In brief

The new small business insolvency reforms enacted by the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) (Corporations Amendment Act) - which inserts a new Part 5.3B into the Corporations Act 2001 (Cth) (Corporations Act) - are due to come into effect on 1 January 2021.

The new Part 5.3B restructuring procedure will be available for companies that satisfy a threshold requirement (among others) of having "total liabilities" of less than $1 million, where "liability" is defined to mean "any liability or obligation that is not contingent". 1

Significantly, these reforms extend the COVID-19 temporary relief relating to statutory demands for small businesses which have not been able to enter into Part 5.3B restructuring but which have provided a declaration to ASIC that they are in the process of seeking restructuring relief pursuant to the Corporations Amendment Act.2 They also amend the prescribed form for a statutory demand.

Contents  

1. Extension of Temporary Statutory Demand Limits
  a. When is a company "eligible for temporary restructuring relief"?
  b. When does a Declaration expire?
  c. In what circumstances does a company cease to be eligible for temporary restructuring relief?
2. Temporary Limits on Statutory Demands otherwise end
3. Some practical observations
 

Extension of Temporary Statutory Demand Limits

For a company that is "eligible for temporary restructuring relief" pursuant to the Corporations Amendment Act, and potentially up until 31 July 2021:  

  the statutory minimum amount for service of a statutory demand will remain at $20,000; and
  the statutory period to respond to a statutory demand will remain at 6 months.3

Consequential amendments are made to the form for a statutory demand. When is a company "eligible for temporary restructuring relief"? The Corporations Amendment Act and Corporations Amendment Regulations include a concept of a company being "eligible for temporary restructuring relief" in circumstances where that relief has not been sought by the appointment of a small business restructuring practitioner.4 The amendments enable temporary relief from the standard statutory demand mechanics for companies proposing to appoint a small business restructuring practitioner in the same terms introduced in March 2020 for COVID-19.5 A company will be "eligible for temporary restructuring relief6 if, between 1 January 2021 and 31 March 2021, its directors make a written declaration (Declaration) - in the prescribed form (if one is prescribed) 7 - stating that:  

  a. there are reasonable grounds to believe that:
    i. the company is insolvent, or is likely to become insolvent before the Declaration expires; and
    ii. the eligibility criteria for restructuring would be met in relation to the company if a restructuring practitioner were appointed on the day on which notice of the Declaration is published or on any day afterwards on which the Declaration has not expired.  These criteria are8 that, on the day on which a restructuring practitioner for the company is appointed:
      the company has total liabilities9 of less than $1 million;
      no person who is or has been in the last 12 months a director of the company, has been a director of another company that has been under restructuring or been the subject of a simplified liquidation proceeding within 7 years (unless the other company was a related body corporate of the company, is or has been under restructuring or a simplified liquidation and in either case the process commenced no more than 20 days before the day on which the restructuring of the company in relation to which the eligibility criteria are to be met began); and
      the company has not been under restructuring or been the subject of a simplified liquidation proceeding within 7 years;10  
  b. the board has resolved that a restructuring practitioner should be appointed; and

 

  c. there is no:
      restructuring practitioner for the company; or
      restructuring practitioner for a restructuring plan made by the company that has not yet terminated;
      administrator, administrator of a deed of company arrangement executed by the company that has not yet terminated, provisional liquidator or liquidator of the company.

   In addition:  

  d. the Declaration not must not have expired;
  e. the company must not otherwise have ceased to be eligible for temporary restructuring relief for any reason;
  f. the company must not have previously been eligible for temporary restructuring relief has that has ceased because a previous Declaration has expired or for any other reason; and
  g. the directors must publish notice of the Declaration on ASIC's Published Notices website.

If the directors of a company publish notice of the Declaration, they must give ASIC a copy within 5 business days.11 When does a Declaration expire? A Declaration will expire: 12  

  3 months after notice of the Declaration is first published on ASIC's Published Notices website (the initial relief period); or
  a further one month after the initial relief period if: 13  
    i. paragraphs (b), (c) and (d) above continue to be satisfied in relation to the company; and
    ii. the directors have taken all reasonable steps to appoint a restructuring practitioner but have been unable to do so; and
    iii. the directors make a further declaration in writing under section 458E(3) in the prescribed form (if one is prescribed) (Further Declaration) that paragraphs (b), (c) and (d) above continue to apply and sets out the steps that the company has taken to appoint a restructuring practitioner and that it intends to take steps to appoint a restructuring practitioner before the Further Declaration expires, and publish notice of the Further Declaration in the prescribed manner on ASIC's Published Notices website no later than 2 weeks before the end of the initial relief period.14  

In what circumstances does a company cease to be eligible for temporary restructuring relief? A company will cease to be eligible for temporary restructuring relief if:15  

  the Declaration expires (see above);
  the directors of the company fail to give ASIC a copy of the Declaration or Further Declaration within 5 business days of its publication;
  a small business restructuring practitioner for the company is actually appointed;
  an administrator is appointed to the company pursuant to Part 5.3A, a liquidator or provisional liquidator is appointed to wind up the company;
  the company publishes a notice that it is not, or is not to be treated as, eligible for temporary restructuring relief; 16 or
  the Court orders that the company is not eligible for temporary restructuring relief.17

  Temporary Limits on Statutory Demands otherwise end In relation to companies which have not made a Declaration, the statutory minimum and statutory period will revert to the pre-COVID-19 position from 1 January 2021, with the effect that:  

  1. The statutory minimum will revert to $2,000; and
  2. The statutory period to respond to the demand will revert to 21 days after the date of service of the statutory demand.

Some practical observations Various ASIC forms remain to be released for the purposes of the new Part 5.3B regime. Once these are available some aspects of the new regime will become clearer. However, it appears that creditors should be able to assume the standard 21 days and $2,000 limit will apply to a statutory demand unless a search of the ASIC's Published Notices website shows a Declaration made in respect of the debtor. Even if a Declaration has been made by the company, it may be possible in appropriate cases to try and "go behind" the Declaration by seeking information from the debtor supporting the Declaration (by request or potentially by preliminary discovery) and, if the Declaration cannot be supported, seeking orders under section 458G (possibly concurrently with a winding up application if the debtor does not apply to set aside the statutory demand within 21 days).