DEMYSTIFYINGINSOLVENCY
What you need to know

Safe harbour in the eraof COVID-19

1

The Administration Process

5

The Liquidation Process

9

The Receivership Process

13

Small Business Insolvency

17

COVID-19 is and will continue to have severe financial impacts
on individuals and on small to medium businesses alike forsome time yet. Employees, customers and clients of many small
businesses across the country have retreated into their homes
for both work and self isolation. Businesses have been thesubject of Government directions.
On 23 March 2020, the NSW State Government issued a Public
Health Order under the Public Health Act 2010 directing thatbusinesses such as pubs, food and drink premises, entertainment
facilities, amusement centres and indoor recreation facilities mustnot be open to members of the public. These directions wereexpanded to confining people to their place of residence andlimiting gatherings to 2 people only on 30 March 2020. Other
businesses such as retailers, have since closed their doors.
How long COVID-19 and its effects on our lives and businesses
go on for is anyone’s guess at this stage. With little or no revenue,
but with rent and other fixed costs still needing to be paid (ifnot now, some time in the future), together with businesses
desperate to retain staff so that experience and expertise is not
lost, company directors are no doubt conscious of trading whilst
insolvent and personal liability that may be attached.
The Federal Government has introduced temporary measures toreduce some of these financial pressures on businesses and therisk of personal liability for company directors for insolvent trading.
These temporary changes to the insolvency regime will cease on
31 December 2020. After then, a new regime will come into placethat differentiates ‘small businesses’ from other businesses forthe purposes of insolvency related options. The last article in thispublication deals with these aspects.
These temporary measures may not be enough to support
businesses and protect directors from personal liability beyond
COVID-19. Whilst there may be short term relief from theGovernment and some financiers, landlords and suppliers, thedebts continue to accrue.

It is vital that directors turn their attention to and develop
plans that will not only see their company through thecurrent COVID-19 period, but will also put their company on areasonable footing to allow it to continue trading successfully
post COVID-19 once normal trading conditions are resumed andbusinesses open their doors again.

PAGE 1The Government’s response to Covid-19
The Federal Government has introduced a package of reforms
through the Coronavirus Economic Response Package Omnibus
Bill 2020 (Coronavirus Bill), designed to assist businesses infinancial distress as a result of the economic impacts of COVID-19.
Some of these reforms include changes to the Corporations
Act 2001 (Cth) (Corporations Act), to provide temporary relief
for directors from their duty to prevent insolvent trading andtemporary relief for businesses at risk of insolvency, including
through increasing the statutory minimum amount and time
period for creditor’s statutory demands.
The reforms also provide for a temporary safe harbour for
directors from liability for insolvent trading with respect to debts
incurred during the COVID-19 pandemic. Section 588GAAA of
the Corporations Act provides that a director will not be liable
for insolvent trading if the debt is incurred in the following
circumstances:
1. in the ordinary course of the company’s business; and2. during the six-month period starting on the day the sectioncommences, being 24 March 2020 (or any longer period
prescribed by the regulations).
The onus of proof lies with the director to document and be able
to produce evidence of the above circumstances (s588GAAA(2)).
The Government has also provided a number of stimulus
packages to support eligible small to medium sized businesses,
including access to funding to continue paying employees, cash
flow support to continue business operations, and assistancefrom the ATO with temporary reduction of payments ordeferrals, or withholding enforcement actions including Director
Penalty Notices and wind-ups.

BARTIER PERRY LAWYERSPART / 01

CONTENTS

DEMYSTIFYING SAFE HARBOUR
IN THE ERA OF COVID-19

While the Government has provided significant temporary
relief to assist businesses and directors through the COVID-19
pandemic, it is our view that these measures alone will not
be enough for many businesses, particularly those struggling
prior to COVID-19, to return to solvent trading at the end of thepandemic.
For these companies, directors should consider whether they
qualify for the 2017 safe harbour provisions under section 588GA
of the Corporations Act and if so, develop and implement a
recovery plan from the impacts of COVID-19.

