Insolvency Reform to Support Small Businesses

What is Insolvency Reform?

The year 2020 will not be forgotten any time soon and the impact of COVID-19 will remain well beyond the release of a vaccine. The pandemic has had no boundaries with the small business sector one of the hardest hit. An unprecedented amount of businesses have been placed under financial distress and the government has responded by announcing insolvency reform that will help support small business.

Insolvency reform comes on the back of the positive results of the temporary relief measures that were implemented earlier in the year. Changes to safe harbour provisions resulted in a decrease in the number of businesses going into external administration. The new insolvency reform package which will come into effect on 1 January 2021 will focus on three key areas:

• New Debt Restructuring Process: a less complex restructure process will support small businesses and maximise their chances of survival.
• Simplified Liquidation: faster and lower-cost liquidation with the aim of increasing the amount of money retuned to creditors and employees.
• Complementary Measures: included to ensure insolvency sector can respond to both short term and long-term support demands and needs of small business.

Small Business Restructure Process

A tumultuous year has highlighted the need for a more efficient and effective insolvency system that will provide sound foundations for economic recovery. Expanding on current corporate insolvency options will allow eligible businesses a better opportunity to recover and improve efficiency for those that are required to wind up. The reforms have considered all parties involved including owners, creditors, and employees. Below is an overview of the new restructuring process as per the legislator.

Overview of new restructuring process

First 20 Business Days

1. The initial step is for the directors of a distressed company to appoint a restructuring practitioner. The practitioner will determine if the company is eligible to access the simplified restructuring process.
2. Creditors are them provided with a notice of process commencement by a technology neutral method such as an online portal. The notice will outline how relevant information can be accessed.
3. The next phase is the development of a restructuring plan. The practitioner will support with the review of the company’s financial affairs and assist the directors in developing a business restructure plan.
4. The plan and other relevant information will be made available to creditors.

Next 15 Business Days

1. The creditors will have a period of 15 business days to vote on the proposed restructuring plan. They will also have to verify proof of debt through an online portal or other tech neutral means.
2. Approval will be determined based on a majority of unrelated creditors by value. Only those who respond by the deadline will be accepted.
3. YES Vote: The plan commences, and the practitioner is appointed to oversee its implementation and execution.
4. NO Vote: The process ends. Directors may choose to enter another insolvency process.

Who is eligible?

The process will be available to any incorporated small business with liabilities that total no more than $1 million. Any outstanding employee entitlements must also be paid prior to a business restructuring plan being presented to creditors.

Currently, small and medium enterprises are part of a uniform system which imposes the same duties and obligations as large organisations. The ‘debtor in possession model’ addresses this issue.

‘Debtor in Possession’ Financing

Part of the insolvency reform includes a shift towards a ‘debtor in possession’ model. This means that business owners will remain in control while working with a restructuring practitioner. The model, which adopts features found under Chapter 11 of the US Bankruptcy Code, has several distinct features. Under this model, business owners will:

1. Complete day-to-day business obligations while the business restructuring plan is developed.
2. Work with a restructure practitioner to develop and put forward a restructuring plan.
3. Provide information to the practitioner with respect to financial affairs and identification of creditors

In normal circumstances, it is difficult for a business that is facing financial distress to obtain additional funds from lenders. Under the new reforms, if prescribed by the restructuring practitioner, businesses will be able to secure additional financing from lenders to remain in business and maximise the possibility of a successful restructure. Debtor in possession financing provisions will protect business owners from creditors.

Small business restructure practitioner role

Under the new process, the role of a restructure practitioner has been simplified when compared to that of an administrator under insolvency framework. The roles and responsibilities of restructure practitioner consist of the following:

1. Help determine if a company is eligible.
2. Support the company to review its financial affairs.
3. Assist in the development of a business restructuring plan.
4. Certify the small business restructure to creditors.
5. Once the plan is implemented, manage disbursements.

Restructure practitioners will not be required to manage the day-to-day affairs of a company and will be free of any personal liability. To provide a more cost-effective service, practitioners will be eligible to register as a small business restructuring practitioner only. Registered liquidators will also be able to manage the process.

Low-Cost Liquidation

One of the underlying benefits of the insolvency reforms is a simplified pathway to liquidation for small businesses. The current framework is suited to large companies whose failure is overly complex. This contradicts the fact that most liquidations in Australia relate to small businesses.

The new simplified and streamlined process will result in low-cost liquidation. A reduction in requirements surrounding investigation and reporting will save time and minimise costs. The savings will maximise the value of recoverable assets with creditors and stakeholders such as employees to benefit. Low-cost liquidation will be achieved by:

1. Removing requirements to call creditor meetings.
2. Simplifying dividend process. Creditors will receive a return proportionate to their debt.
3. Using technological advances for voting and other communications.
4. Liquidators only required to report potential misconduct where there are reasonable grounds
5. Applying the same threshold to the eligibility criteria i.e. liabilities of less than $1 million

For more information on the new small business restructuring process and to see if you are eligible, contact Australian Debt Solvers today.