The new small business restructuring process - adjournment of a winding up
A recent Supreme Court of Victoria decision addresses how the new small business restructuring amendments to the Corporations Act 2001 (Cth) (the Act) operate in respect of the adjournment of a winding-up application. The decision emphasises the importance of a small business restructuring practitioner (Restructuring Practitioner) being independent when the validity of creditor claims is being considered in the context of a winding-up adjournment.
Small Business Restructuring Process
Part 5.3B of the Act sets out the new small business restructuring process, the part having commenced on 1 January 2021. The object of the part is to provide a restructuring process for eligible companies that allows companies to retain control of the business, property and affairs of the company while developing a plan to restructure with the assistance of a Restructuring Practitioner and to then enter into that plan with creditors.
The restructuring process is intended to be a simpler, less expensive restructuring option for eligible small businesses, the ultimate aim being to have a plan in place that sets out an approach to the repayment of the company’s existing debts, thereby enabling the company to stay in business and avoid being wound up.
Part 5.3B of the Act and the relevant regulations set out a process where the Company may propose a restructuring plan to its affected creditors, via a Restructuring Practitioner. The Restructuring Practitioner is required to undertake reasonable inquiries into and verify the Company’s business, property, affairs and financial circumstances, to assess the accuracy and completeness of the information provided in the restructuring plan and a proposal statement.
Background
A winding-up application was filed on 2 February 2021 in respect of a company that operated a project management, building and construction business (the Company). The plaintiff was a subcontractor of the Company (the Plaintiff) that served a statutory demand on the Company for a judgment debt amount.
On the same day that the winding up application was filed a Restructuring Practitioner was appointed under Part 5.3B of the Act, the Company meeting the small business eligibility criteria.
On 3 February 2021 the Restructuring Practitioner issued an initial report to creditors, creditors being given until 12 February 2021 to complete their debt notifications.
On 23 February 2021 the Restructuring Practitioner provided a report to creditors, proposing a restructuring plan that provided for the distribution of $66,000 to the Company’s creditors, $45,000 funded by one of the directors with the balance funded by pre 1 May 2021 trading profits. The Restructuring Practitioner concluded that he believed that it was in the best interests of creditors of the Company to enter into a restructuring plan, which would result in a greater dividend than if the Company was liquidated.
The Application
The Company sought an adjournment of the winding-up application until after the restructure acceptance period which ended on 15 March 2021 so the Company could continue under the restructuring plan.
The Plaintiff opposed the adjournment on the following basis:
Based on evidence that “friendly creditors” of the Company would use their voting power to pass the restructuring plan to the detriment of the Plaintiff and other trade creditors
There were reasons to doubt the information provided to the Restructuring Practitioner by the directors of the Company.
One of the creditors may not have been a legitimate creditor based on the absence of a public presence for the company and an apparent connection to the director of the Company based on ethnicity.
The appointment may have been the last resort to avoid the consequences of liquidation.
Decision
The Judicial Registrar was satisfied that it was appropriate to adjourn the winding up to allow the restructure acceptance period to expire, considering the relevant section of the Act, being section 453Q, and the relevant voluntary administration case law. The Judicial Registrar reached that conclusion because:
On the information available to her she was satisfied that it is in the interests of the creditors of the Company to continue under the restructuring plan rather than be wound up.
The restructuring plan provided certainty of dividend through receipt of the restructuring fund.
The Restructuring Practitioner has not identified any significant claims available to the liquidator.
It was not readily apparent based on the Plaintiff’s concerns that further investigations by a liquidator would increase returns to creditors.
The costs of winding up would exceed the restructuring costs, leaving less distribution to creditors.
The Judicial Registrar also found that the plaintiff’s evidence was not of sufficient cogency to be satisfied that the Restructuring Practitioner’s evidence was not reliable, referring to the practitioner’s independence.
Comments
It is positive to see a decision supportive of the role of the Restructuring Practitioner and the new small business restructuring process generally, particularly when more small business will be appointing Restructuring Practitioners as a result of the COVID insolvency measures ending.
The decision supports the role of the Restructuring Practitioner when it comes to investigations as to creditors’ claims. The Court had regard to the independence of the practitioner and the duties owed by him when reviewing creditors claims, the practitioner having investigated the Companies affairs with an independent mind within the constraints of the role.
The decision also gives guidance as to the issues that will be considered on an adjournment application under section 453Q of the Act, the Judicial Registrar refusing to consider alleged misstatements made in separate proceedings between the Plaintiff and the Company.
Of interest, the Judicial Registrar did not share the Plaintiff’s scepticism regarding the timing of the Restructuring Practitioner’s appointment. The appointment of a Restructuring Practitioner being one option open to a creditor served with a statutory demand.
See DST Project Management and Construction Pty Ltd [2021] VSC 108
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