What is Safe Harbour

BARTIER PERRY LAWYERS

We explained the safe harbour provisions in detail in our April
2018 bulletin, which can be accessed here: https://www.bartier.
com.au/insights/articles/an-insolvency-safe-harbour-forcompany-directors/
To briefly recap, on 19 September 2017, new legislation cameinto force providing “safe harbour” protection for company
directors against insolvent trading claims while they develop andimplement plans to restructure the company.
In particular, s588GA of the Corporations Act provides protection
for company directors from personal liability for insolvent trading
if, at a particular time after the director starts to suspect that thecompany may be insolvent, he or she develops and implementsa course of action that is reasonably likely to lead to a better
outcome for the company, and the relevant debt is incurred inconnection with that course of action.
A director will not qualify for “safe harbour” protection if thecompany has not:• paid its employee entitlements, including superannuationby the time they fall due; or• revisit credit and debt arrangements for the company, andensure cashflow is maximised by focussed debt recovery;• provided its returns, notices, statements, applications or otherdocuments to the ATO more than once during the 12 month
period prior to a debt being incurred from which the director
seeks the protection of the safe harbour.

• liaise with company financiers to obtain deferrals and othersupport as appropriate and determine whether any form offinancial restructure is possible;

Why is Safe Harbour still important?
It is almost certain that the financial impact on businesses as aresult of COVID-19 will continue beyond the six-months currently
allowed for by the Government’s reforms.
The Government’s temporary relief measures and the six monthprotection from insolvent trading for directors may prove
sufficient for a healthy business with a viable cash flow to enable
it to return to solvent trading at the end of the six month period.
But for many businesses facing working capital difficulties
arising prior to and as a result of COVID-19, sole reliance on these
Government measures without a turnaround strategy for when
the pandemic ends will not be enough.
For these businesses, steps should be taken so that directors
can take advantage of the “safe harbour” protections in the
Corporations Act. The company should pursue a course of action
that:• ensure costs are contained and reduced where appropriate,
bearing in mind the ability of the company to reboundonce the COVID-19 period is over will depend largely on its
workforce;• ensure the company is keeping appropriate financial records;• prevent misconduct by company officers and employees that
could adversely affect the company’s ability to pay its debts;• obtain advice from an appropriately qualified adviser onwhether the threshold matters for entering the “safe harbour”
are complied with and the development of a restructure plan,
ensuring it is reasonably likely to lead to a better outcome forthe company than administration or liquidation; and• implement the plan for restructuring the company to improve
its financial position for when the pandemic ends.
Bartier Perry has extensive experience and a wide range of
networks to assist directors seeking safe harbour protection.
Please contact us for a no obligation discussion.

• will allow it to continue to trade once normal trading
conditions are resumed in a manner that affords directors
protection from insolvent trading liability; and• is assessed with the input of an appropriately qualified
adviser to be reasonably likely to lead to a better outcome
for the company than administration or liquidation once thepandemic ends.
• We suggest that directors take this opportunity to:• stay informed about the company’s financial position, andwhat government support is available to support businesses
through the COVID-19 period;

PAGE 3... on 19 September 2017, new legislation
came into force providing “safe harbour”
protection for company directors
against insolvent trading claims while
they develop and implement plans to
restructure the company.

BARTIER PERRY LAWYERS

PAGE 2

A company is insolvent if it cannot pay its debts as and when
they fall due. This is principally a test of a company’s cashflow andwhilst funding and debt moratoriums provide immediate relief by
the deferral of a requirement to pay, debts continue to accrue on
the company’s balance sheets and will become due and payableat some point in time.

discuss the fundamental
considerations in
respect of the various
stages of the Voluntary
Administration process.

In this second instalment of the Demystifying Insolvency series,
we focus on the company Administration process, which to
many can seem confusing given the required steps in theprocess that are dictated by statute.
From 1 January 2021, a new regime will be in place thatdifferentiates between ‘small businesses’ with debts below$1 million, and other businesses with debts above that level.
Businesses that fall into the ‘small business’ category will havedifferent options to restructure and liquidate, which we cover inthe last article of this publication.
Voluntary Administration is a process regulated by the
Corporations Act 2001 (Cth) (Act), that can be utilised bydirectors where they believe a company is insolvent or likely to
become insolvent as a result of an imminent event. The processprovides a regime for an Administrator to take control of acompany’s business, property and affairs to ensure that:

BARTIER PERRY LAWYERS(a) the prospect of the continued operation of the business ismaximised; andAdministration, being:
1. The directors;
2. A creditor; or
3. A liquidator.
Whilst a Liquidator may appoint an Administrator to thecompany, they can only appoint themselves (pursuant tosection 436B(2)(f) of the Act) if:(a) the creditors pass a resolution approving their appointment
as Administrator; or(b) the appointment is made with leave of the Court.
A key consideration for directors when determining whether
to place a company into Administration is funding. If there isfunding available within the company then this can be set aside
for the Administrator’s costs. If not, then directors will generally
need to be prepared to provide an agreed amount of funding
to the Administrator so that the process can be implemented. In
either case, the Administrator will generally require an indemnityfrom the directors in respect of their personal exposure for the
Administration.

