Market Briefing: Simplified Liquidation

This note has been prepared to guide company directors, their advisors, and creditors about the operation of Simplified Liquidation.  It is not legal advice.  FerrierSilvia can assist you with further information about how this relief works.

Together with Temporary Insolvency Relief and Small Business Restructuring, from 1 January 2021 the Federal Government has introduced a streamlined form of liquidation, called Simplified Liquidation.

Simplified Liquidation serves the valuable purpose of allowing Liquidators to focus on achieving quick returns to creditors and reduces cost.  It has the potential to benefit everyone who deals with insolvency, although those benefits are to be balanced against some risks of abuse.

Simplified Liquidation is available where a company has begun a Creditors Voluntary Liquidation – companies can do so directly, by resolution, or after Voluntary Administration.  To qualify, the company must have less than $1 million in liabilities, excluding employee entitlements and some contingent liabilities; and must be unlikely to pay its creditors within 12 months.

The procedure for invoking Simplified Liquidation requires a resolution by the directors after the liquidation starts, and then notification of creditors by the Liquidator of the proposal to use the simplified process within 20 business days after the liquidation starts. If creditors representing 25% or more of value object within 10 business days of the receipt of the proposal, then the liquidation must proceed as an ordinary liquidation. If not, Simplified Liquidation occurs.

Simplified Liquidation omits several features of ordinary liquidation that are often expensive:

  • The Liquidator’s duties to report offences to ASIC are less stringent: only offences that materially contributed to the failure need to be reported.
  • There is only one, final dividend
  • There are no meetings and no committee of inspection. All decisions will be taken by creditors using the ‘Proposal Without a Meeting’ procedure.
  • Reporting requirements are relaxed.
  • Preferential payment recovery is limited to payments within 3 months before liquidation.

Like Small Business Restructuring, Simplified Liquidation is available once: a company cannot use it if one of its current or recent directors has been involved in a Simplified Liquidation in the past 7 years.

Given the cap on liabilities, we think simplified liquidation is a useful reform.  It mirrors what often happens in efficiently run, small liquidations.  While the least radical of the government’s policies, it is the one that is most likely to be useful to creditors and business operators, and is likely to endure.

Author: Peter Sheppard, Director

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