Insolvency Framework Reforms

On 24 September 2020, Australian Treasurer Josh Frydenberg announced that the Government would “undertake the most significant reforms to Australia’s insolvency framework in 30 years”.

The Treasury Department has since released exposure draft legislation which would give effect to the announcement — the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020.

The legislation would create a new debt restructuring process (the legislation refers to this process as “restructuring”) for corporations — including clubs — that are insolvent and have liabilities of less than $1 million.

Currently, a club which is insolvent cannot continue to trade unless it has entered voluntary administration, whereby the directors no longer retain control of the affairs and business of the club.

Under the new restructuring process, the directors of an insolvent club would retain control and would work with a restructuring practitioner to develop a debt restructuring plan to present to creditors.

A restructuring practitioner is a new class of insolvency practitioner who will specialise in the debt restructuring process created by the new legislation.

The qualifications for a restructuring practitioner will reflect the streamlined requirements of the person.

Registered liquidators will be able to manage the new process.

If more than 50 per cent of creditors (by value) endorse the plan, it will bind all unsecured creditors, and the club would continue to operate on the condition that it fulfils the terms of the restructuring plan.

If the plan is not endorsed by creditors, the directors would be required to opt whether to enter voluntary administration or liquidation.

The Australian Government’s guidance material explains the benefits of the new restructuring process relative to the existing corporate insolvency mechanisms:

Currently, requirements around voluntary administration in Australia are more suited to large, complex company insolvencies. The high costs of voluntary administration can also consume most or all of the value of a small business’s assets, making it harder for the business to restructure and reducing the business’s willingness to engage with the system.

The temporary protections against trading while insolvent will expire on 31 December 2020. 

However, if a business intends to undertake the debt restructuring process, there will be an option to extend the temporary protections until 31 March 2021.

To access a three-month extension of the temporary safe harbour protections, a club will be required to declare such an intention through the published notices on the website of the Australian Securities and Investments Commission (ASIC).

Further details on this option will be published after the enactment of the legislation.

This option will give eligible insolvent clubs an opportunity to continue trading following 1 January 2021, while the administrative arrangements for the new scheme are instituted.