(b) if at all possible a better return for stakeholders is achieved
than if the company was immediately placed into liquidation.

The First Meeting

Often when directors of a company are considering the meritof a Voluntary Administration, they will also consider whetherthe ‘safe harbour’ provisions of the Act may provide a preferable
process for managing the financial position of the company.

The Administrator must convene two meetings of creditors. The
Administrator must convene the first meeting of creditors withineight business days of their appointment. The purpose of thefirst meeting is to consider:

In this bulletin, we discuss the fundamental considerations in
respect of the various stages of the Voluntary Administration
process.

(a) whether or not to appoint a committee of creditors; andThe Appointment
A company may be placed into Voluntary Administration if it isdetermined that the company is insolvent or is likely to become
insolvent some time in the future. Generally, there are threeclasses of people who would seek to place a company into

PAGE 5(b) whether there is any motion to replace the Administrator.

The Report
Prior to the second meeting, the Administrator is required
to prepare a comprehensive report to creditors (pursuant tosubsection 439A(4) of the Act). This report, commonly called the“439A Report”, must contain the following:

BARTIER PERRY LAWYERS

In this bulletin, we

PART / 02

PAGE 4

DEMYSTIFYING THE
ADMINISTRATION PROCESS

(b) the Administrator’s opinions, and reasons, on each of thealternative options available to be voted on;(c) any other information that will enable creditors to makean informed decision in relation to the alternative options
available to be voted on; and(d) a statement setting out the details of any Deed of Company
Arrangement (DOCA) that may have been put forward by the
directors.

The DOCA Proposal
A DOCA is a binding agreement between the company andthe creditors which allows the company to continue trading
under specific terms in order to pay the company’s creditors, as
opposed to being placed into liquidation.

BARTIER PERRY LAWYERSThe DOCA will generally specify how the company’s affairs andassets are to be dealt with so that the business (or as much of itas possible) can be operational again. Therefore, entering into a
DOCA is one of the best chances creditors have for recovery on
their debts.

The Second Meeting

3. the Company be placed into liquidation.

The second meeting is much more important than the first andis where the outcome of the Administration is determined by
the creditors. The second meeting must be convened within fivebusiness days before or after the end of the convening period.
The convening period is usually twenty business days beginningon the day after the Administration began.

A resolution of the creditors passes only when:

The administrator is required to attach a copy of the 439A Reportto the notice for the second meeting.
In addition to the Report, the Administrator will provide thecreditors with his or her opinion and recommendations inrelation to the following:(a) the estimated return to creditors if the company is placed
into liquidation;(b) any voidable transactions which may be recoverable;(c) any DOCA proposals that have been received, including
sufficient details to enable the creditors to understand theentire proposal. This should include:(i) the estimated return to creditors;(ii) the likely timing of any returns to creditors;

The DOCA proposal should include, at the minimum, thefollowing information:(iii) the identity of the deed administrator;

1. Who the administrator is and what their role and powers are;(iv) the likely remuneration payable to the deed administrator;and2. The property of the Company and external funding (generally
provided by owner directors) that is offered to pay thecreditors some portion of their debts;
3. The duration of the DOCA period and the moratorium period;
4. To what extent the company will be released from its debts;(v) any relevant monitoring and reporting arrangements.
After the Administrator has provided the above information
along with notice of the second meeting, the creditors will be
required to vote on the future of the company. There are only
three options available being:

5. The conditions under which the DOCA will come into effectand continue to remain in effect;

1. the company executes a DOCA; or

6. The circumstances under which the DOCA terminates; and2. the Administration should come to an end and the company
be returned to the directors; or

7. The cut-off date for creditors to make their claims, noting that
this is usually no later than the day the Administration began,meaning any debts claimed after this date won’t be considered.

