Simplified Liquidation
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.
SIMPLIFIED LIQUIDATION
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.
Eligibility Criteria
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.
Factsheets
Australian Securities and Investments Commission (ASIC): Simplified Liquidation
ARITA: The Liquidation Process – Simplified Liquidation factsheet