News & Insights

The new 2021 year brought in various changes to insolvency laws, which included the introduction of the Small Business Restructuring (SBR) process to assist small businesses in restructuring their debts. This new regime provides an opportunity for eligible small businesses which are financially distressed, but otherwise viable, to continue trading into 2021 and beyond. However, a question that we have recently been faced with is whether a company that is a corporate trustee of a trust, also known as a trustee company, is able to avail itself of the SBR process.

what is small business restructuring (SBR)?

The SBR process, which became effective on 1 January 2021, provides a mechanism for eligible small incorporated businesses to restructure their debts with the assistance of a Small Business Restructuring Practitioner (SBRP), but without the appointment of an external administrator or liquidator. Part 5.3B of the Corporations Act 2001 provides for a ‘debtor in possession’ restructuring process for eligible companies that allows those companies to:

1. retain control of the business, property and affairs while developing a plan to restructure with the assistance of a SBRP; and
2. propose a restructuring plan to creditors.

The SBR process is different to other formal insolvency processes as in this situation, the directors of the company remain in control and can continue trading while the restructuring process is under way. It is a director driven process whereby the directors, rather than the SBRP, develop a restructuring plan to submit to creditors.

eligibility to engage in the small business restructuring process

For a small business to be eligible to engage in the SBR process, it must:

• be incorporated under the Corporations Act;
• have total liabilities which do not exceed $1 million on the day the company enters the process. This excludes employee entitlements, but liabilities for the purposes of restructuring includes debts to related parties and contingent liabilities;
• be in substantial compliance with the following requirements:
• employee entitlements which are due and payable have been paid,
• tax lodgements are up to date meaning all relevant tax returns and activity statements are lodged with the ATO.
• have not invoked the debt restructuring process within the past 7 years; and
• not have a director who has invoked a formal debt restructuring process within the past 7 years (including former directors who resigned in the previous 12 months).

what additional factors need to be considered by a corporate trustee?

As a first step, it is necessary to review the trust deed to determine whether there are any provisions which may impact the trustee company’s ability to pass a resolution to appoint a SBRP. Assuming that the trust deed includes a clause that empowers the trustee company to pass a resolution to appoint a SBRP, the next step is to refer to the Corporations Act regarding the resolution required to effect that appointment.

Section 453B of the Corporations Act sets out the particular resolution that the board needs to pass to appoint a SBRP as follows:

“Appointing a restructuring practitioner”

A company may, by writing, appoint a small business restructuring practitioner for the company if:

• the eligibility criteria for restructuring are met in relation to the company on the day the appointment is made; and
• the board has resolved to the effect that:
       (i) in the opinion of the directors voting for the resolution, the company is insolvent, or is            likely to become insolvent at some future time; and
       (ii) a restructuring  practitioner for the company should be appointed.”

has the court considered whether corporate trustees are eligible for SBR?

Since this is still a relatively new regime, there are currently limited Court decisions which address the SBR process. The Supreme Court of Victoria provided some early guidance on this suite of insolvency reforms in the case of Re Dessco Pty Ltd [2021] VSC 94. In that case, the defendant, Dessco Pty Ltd (Dessco), was the corporate trustee of a discretionary trust, namely the Dessmann Family Trust. Dessco applied for an adjournment of a winding up application which had been filed against it on the basis that it had appointed a Small Business Restructuring Practitioner under section 453B of the Corporations Act to pursue a restructuring plan. In determining the adjournment application, the Court was required to consider:

• Dessco’s eligibility for restructuring and, in particular, whether its liabilities exceeded $1 million; and
• whether restructuring would be in the best interests of Dessco’s creditors.