PAGE 7(a) At least half the creditors have voted for a resolution; and(b) The creditors whose debts makes up at least half of the total
debts of the company support that resolution. See our article:
https://www.bartier.com.au/insights/articles/insolvencymeetings-casting-a-shadow-over-voting-rights/

Administering the DOCA
If the creditors vote to enter into a DOCA, then they must alsopass a resolution specifying the terms of the DOCA. These terms
can be in addition to the terms proposed in the Second Meeting.
Importantly, the terms of the DOCA will bind all creditors,
including unsecured creditors who may have voted against theentry into the DOCA.
Usually, the Administrator will be the deed administrator for
the DOCA, unless the creditors choose to appoint someone
else. Once the terms of the DOCA and the identity of the deedadministrator are clear, the deed administrator will then prepare
the instrument containing all the terms of the DOCA agreed toin the resolution.
The company must sign the instrument within fifteen businessdays of the Second Meeting, unless an extension is sought andgranted by the Court. The administrator must also execute theinstrument as soon as practicable. Failure of these things to
occur may result in the company being placed into liquidation,with the Administrator becoming the liquidator.
Once the company complies with its obligations under the
DOCA, it will then be released from the debts proved in the
Administration. At this point, the deed administrator will cease
monitoring the performance of the DOCA and the company
will be handed back to the directors to continue to trade subject
to all the usual rules and obligations that apply to companies
in Australia.

BARTIER PERRY LAWYERS

PAGE 6(a) the results of the Administrator’s investigation into the business,
property, affairs and financial circumstances of the company;

BackgroundIn this third instalment of the Demystifying Insolvency series, we
focus on the company liquidation process.
Commonly, although not always, a company goes into
liquidation when it is insolvent (i.e. when it cannot pay its
debts as and when they become due and payable). During theliquidation process, a company and its affairs are wound-up in
a fair and orderly manner, and the company’s assets are utilised
to pay money owing to creditors of the company, along withthe costs associated with the winding-up. Prior to the company
then being de-registered, any surplus funds are returned toshareholders, although this is rare.
A liquidator, being an independent third party, is appointed
to oversee the winding-up process of the company aiming tomaximise the possible returns to creditors.

BARTIER PERRY LAWYERS

In this bulletin, we discuss the types and various stages of theliquidation process, including what it means to place a company
into provisional liquidation.

What are the types of Liquidations?

Entering into a DOCA is
one of the best chances
creditors have forrecovery on their debts.

(b) creditors after a company has been in Voluntary
Administration or following the termination of a DOCA;
and3. Member’s Voluntary Liquidation - which is only available
to solvent companies and is usually utilised to wind-up thecompany and return capital to shareholders. A common
reason for doing this is when a company is part of a group ofcompanies and a decision is made to wind-up an entity tosimplify the group and lower administrative costs.
Ultimately, the decision as to what type of liquidation is required
will depend on a number of factors including whether:
1. the company is solvent or insolvent;2. there is a dispute between directors, shareholders andcreditors as to whether a company should be wound-up; and3. there is a risk that the assets of the company will dissipate(this is discussed in detail below).
This bulletin will explore the role of a liquidator in Court
Liquidations and Creditor’s Voluntary Liquidations in detail below.

Provisional Liquidation
In circumstances where there is an application for a Court
Appointed Liquidation, the moving party may seek orders thata provisional liquidator be appointed for the period between:

Generally speaking, there are three different ways that acompany can be placed into liquidation being:

1. when the application is made to the Court; and1. Court Appointed Liquidation - when the Court orders thata company be wound up and a liquidator be appointed,
usually on application by a creditor, director or shareholderof the company or the Australia Securities and Investments
Commission (ASIC);

A provisional liquidator may be appointed to a company incircumstances where there is a dispute between shareholders,or where a company is insolvent and:2. Creditor’s Voluntary Liquidation - which is usually initiated by:(a) d irectors and shareholders who agree to place a company
into liquidation on the basis that it is insolvent; orPAGE 92. the winding up application is heard by the Court.

1. there is a real danger that the assets of the company will
dissipate;

BARTIER PERRY LAWYERSPART / 03

PAGE 8

DEMYSTIFYING THE
LIQUIDATION PROCESS

3. it is urgent that an independent third party be appointed
to preserve and control the assets of the company while anapplication to wind-up a company is on foot.
The Court has the power to appoint a provisional liquidator tocarry on the company’s business pursuant to sections 472(2) and472(4) of the Corporations Act 2001 (Cth) (Corporations Act).
The appointment of a provisional liquidator is not permanent andcan be reversed if the company is not wound up or the company
is placed into liquidation and an alternative liquidator is appointed.
During its appointment, a provisional liquidator may carry on thecompany’s business and is required to prepare a detailed report to
the Court in relation to the solvency of the company.

How is a Liquidator Appointed?
The process of appointing a liquidator will ultimately depend on
who wishes to place the company into liquidation.

