not have more than $1 million in liabilities and its taxation lodgements must be up to date. The directors and liquidator have a number of minor documentary obligations to fulfil after which they may begin liquidating the company through the Simplified Process. Above all, the company and its directors must have acted in good faith at all times. If it becomes apparent to the liquidator that they have not, the liquidator is bound to terminate the Simplified Process and liquidate the company through the Regular Regime.
As with most new pieces of legislation, the law in this area is developing and evolving. Despite the clear legislative intention to limit voidable transactions in the Simplified Process, there is still scope for recovery, particularly in respect of unfair preferences. Knowing your legal rights, options and obligations under the Simplified Process is important.
If you require help understanding your rights and obligations under the Simplified Process, or are looking for advice as to the recoverability of unfair preferences, contact CMN’s team of specialist insolvency lawyers.