News & Insights

As part of the Federal Government’s suite of reforms to insolvency laws in response to the COVID-19 pandemic, directors of insolvent companies with total debts not exceeding $1 million are eligible to appoint a Small Business Restructuring Practitioner (SBRP).

This new regime allows directors of eligible companies to retain control of their business while working alongside an SBRP to develop a proposed restructuring plan for approval by the company’s creditors.

Although we are only in the early stages of these reforms, two recent decisions handed down in the Commercial Court of the Supreme Court of Victoria have provided some valuable authority and guidance on the valuation of debts by SBRPs when determining a company’s eligibility to enter restructuring and evidentiary hurdles for companies in restructuring seeking to stave off judgment in winding up proceedings.

Davey v Dessco Pty Ltd [2021] VSC 94

In this case, the plaintiff (Davey) brought an application to wind up Dessco Pty Ltd (Dessco) on the basis of an unsatisfied Creditors Statutory Demand for Payment of Debt served in July 2020 relating to contingent underlying debt.

At the time that the Statutory Demand was served on Dessco, the statutory period for compliance with the Demand was six months (which was part of the initial package of temporary laws enacted by the Federal Government in March 2020 in response to COVID-19).

On 15 February 2021 Dessco applied for an adjournment of the winding up proceeding of 50 days pursuant to s453Q of the Corporations Act 2001 (Cth) (Act). This provision mirrors s440A of the Act and provides that the Court is to adjourn the hearing of an application for an order to wind up a company if:

1. the company is under restructuring; and
2. the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under restructuring rather than be wound up.

On the same day that the application for an adjournment was filed, Dessco appointed an SBRP, which formally commenced the restructuring process.

Davey opposed the adjournment at the hearing on 26 February 2021 on the grounds that:

1. the initial assessment of Dessco’s total debts by the SBRP undervalued the likely quantum of Davey’s debt, which was at the time of the hearing, an untaxed cost order in the estimated sum of $750,592. The amount allowed for Davey’s debt by the SBRP in determining Dessco’s eligibility was only $200,000, which Davey challenged;
2. if Davey’s estimate of the quantum of his debt were accepted by the Court, Dessco was ineligible for restructuring as its debts were likely to exceed the statutory threshold of $1 million;
3. Dessco had appointed an SBRP at a late stage in the winding up application and should not be allowed to continue operating whilst insolvent; and
4. the restructuring proposal had already been rejected by notice from Davey sent to the SBRP in response to the initial circular to creditors advising of the SBRP’s appointment.

estimate of company debt for restructuring

On the issue of the estimate of Dessco’s debts, the Court held that what is required of an SBRP in forming a view on a company’s eligibility for restructuring under Part 5.3B of the Act is that they:

1. make a just estimate of the value of the creditor’s claim based on the factual material available from the creditor and the company;
2. must have reasonable grounds for ascribing a particular figure to the claim but are not, in the initial stage of his/her appointment, required to carry out a comprehensive detailed enquiry; and
3. are not obliged to accept the quantification of the contingent debts claimed by a creditor for the purposes of calculating the company’s total liabilities.

In rejecting Davey’s submissions, the Court accepted that the SBRP had adequately reasoned the quantification of Davey’s claim with reference to relevant accounting standards.

Ultimately, the Court rejected the balance of Davey’s submissions and granted Dessco an adjournment of the winding up proceeding until shortly after the expiry of the period for creditors to vote on the restructuring plan.

In reaching its decision and allowing the restructuring process to continue, the Court determined that restructuring would give creditors, including Davey, the best chance of receiving some payment of their debts.

Redhill Bricklaying Pty Ltd v DST Project Management and Construction Pty Ltd [2021] VSC 108

This proceeding also dealt with an application by a company under restructuring for an adjournment under s453Q of the Act.

The opposition to this adjournment by the petitioning creditor was focused on the relationship between the company and the other creditors constituting over 50% in value of the company’s debts and holding the required majority to approve the impending restructuring plan.

The Court found that the creditors that were alleged to be “friendly” to DST Project Management and Construction Pty Ltd (DST), which included a company whose director was the wife of the sole director of DST, were not “excluded creditors” within the meaning of regulation 5.3B.01 of the Corporations Regulations 2001 (Cth), as they were neither related creditors of DST nor related entities of the SBRP. As a result, the debts of the friendly creditors were not discounted by the Court at the hearing of DST’s application for an adjournment.

In support of its application, DST and their appointed SBRP argued, amongst other things, that having regard to the recent turnaround in the building industry, there were good prospects for DST to continue trading into the future provided it undertakes appropriate restructuring measures.

The SBRP also gave evidence that it would be in the best interests of creditors for the restructuring plan to continue, as it would provide a greater likelihood of a return to creditors in a shorter amount of time when compared to liquidation. Relevantly, the SBRP estimated the cost of the restructuring plan to be $3,000, as opposed to between $24,750 and $48,400 for a liquidation.

Accepting this evidence, the Court granted an adjournment of the winding up proceeding to allow DST to continue with the restructuring process.

what does this mean?

The reforms to insolvency laws introduced by the Federal Government were aimed at creating greater flexibility for small businesses suffering from financial distress by introducing a less complex and costly process to restructure existing debts and increase their chances of survival.

For companies operating small businesses in severe financial distress, the SBRP process may be the lifeline they need to get back on their feet and trading.

These two early case studies show that the Court is reluctant to wind up companies that are subject to a restructuring process even where the SBRP has been appointed late in the winding up proceedings, there is a limited assessment of the debts of the Company and some evidence of vote stacking.

These cases also provide some insight into the changing landscape and pitfalls for creditors applying to wind up companies operating small businesses.

If you need any advice on the new restructuring regime, please do not hesitate to contact our team.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.