BARTIER PERRY LAWYERS

If:
1. the directors and shareholders of a company agree to place
the company into liquidation, the directors and shareholders
simply need to pass a resolution appointing a liquidator. Prior
to a liquidator being appointed, the directors of the company
will need to contact the liquidator to obtain a Consent toAct from the liquidator and ensure that there is no conflict ofinterest with the liquidator being appointed to the company;
2. the creditors decide to place a company into liquidation after
a company has been in Voluntary Administration or following
the termination of a DOCA, the creditors decide who willbe the liquidator. The administrator is often appointed asliquidator, given they are already aware of the affairs of
the company. However, creditors may prefer an alternativeliquidator in certain circumstances. For further commentaryon this issue, see: https://www.bartier.com.au/insights/
articles/appointment-from-administrator-to-liquidator-in-awinding-up-guiding-principles-that-the-court-will-consider/;and3. the company is placed into liquidation by an order of the
Court, the Court will appoint the liquidator pursuant tosection 472(1) of the Corporations Act. The applicant to theproceeding may suggest a liquidator and obtain a Consent
to Act from the liquidator to provide to the Court. Generally
speaking, the Court will appoint the suggested liquidator,
unless there are circumstances where an alternative liquidator
may be more suitable.

The Liquidation Process and the Roleof a Liquidator
Once a liquidator has been appointed to an insolvent company,
it owes a duty to the creditors of the company. It’s role during
the liquidation process includes:
1. undertaking an investigation into the affairs of thecompany and reporting to creditors as to the findings ofthe investigations. This may include any recoverable unfair
preference payments or possible claims against the directorsof the company;
2. finding, collecting and protecting any assets of the company;
3. reporting to ASIC as required; and4. distributing proceeds from the realisation of assets tocreditors and potentially shareholders, after payment of thecosts of the liquidation have been made.

The Initial Report informs creditors of the appointment of theliquidator, their rights to request information, their rights torequest that a meeting of creditors be held and their rights toprovide directions to the liquidator.
The Statutory Report provides detail to creditors about theestimated value of the company’s liabilities and assets, provides
an update as to the investigations undertaken by the liquidators
including a summary of the affairs of the company and thelikelihood that a dividend will be paid at the end of the liquidation.

Payment of Dividends
After the realisation of the company’s assets, secured creditors
will be paid in priority from the assets of the company. Generally
speaking, funds will be distributed from the assets of thecompany as follows:
1. costs of the liquidation, including the liquidator’s fees;
2. wage, superannuation and leave payments to the company’s
employees;

Creditor’s Meetings and Approval of LiquidatorFees

3. secured creditors;

During the course of the liquidation, a liquidator may call a meetingof creditors to provide them with an update on the liquidation,
ascertain their position on particular matters during the liquidation
process and seek approval regarding the liquidator’s fees. See:
https://www.bartier.com.au/insights/articles/insolvency-meetingscasting-a-shadow-over-voting-rights/

5. shareholders.

While the liquidator does not require creditor approval for all
decisions made during the liquidation process, the liquidator’sfees (which are generally paid from the assets of the company)
must be approved by creditors or the Court. Prior to voting on
the liquidator’s fees, creditors must be provided with a reportcontaining sufficient information to allow creditors to assess thereasonableness of the liquidator’s fees.

4. unsecured creditors; andOnce each category is paid in full, the next category of creditors
is paid. If sufficient funds are not available to pay out a certain
category, the creditors within that category are paid on a prorata basis and the balance of the creditors are not paid anything.
It is rare that a dividend is payable to shareholders in an insolvent
liquidation.
Unsecured creditors are required to lodge a proof of debt
with the liquidator which provides sufficient information forthe liquidator to be able to decide whether the debt from thecompany exists, and the amount of it.

Investigations and Reporting to Creditors

Unsecured creditors generally will not know the exact amountof the dividend payable, if any, until the conclusion of theliquidation.

During the course of the liquidation, the liquidator will provide
creditors with:

Finalisation of Liquidation

1. an Initial Report about their rights as creditors during theliquidation. This is usually done within 10 business days
after the liquidator’s appointment in a creditors’ voluntaryliquidation or within 20 business days following a court
appointed liquidation;
2. a Statutory Report within 3 months after the appointment of
the liquidator; and3. any further reports required to provide creditors with an
update in relation to the liquidation.

... the liquidator’s fees must be
approved by creditors or the Court.

PAGE 11

Once the assets of the company are realised, debts paid,
payments are made as outlined above and liquidators report all
things necessary to ASIC, the liquidation effectively comes to an
end and the company will be de-registered.

BARTIER PERRY LAWYERS

PAGE 10

2. the applicant wishes to provide stability to the company
while an application to wind-up the company is on foot; andabove and liquidators report all things necessary
to ASIC, the liquidation effectively comes to an
end and the company will be de-registered.

