what directors need to know about small business insolvency reforms

The goals of the latest reform and eligibility parameters

A key element of the legislation is a new debt restructuring process for eligible small businesses. The regime, which must be supervised by a small business restructuring practitioner (SBRP), enables financially distressed companies to restructure their existing debts by proposing a restructuring plan to creditors within 20 business days.

During the restructuring period, the director will remain in control of the company and be capable of entering into transactions and dealing with company assets that are in the ordinary course of the company’s business. For any transactions or sale of assets outside of the ordinary course of business, the SBRP must grant permission.

To access the small business restructuring process, companies must satisfy the following eligibility criteria:

Liabilities

The total liabilities of the company on the day that restructuring begins cannot exceed $1 million (a liability is defined as any liability to pay an admissible debt or claim. The Corporations Regulations include the test for relevant liabilities and their calculation.)

Entitlements

Outstanding employee entitlements must be up to date and remain that way (including any new instances of employee resignation, in which case employee entitlements must be paid out.)

Taxes

All ATO lodgements must be up to date.

A company may have tax debt, but lodgements must not be overdue. In many cases, poor accounting systems may result in everything not being properly lodged, and directors will have to rectify this for their business to be eligible for restructuring.

The role of a Small Business Restructuring Practitioner

Companies eligible to appoint a SBRP will have already met the eligibility criteria, and the board will have resolved that it has reasonable grounds for suspecting that it is insolvent, or likely to become insolvent.

The SBRP acts as an agent for the company in respect to the restructuring process, preparing a declaration in relation to the restructuring plan, administering the plan, and resolving disagreements relating to a creditor’s admissible debts or claims. The SBRP also manages the distribution to creditors under the restructuring plan.

While the latest legislation created a special class of SBRPs, which are qualified only for the newest restructuring processes, it is advisable to retain the services of a fully qualified insolvency practitioner who can provide advice on all available options, whether that is restructuring, liquidation or another option.

Initial slow take up

Thus far, the new restructuring option has seen very little take up. In the past three months only 19 companies declared with ASIC they were eligible to access the Small Business Restructuring regime, however less than 10 have progressed to appointing an SBRP. It is expected this slow take up is in part due to the tight liability cap set on eligibility. Companies with more than $1 million in liabilities simply are not eligible to access this regime. The cessation of the JobKeeper program on 28 March 2021 may see more small businesses seeking assistance and professional advice.

Common obstacles to continued trading

Directors continue to control and trade the business during the restructure. This differs from other insolvency appointments where the external administrator takes control, and provides reassurance and comfort to suppliers that ongoing trade expenses will be met.

Directors need to carefully consider the impact entering restructuring has on secured creditors, any overdraft facilities and key suppliers. Businesses that rely on credit may find these terms restructured or cancelled. Key stakeholder considerations must be addressed, including how future trade will continue and be funded and ongoing financier and supplier support.

Some practical obstacles include:

Limited access to credit

Credit extended by banks or finance companies may be withdrawn once a business announces it has entered restructuring.

Limited access to payment acceptance options

Banks may suspend merchant accounts, making it impossible to accept credit card payments (to limit the bank’s risk of chargebacks).

Impacted trading accounts

Suppliers may withdraw support, or demand COD arrangements.

Staff turnover

Once restructuring is announced, employees may become concerned about job security. Staff may leave, triggering payouts of employee entitlements.

Secured creditors and third-party rights

While the company is preparing their restructuring plan, they are protected from third parties enforcing their security (some exceptions apply). It is vital companies consider and consult with their financier/lessors as to how their security will be dealt with. Secured parties are not bound by the restructuring plan, unless they choose to be, and after the plan is voted upon, will be free to enforce/sell or otherwise deal with their security interest.

When to seek help

Early intervention is key to exploring all available options for a business in distress. The restructuring legislation is complex so it is vital to obtain professional advice from qualified practitioners.