Simplified Liquidations And Stat. Demand Thresholds
Where a turnaround of a financially distressed small corporate business is not possible, to provide for a liquidation pathway that is faster and enables greater returns for creditors and employees, a new Simplified Liquidation (SL) process commenced on 1 January 2021.
Changes were also made to the thresholds applicable to statutory demands made by creditors seeking to have individuals and companies pay the debts owed to them.
You can read part one of this blog over here.
Is The Simplified Liquidation Process Going To Be The ‘New Black’?
The SL process is an offshoot of the existing Creditors Voluntary Liquidation (‘CVL’) process aimed at reducing the complexity associated with ‘normal’ liquidations in an attempt to reduce time and cost. It is only able to be used by small corporate businesses, who the legislators believed had uncomplicated and simple businesses. Unfortunately, this is not always the case.
To enter into the SL process the company must first enter into the conventional CVL process. Once commenced, the directors then have five business days give to the liquidator:
- a report on the company’s business affairs; and
- a declaration that they believe, on reasonable grounds, the company meets the eligibility criteria for the simplified liquidation process will be met.
The eligibility criteria for the SL process is as follows:
- the company must be in a CVL which commenced on or after 1 January 2021
- liabilities of the company on the day a liquidator is first appointed must not exceed $1 million
- the company will not be able to pay its debts in full within 12 months
- no person who is a director of the company, or who has been a director of the company within the 12 months before the date a liquidator was first appointed, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years
- the company has not undergone restructuring or been the subject of a simplified liquidation process in the preceding seven years
- the directors hold reasonable grounds to believe that there are no voidable transactions
- the company has given returns, notices, statements, applications and other documents required under the Income Tax Assessment Act 1997.
The Liquidator has 20 business days from appointment to decide whether to transition the CVL into a SL.
While the liquidator will still investigate and report to creditors about the company’s affairs and enquire into the failure of the company, reporting to creditors is reduced and the mandatory lodgement of a Director offences report with ASIC has been removed.
In order to trim down the CVL process, the SL legislation:
- has removed the convening of meetings of creditors;
- enables the Liquidator to only declare and distribute a dividend once;
- excludes creditors from receiving any money if they fail to prove their debts prior to the payment of the dividend; and
- restricts the circumstances where a liquidator can pursue an unfair preference claim*.
*An unfair preference is a payment made or other benefit given to a creditor by an insolvent company that causes the creditor to be in a more favourable position than other unsecured creditors in a liquidation. The company’s liquidator can ordinarily seek to recover an unfair preference provided it occurred within six months prior to the liquidation, and when the company was insolvent or if the company became insolvent by making the payment or giving the benefit. The SL process limits such recoveries from unrelated parties to those which occur within three months and exceed $30,000.
Changes to debt recovery limits
Statutory Demands & Bankruptcy Notices have long been used by creditors in a final attempt to extract payment from the debtor prior to seeking its liquidation/bankruptcy. The thresholds to use these demands have historically been low so as to provide the maximum incentive for debtors to pay.
However, from 1 January 2021 these thresholds were increased, meaning that a creditor must have a much larger debt owing to it by the company before it can issue a statutory demand. The new statutory minimum for individuals increased from $5,000 to $10,000
In addition, until the end of July 2021 small companies eligible for temporary restructuring relief have had the threshold increased from $2,000 to $20,000 and have also had the time for them to respond to a statutory demand increased from 21 days to six months. This time extension reduces the pressure on the company for a quick (and perhaps under-considered) response and gives it additional time to consider its future course of action in dealing with its financial distress more generally.
Regardless of the take-up of the Small Business Restructure and SL processes, the addition of these two new options for financially distressed small businesses increases the options for both directors, advisors and Registered Liquidators to consider when assessing a company’s financial position. Rarely is having too many options a bad thing and through promoting early discussions with a Registered Liquidator the greater the opportunity for the business to be saved through either an informal or formal turnaround process.