DEMYSTIFYING THE
RECEIVERSHIP PROCESSIn this fourth instalment of the Demystifying Insolvency series,
we focus on the receivership process.
A company goes into receivership when an independent andsuitably qualified person (the receiver) is appointed by a secured
creditor or the court and is tasked with taking control of some or
all of the company’s assets in order to protect the interests of theappointing creditor.
In this article we will focus primarily on receiver appointments bysecured creditors and seek to clarify the interactions between
receivers and other types of external administrations.
Receivership often occurs at the same time as other insolvency
appointments such as provisional liquidation, liquidation,
voluntary administration or when a company is subject to a deedof company arrangement.
Importantly, entering into receivership does not always spell theend of a company. Often companies will trade successfully at theend of the receivership period.

BARTIER PERRY LAWYERS

Who is a secured creditor?
A secured creditor is someone who holds a security interest oversome or all of the company’s assets, such as a mortgage (over a
non-circulating asset such as real property) or a PPS registration(over a circulating asset such as debtors or stock).
The security interest provides the creditor with security for the
debt owed by the company. In order for the secured creditor tohave the power to appoint a receiver, or a receiver and manager,
the security document needs to have been prepared in a way
which allows for the appointment.
A secured creditor needs to be careful:
1. when drafting the security documents, to ensure that issues
with appointment are minimised; and2. not to inadvertently waive its rights under the security
document, for instance by lodging a proof of debt or voting
at a creditor’s meeting in a manner that unintentionallysurrenders its rights.

PAGE 13

Purpose of Receivership
The main purpose of receivership is to allow a secured creditor
to recover the debt owing to it by appointing a skilled andindependent person to enter the business and realise assetsthat are subject to the security. In contrast to other insolvency
processes, directors are able to remain in office during thecourse of a receivership, however their powers (in respect of the
secured assets) are limited.
If a receiver is appointed with the power to manage thecompany’s affairs they then become a receiver and manager.
The powers of the receiver and manager are found in the
security document under which the receiver was appointed.
It is important to keep the distinction between ‘receiver’and ‘receiver and manager’ in mind not only when draftingand entering into a security document but also, as the creditor,
when choosing to enliven the provision in the security
document which allows you to appoint a receiver.
In addition to the powers found in the security document,a receiver is also provided with specific powers under the
Corporations Act 2001 (Act). Specifically, the receiver’s ‘power
to do all things necessary or convenient to be done for or inconnection with, or as incidental to, the attainment of theobjectives for which the receiver was appointed’ comes fromsection 420 of the Act.
The receiver has a wide discretion when disposing of thecharged property in the company. If another creditor also has aninterest over charged goods it is necessary to remain informed
about the actions of the receiver and, in some circumstances,
seek independent legal advice.

BARTIER PERRY LAWYERS

debts paid, payments are made as outlined

PART / 04

PAGE 12Once the assets of the company are realised,It is important to understand the interaction between
receivership and other insolvency appointments.

Administration
Where a company is already in administration, the general ruleis that securities are not enforceable whilst the administration
exists.
There are, however, limited classes of secured creditors that canenforce their security in an administration, such as:
1. creditors with security over perishable property;
2. creditors with security over the whole (or substantially thewhole) of the company’s property (who have 13 days from
appointment of the administrator to make a decision about
enforcing their security);
3. secured creditors with the consent of the administrator; and4. secured creditors with leave of the court.

BARTIER PERRY LAWYERS

A receiver appointed before the company goes into
administration is generally allowed to continue enforcing theirsecurity throughout the administration.

Liquidation
A liquidator does not have any power to disturb a secured
creditor’s right to appoint a receiver once the winding up
of a company has been commenced. Indeed, in certain
circumstances a secured creditor may look to appoint a receiver
over a major asset of a company in liquidation in order topreserve it whilst steps in the liquidation process take place.
If the security interest is over the whole (or substantially thewhole) of the company’s property, the liquidator will have norecourse to those assets until the receivership has concluded.
However, in some circumstances, having a liquidator appointed
may be a useful way for another creditor to obtain information
about the receivership that would otherwise be unknown, andalso access company property out of the reach of the receiver.

If a liquidator is appointed to a company that already has
a receiver appointed, the receivership will usually continue
undisturbed. The commencement of winding up a company
does not affect the receiver’s power to collect, hold and disposeof property that is the subject of a security or their power tocontinue trading the company incidentally to the beneficial
disposal of the assets.

