On 10 December 2020 the Federal Government passed the Corporations (Corporate Insolvency Reforms) Act 2020 (Cth) which included measures designed to assisting small business with restructuring as well as a simplified liquidation.
Our recent blog on Small Business Restructuring which can be found at the following link: Small Business Restructuring Process (SBR)
These laws commenced on 1 January 2021 and are now another option available to eligible small business companies that are suffering financial distress.
The title is somewhat of a misnomer as the process is anything but simplified, save for the reduction in a few reporting and investigation requirements (see Effects of a Simplified Liquidation below). However, it has been introduced with the idea of allowing small business companies with limited resources to access a more streamlined liquidation service at a lower cost.
Like the SBR there are eligibility criteria for companies seeking to commence a simplified liquidation.
The liquidation of the company commences as a normal liquidation until a director completes a report on the company affairs and property (ROCAP) and makes a declaration that the company is eligible for a simplified liquidation process.
For a small business company to be eligible for the simplified liquidation they must meet the following hurdle requirements:
- The company will not be able to pay all its debts in full within 12 months after the start of the liquidation.
- All taxation lodgement obligations are up to date
- Debts to external creditors of less than $1 million (including amounts due to terminated employees but excluding contingent debts)
- Not have been through the process or used a simplified liquidation in the last 7 years – the same rule applies to directors of the company in the last 12 months
Unlike the Small Business Restructuring Process a simplified liquidation can only be undertaken by a Registered Liquidator with an unrestricted registration.
Please ensure that your advisor is appropriately qualified ARITA: Beware of Dodgy Advisors
Adopting a Simplified Liquidation process
A normal liquidation can commence a number of ways:
- By resolution of the company’s shareholders
- After a Voluntary Administration
- By terminating a Deed of Company Arrangement
If eligible, a Simplified Liquidation can commence after any of these processes, however a Simplified Liquidation process cannot be adopted in a Court Liquidation.
If the eligibility criteria are met, a liquidator then has 20 business days to adopt a simplified liquidation process. The liquidator does so by providing a 10 business day notice to creditors advising of the intention to adopt the simplified liquidation process.
The process will be adopted unless creditors of at least 25% in value object in writing or it is determined that the eligibility criteria was not met.
The Effect of a Simplified Liquidation
Once adopted the Simplified Liquidation process has the following effects:
- Creditors meetings are not an option
- Unfair Preference recoveries by liquidators, from non related entities are limited to claims greater than $30,000 that occur 3 months prior to the relation back day (usually the date of appointment). Previously there was no minimum and the time frame was 6 months.
- A liquidator is unable to compromise debts over $100,000 or enter into agreements greater than 3 months (as they require a meeting to authorise the liquidator to do so)
- Change in regulator reporting requirements, but they still exist
- Only one dividend and a single process for calling for proofs / notice of intention to declare a dividend
- No reviewing liquidators
Ceasing the Simplified Process
A liquidator must cease to follow the simplified process in certain instances:
- Eligibility criteria no longer met
- Reasonable grounds that the company or its director has engaged in fraudulent or dishonest conduct materially adversely affecting the interests of all or a class of creditors
If either of the above occur the process is ceased from the date the liquidator became aware and then has 2 business days to lodge the notice of cessation. The liquidation then reverts to a normal Creditors Voluntary Liquidation.
Want to know more
Please call anyone of our five registered liquidators at Dye & Co – who are all able to advise on the best options available for you, your company or that of your client, including the Simplified Liquidation process.