In assessing the company’s eligibility, there was no issue raised that impacted Dessco’s eligibility based on the company being a corporate trustee of a discretionary trust. The Court ultimately accepted that Dessco was eligible to avail itself of the SBR regime and granted the adjournment to allow the restructuring to continue, indicating that corporate trustees are not prevented from engaging in the small business restructuring process. Further information regarding the Dessco case can be found here.

ipso facto clauses regarding removal or replacement of corporate trustees

Trust deeds commonly contain provisions for the automatic removal of, or right to replace, the trustee, being the company, on the occurrence of an insolvency event. The relevant clauses need to be reviewed to consider the specific circumstances that will trigger the ipso facto clause to vacate the office of the trustee. In particular, it needs to be determined whether the appointment of an SBRP to the trustee company will trigger its removal or replacement as corporate trustee. This will depend on how broadly the ipso facto clauses in the trust deed have been drafted and whether they encapsulate the SBR process.

A common triggering event for the automatic removal of a corporate trustee found in a trust deed is usually along the lines of ‘making an arrangement or composition with creditors’. This type of triggering event, or words to a similar effect, would appear wide enough to encompass restructuring. As the appointment of a SBRP involves the commencement of “restructuring” of a company under section 453 of the Corporations Act, then a corporate trustee faces the risk of removal or replacement if it seeks to engage in the SBR process. A corporate trustee faces this same risk if the trust deed broadly states that the office of the trustee will be vacated by the occurrence of an ‘insolvency event’, as a company will generally be taken to be insolvent if it proposes a restructuring plan to its creditors.

On the other hand, an ipso facto clause may instead refer to specific types of insolvency events that need to transpire for the company to be ejected as trustee. These can often include events such as:

• Having a receiver appointed;
• Entering official management;
• Having an application for its winding up presented to the Court;
• Passing a resolution for its winding up; or
• Entering into a scheme of arrangement.

In circumstances where the trust deed refers to specific events, rather than an ‘insolvency event’ in the general sense, then the SBR regime may not be caught by the ipso facto clause which means that the appointment of an SBRP to the trustee company is unlikely to trigger its removal as trustee. For example, while the appointment of a SBRP involves commencing the “restructuring” of a company, it does not involve the appointment of a receiver or involve entering into a scheme of arrangement, which has a particular meaning under the Act. Further, the appointment of the SBRP does not involve the company “entering official management” as the SBR process does not involve the company entering into external administration and, indeed, the role of the SBRP is to provide advice and to assist the company to develop a restructuring plan, as prescribed in section 453E of the Corporations Act.

As mentioned above, there are very limited Court decisions which consider the SBR regime since this is relatively new law. However, recent case law indicates that the Courts will generally take a strict approach when interpreting a trust deed and the powers to be exercised pursuant to the trust deed.^[1]

It should be noted that if the SBR process ends unsuccessfully or is terminated, then the trustee company may ultimately be faced with an insolvency event which may lead to it being removed or replaced as the corporate trustee.

ipso facto clauses in contracts

In circumstances where a corporate trustee enters into a contract with another party, that contract may contain an ipso facto clause which allows for the termination or modification of the contract upon a stipulated insolvency related event taking place. Such ipso facto clauses in contracts entered into from 1 July 2018 are subject to a moratorium if the ipso facto provision is triggered by specific formal corporate insolvency events. From 1 January 2021, the scope of the moratorium was expanded and now includes restructuring under Part 5.3B of the Corporations Act. The relevant provisions are contained in section 454N of the Corporations Act which stays the enforcement of rights if the company is under restructuring. The effect of these provisions is that another party would be restricted from enforcing certain ipso facto contractual rights against a trustee company that was engaged in the SBR process.

take away points

• A corporate trustee is not excluded from engaging in the SBR process. Provided that the corporate trustee meets the relevant eligibility criteria, the company will be able to avail itself of the SBR process and appoint a SBRP to assist with preparing a restructuring plan.
• It is important to review the provisions of the trust deed to determine if there are any provisions which impact the trustee company’s ability to pass a resolution to appoint a SBRP.
• Careful consideration needs to be given to any ipso facto clauses in the trust deed to ensure that the appointment of a SBRP does not trigger the automatic removal or replacement of the corporate trustee.

If you need any advice in relation to the new restructuring regime or insolvency issues, please contact our team.

^[1]Advance Holdings Pty Limited atf The Demian Trust v Commissioner of Taxation [2020] FCA 1479].

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.