Obligations to creditors
Unlike administrators and liquidators, receivers have no
obligation to report to unsecured creditors about thereceivership and unsecured creditors are not entitled to see any
report prepared by the receiver for the secured creditor who
appointed them. The only obligation that a receiver has to an
unsecured creditor (except employees) is to take reasonable care
to sell any assets of the company for not less than market value,or the best price reasonably obtainable.
When non-circulating assets of the company are sold, thereceiver can apply the proceeds to pay the debts of any creditors
secured by the asset (in order of priority), after the costs and feesof the receiver are paid.
When circulating assets of the company are sold, the proceeds
are distributed first to the receiver’s costs and fees in collecting
the money, then to priority claims and then to pay the secured
creditors’ debt. The most common priority claim is employee
entitlements. There are specific rules that govern payments toemployees, which are not covered in this article.

Continuing to trade with a receiverand manager
In most cases, a receiver and manager will continue to trade
the company whilst the receiver investigates the affairs of
the company and seeks to realise the relevant security. In this
scenario, a receiver will usually communicate with the othercreditors and ask them to advise if they wish to continue tradingwith the company.
It is important that the receiver’s directions to a creditor in
respect of continuing to trade are followed. This is to ensurethat the creditor begins trading with the receiver appointed forthe company and does not simply continue to trade with thecompany itself.
Any debts arising from the receiver authorising the purchase ofgoods or services during a receivership are required to be paid
from the realised assets. These form part of the costs of thereceivership. The receiver will be personally liable for the shortfall
between the amounts realised from assets and the costs of thereceivership.

Conclusion of Receivership
A receivership will usually end when the receiver has:• collected and sold enough of the company’s collateral tosatisfy the debt owing to the secured creditor that appointedthem;• paid the liabilities incurred during the receivership; and• completed all other duties, such as reporting to ASIC any
irregular matters or offences.

It is important to understand theinteraction between receivership andother insolvency appointments.

PAGE 15

Following the receiver’s retirement, unless a liquidator or
administrator has been appointed to the company, the company
and any remaining assets is handed back to the directors.

BARTIER PERRY LAWYERS

PAGE 14

Interactions between receiver and otherappointments

Government have been implemented
to ensure that small businesses
survive the COVID-19 pandemic.

DEMYSTIFYING
SMALL BUSINESS INSOLVENCY
BackgroundIn this fifth instalment of the Demystifying Insolvency series, we
focus on the insolvency reforms to support small businesses.
On 24 September 2020, the Federal Government announced
that from 1 January 2021, changes will come into effect which will
have a significant impact on the current insolvency frameworkfor small businesses. The changes will reduce the complexity,
timing and costs for small businesses that are associated withthe current insolvency framework.
The changes will be introduced in circumstances where:

BARTIER PERRY LAWYERS•

The regulatory changes that the Federal Government has
already implemented are due to expire on 31 December 2020.

•

The economic impact of COVID-19 is likely to continue into
2021, especially for small businesses.

•

The current system in place imposes the same obligations
on all businesses, regardless of the size or complexity of theadministration.

•

Small businesses are often reluctant to engage insolvency
practitioners early due to the costly and lengthy processes
which reduces their opportunity to restructure and survive.

This bulletin explores theses recent changes and sets out the key
elements from the reforms.

Key Changes
The reforms have introduced three key changes:•

A new formal debt restructuring process for small businesses
which provides financially distressed but viable businesses
with a quicker and simpler mechanism to restructure debts
and survive.

•

A new and simplified liquidation pathway for small
businesses to allow faster and less costly liquidation.

•

Complementary measures to ensure the insolvency sector
can respond effectively to the needs of small businesses inboth the short and long term.

PAGE 17

We explore each of these elements below.

A New Formal Debt Restructuring Process
Who does it apply to?
Incorporated businesses with liabilities less than $1 million.

How will the new process work?
Step 1	A financially distressed business approaches aninsolvency practitioner to discuss the situation andobtain advice.
Step 2 The board of the small business resolves to appoint
the insolvency practitioner as their small businessrestructuring practitioner. Once a practitioner isappointed, creditors cannot take action against thebusiness or personal guarantors.
Step 3 Over a 20 business-day period, the business owner andpractitioner work together to develop a restructuring
plan for the business’ debts and prepare supporting
documentation for the plan. This will include a
remuneration proposal for the practitioner. During thistime the business owner continues to run the business.
This is set out in further detail below.
Step 4 The practitioner sends the plan and supporting
documents to creditors and certifies whether they
believe the business will be able to comply with theplan, make proposed payments on time and has madeproper disclosure. Creditors have 15 business days tovote on the plan and consider the proposed practitioner
remuneration.

