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This is the second part in a blog series discussing the new debt restructuring regime, which commences on 1 January 2021. This blog discusses the effects on a company entering debt restructuring, and its creditors.

The regime will be implemented through substantial amendments to the Corporations Act 2001 (Cth) (“the Act”) and the Corporations Regulations 2001 (Cth). Relevant links are:

Conduct of the company’s business

Section 453L of the Act will prohibit the directors from entering the company into any transactions dealing with the company’s property, unless one of the following applies:

  1. The transaction was in the ordinary course of business;
  2. The restructuring practitioner consents to the transaction (which can only be given if the restructuring practitioner believes it would be in the interests of creditors);
  3. The transaction was entered into by order of the Court;
  4. The transaction was with a bank, and was made in good faith and in the ordinary course of the bank’s business.

Transactions that infringe section 453L of the Act are generally void, and compensation may be sought against the director (s 453M). Transactions entered into in good faith by the restructuring practitioner are valid, and not liable to by set aside in a winding up of the company (s 453N).

Most of these restrictions similarly apply to directors during a voluntary administration (see s 437D), with the key exception being that directors can continue dealing with the company’s property provided that it is within the ‘ordinary course of business’. The rationale being that the company will not need to incur a restructuring practitioner’s fees just to approve everyday transactions.

The debt restructuring regime utilises the existing safe harbour regime to provide relief for directors trading during the restructuring of the company. Specifically, the addition of section 588GAAB(2) of the Act will provide that the insolvent trading provision (s 588G(2)) does not apply where the debt was incurred during the restructuring of the company and the debt was incurred in the ordinary course of the company’s business or with the consent of the restructuring practitioner.

Effect on creditors’ rights

Similarly to the application of section 440A of the Act for a company entering voluntary administration, section 453Q will provide for a Court to adjourn any hearing of a winding-up hearing if the company is under restructuring, provided that it is in the interest of creditors. The wording is almost identical to section 440A, and so it would seem the body of case law discussing the usual considerations will also similarly apply when a company is under a restructuring.

Section 453R of the Act will also mimic section 440B so that secured creditors and landlords are limited in their capacity to enforce their rights against a company whilst under a restructure. The moratorium on proceedings and enforcement processes will also apply to companies under a restructuring (ss 453S & 453T), and a restructuring process should not trigger the liability of a director under a guarantee (s 453W). The ipso facto regime will be extended to restructuring processes (s 454N).

In Part 3 of this blog series, which will be released shortly, we will discuss the process of putting forward a restructuring plan to creditors.

If you would like to know more about the debt restructuring process, or have any concerns you would like to discuss with an expert, please do not hesitate to contact us.  Our Insolvency and Restructuring Team will be back in the office from 11 January 2021.  In the meantime, should you wish to speak to someone urgently, you can contact Jeffrey Brown at jeffreyb@matthewsfolbigg.com.au.  Jeffrey will be checking his emails regularly over the Christmas and New Years break.