Schemes of Arrangement are a seldom used external administration option to restructure a company. The process was largely replaced by the Voluntary Administration process that commenced in 1993; however still has its place when the right circumstances arise.  

On 2 August 2021, Treasury opened consultation on improving schemes of arrangement to better support business. The consultation paper can be found here.

In particular, the Federal Government is seeking stakeholder views on:

  • The appropriateness and impact of applying an automatic moratorium on creditor claims during formation of a creditor’s scheme (Note: Currently, no automatic moratorium is applied); and
  • Whether other improvements to schemes of arrangement could be made, including:
    • Scheme Approval Thresholds;
    • Cross-Class Cram Downs;
    • Debtor-In-Possession Funding;
    • Cross Border Recognition Issues; and
    • Creditor Protection.

Stakeholders are invited to submit their comments on the consultation paper up until 10 September 2021.

On the surface, the proposal put forward in the consultation paper in relation to the ‘automatic moratorium’ is similar to the moratorium regime which has been implemented in Singapore by way of the Companies Amendment Act 2017 (Singapore). The effect of these reforms in Singapore have, in effect, created a ‘light-touch’ debtor-in-possession regime, which has created a much more ‘debtor friendly’ environment in Singapore.

With the Federal Government introducing the Small Business Restructuring Process on 1 January of this year, it is clear that the Federal Government is open to the utilisation of debtor-in-possession regimes within the insolvency space.

However, with debtor-in-possession regimes increasing in popularity around the world, the question must be asked, ‘Is the debtor-in-possession model right for Australia?’

Careful thought must be had by Treasury in relation to this question, and particular focus should be applied as to what has and hasn’t worked within the Singapore regime.

The proposed reforms outlined in the consultation paper have raised various questions which stakeholders must consider before the 10 September 2021 deadline, including:

  • What behaviour, both positive and negative, do the proposed reforms incentivise?
  • What impact will the proposed moratorium regime have on Australian credit markets?
  • Would the proposed moratorium regime be available to all companies, or would it only apply to a certain few?
  • Would debt incurred during any such moratorium period, by a company utilising the proposed moratorium regime, have any priority treatment in liquidation?
  • Would payments made to creditors and other transactions made during any such moratorium period, by a company utilising the proposed moratorium regime, be subject to the voidable transactions regime?
  • What conditions must be satisfied for a company to access the proposed moratorium regime?
  • Would there be any restrictions on the company utilising the proposed moratorium regime in making payments, incurring debt, disposing of assets, granting security or entering into transactions outside the ordinary course of business during any such moratorium period?
  • Would there be any oversight of a company utilising the proposed moratorium regime during the moratorium period itself?

Supporting companies and directors whilst creditors’ schemes of arrangement are being negotiated is vital, however, it must not come at the expense of creditors and other stakeholders. As such any change to the existing regime must be carefully considered.

We will endeavour to provide you further updates surrounding this consultation paper and the proposed reforms as and when they become available.

About the author

Benjamin Mitchell is a Senior Insolvency Accountant at HLB Mann Judd Insolvency WA. Benjamin assists the Partners with the many Corporate and Personal insolvency appointments managed by the HLB Insolvency team.

If you have any queries about insolvency matters, please feel free to contact the team on 08 9215 7900.


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