Small Business Debt Restructuring

Is your business struggling financially? It's important to know your options.

On 24 September 2020 the Federal Government announced changes to the insolvency regime in Australia. Two of the key proposed changes provide for:

  • A debt restructuring process; and
  • A simplified liquidation process.

These changes came into effect on 1 January 2021. The key eligibility criteria for the new processes are:

  • Liabilities of less than $1 million;
  • Fully paid employee entitlements; and
  • Up to date tax lodgments.

Debt Restructuring

The small business restructuring process sees the directors of a company retain control of the assets and affairs of the company during the restructuring process under the supervision of a small business restructuring practitioner (“Restructuring Practitioner”). There is a moratorium on enforcement action, similar to that currently in place under the voluntary administration process.

During the restructuring of a company a creditor cannot enforce any guarantee given by a director or a director’s spouse in relation to a company debt.

The directors would work with the Restructuring Practitioner for 20 business days to create a plan to restructure the company. The Restructuring Practitioner must certify the plan and creditors then have 15 business days to vote on the plan. If 50% of the creditors by value vote in favour of the plan, it will become binding. In that case, the Restructuring Practitioner will administer the plan.

Simplified Liquidation

The simplified liquidation process would see simplification of the regulatory obligations of the liquidator and a limitation on the circumstances in which unfair preferences can be clawed back.

Specifically, the Regulations provide that a transaction that is an unfair preference cannot be clawed back if no creditor involved in the transaction is a related entity of the company and the transaction was entered into:  

  • more than three months before the relation back day; or 
  • between the date of liquidation and three months before the relation back day and results in the creditor receiving no more than $30,000.  

The 'Debtor in Possession' Model

A key feature of the Small Business Insolvency reforms is that the Restructuring Practitioner does not take over the business, but rather assists the business to implement the restructuring plan.  This has been referred to as a ‘debtor in possession’ model and it allows business to stay in control and continue trading. 

What is Restructuring?

Restructuring is a corporate management term for action taken to reorganise or change operations, structures or financial accommodation of a company for the purpose of making it more profitable, better organised for its present needs or the elimination of financial harm.

Restructuring activities can range from small projects aimed at improving efficiency and profitability, to more detailed transformational processes, such as asset or business divestments and/or managed wind downs. The courses of action that, therefore, might form part of a restructuring plan will depend on the company’s particular circumstances but may include:

  • Operational restructuring, to identify causes of operational underperformance and develop strategies to improve performance.
  • Debt refinancing or consolidation.
  • Financial restructuring via negotiations with creditors and/or the conversion of debt to equity.
  • The sale of a business or asset(s).
  • Wind down of a business.

Eligibility

As set out above, the key eligibility criteria for the new processes is:

  • Total liabilities of less than $1 million;
  • Fully paid employee entitlements; and
  • Up to date tax lodgments.

Better Outcomes for Creditors

The debtor in possession model of the Small Business Insolvency reforms has the potential to lead to a better return for creditors on amounts they are owed.  Namely, it allows a business to continue to trade to pay its debts.   Additionally, if done properly the process has the potential benefit of a continuing commercial relationship with the small business beyond simply the repayment of amounts currently owing. 

Creditors can take some comfort from having the Restructuring Practitioner assisting the business, which will hopefully prevent rogue operators from misusing the process.

When to Act

A Director who suspects that a company is or may become insolvent should take action immediately, including the any of the following:

  1. Consult an experienced Insolvency & Restructuring Lawyer for preliminary advice.
  2. Verify that all Returns, Activity Statements or the like required to be lodged under any taxation laws have been lodged or immediately take steps for any outstanding items to be lodged promptly.
  3. Verify that all employee entitlements that are due and payable have been paid.
  4. If any employee entitlements are overdue, if possible, pay outstanding entitlements or seek urgent advice from an experienced Insolvency Lawyer &/or Insolvency Practitioner.
  5. Take prompt steps to ensure that the company records are up-to-date and that current Management Statements are available for the Directors and their advisors to properly evaluate the company’s financial position and to give appropriate advice in relation to viable restructuring options and outcomes.
  6. Develop a preliminary restructuring plan.
  7. Defer incurring any fresh debts or unnecessary expenditure.
  8. Avoid advancing further funds to the company unless absolutely necessary. Where it is necessary, obtain a written loan agreement with appropriate security over the company’s assets.

Call now to speak to an experienced Small Business Insolvency Lawyer