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and reforms by the Federal

PART / 05

PAGE 16

The introduction of these changes

Step 6 Once a plan is approved, the business continues to trade,and the practitioner makes distributions to the creditorsin accordance with the plan. If the plan is not approvedby creditors, the process ends, and the business may
consider an alternative insolvency process.

Debtor in Possession Model
The reforms allow all small businesses to keep trading under thecontrol of the actual owners while a debt restructuring plan isvoted on by creditors. Businesses can continue to trade in theordinary course of business during this time while the businessowner works with an insolvency practitioner.

Role of the insolvency practitioner

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The practitioner will work side by side with the business ownerto develop a restructuring plan, determine if the small businessis eligible for the new process, assist the business in developing
a plan and reviewing its financial affairs, seek approval fromcreditors in relation to a restructuring plan and manage costs
once a plan is in place.

Protection for Creditors

Currently, the costs of liquidation can be extensive and may
consume most or all the remaining value of the company.
The reforms have attempted to provide a simplified liquidation
procedure which aims to cut costs and streamline the process.
These key changes include:•

A reduction in investigative requirements of liquidators.

•

Removal of requirements to call creditor meetings.

•

Requirement to only report to ASIC on potential misconduct.

•

Simplify the payment of dividend and proof of debt
processes.

•

Utilising technology in voting and other communications

This option is also only open to incorporated businesses withliabilities of less than $1 million

PAGE 19

Note: This publication has been prepared from the initial
information provided by the Federal Government of Australia
as at the date of publication and may be subject to change
following the passing legislation to give effect to the Small
Business Insolvency regime.

To assist in implementing these reforms as at 1 January 2021,
the Federal Government will introduce the following measures:•

The establishment of a new classification of insolvency
practitioners who deal solely with the simplified restructure
process set out above.

•

Waiving registration fees for liquidators for approximately
2 years until 30 June 2022.

•

Removal of rigid requirements for the registration of
insolvency practitioners.

The insolvency practitioner remains independent.

•

Creditors vote on the plan.

•

Key creditor rights (e.g. payment of distribution in priority) arepreserved.

•

Embracing technology to allow external administrations
to be carried out more efficiently.

•

Related creditor voting on a plan is prohibited.

•

Provision of temporary relief for eligible businesses who wish
to access the simplified restructure process. The business canannounce its intention to access the simplified restructure
process which will provide it with temporary insolvency relief
for up to 3 months until the process commences.

The unfortunate reality for some small businesses is that plans
will not be approved by creditors and the business will need toconsider whether or not to place the company into liquidation.

The introduction of these changes and reforms by the Federal
Government have been implemented to ensure that small
businesses survive the COVID-19 pandemic. In light of theuncertainty surrounding how long the pandemic will last, itremains to be seen whether these reforms will be successful
in helping small businesses survive in the current economy.
Over the next few months, small businesses and insolvency
practitioners should endeavour to familiarise themselves withthe reforms to ensure they are well equipped to deal with any
issues that may arise.

Further Measures to Support the Insolvency Sector•

Simplified Liquidation Pathway

Conclusion

Currently, the costs of liquidation
can be extensive and may consume
most or all the remaining value ofthe company.

BARTIER PERRY LAWYERS

PAGE 18

Step 5 If more than 50% of creditors by value endorse theplan, it is approved and binds unsecured creditors andsecured creditors.

BARTIER PERRY LAWYERS

PAGE 20
Gavin Stuart
Head of Dispute
Resolution & Advisory

David CreaisPartner

P 02 8281 7878
gstuart@bartier.com.au

P 02 8281 7823
dcreais@bartier.com.au

Adam Cutri
PartnerMark Glynn
Partner

P 02 8281 7873
acutri@bartier.com.au

P 02 8281 7865
mglynn@bartier.com.au

Sharon Levy
Partner

Jennifer Shaw
Partner

P 02 8281 7818
slevy@bartier.com.au

P 02 8281 7937
jshaw@bartier.com.au

Norman Donato
Partner

Jason SpraguePartner

P 02 8281 7863
ndonato@bartier.com.au

P 02 8281 7824
jsprague@bartier.com.au

BARTIER PERRY PTY LTD
Level 10, 77 Castlereagh Street Sydney NSW 2000
T + 61 2 8281 7800
F + 61 2 8281 7838
bartier.com.au
ABN 30 124 690 053

Bartier Perry@BartierPerryLaw
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