On 1st January 2021 the Australian federal government’s small business insolvency reforms came into effect thus replacing the temporary insolvency protections which were introduced on 25th March 2020 during the peak of the covid-19 pandemic.
The reforms in the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 were passed through federal parliament on Friday 11th December as part of the 2020-21 federal budget.
These new changes made to Australia’s insolvency framework will give eligible businesses experiencing financial distress access to a new and simplified debt restructuring process or will allow them to enter a new simplified liquidation pathway to enable a quicker and cheaper liquidation process.
The new processes aimed to help Australian businesses will be available to incorporated businesses with liabilities of under $1 million. On top of this businesses will need to have paid all entitlements which they owe their employees and furthermore must be up to date with their tax lodgements.
Directors are only permitted to use the VA lite or simplified liquidation process once. Transitional arrangements made for directors and practitioners to familiarise themselves with this new process have been proposed to operate until the 31st March 2021.
These newly introduced insolvency reforms cover approximately 76 percent of Australian businesses subject to insolvencies, and 98 percent of those eligible businesses have less than 20 employees.
Craig Dangar from C&D Restructure & Taxation Advisory has welcomed the changes made on New Year’s Day. “It would have been good to have a few extras months but overall the timing is probably appropriate. We are, for all intents back to normal. This means that the rules are back to where they were, albeit there are some tweaks on the thresholds and the time to recover. We have noted that there has been a marked increase in claims being made” says Mr. Dangar.
Small Business Restructuring (VA Lite)
The new simplified debt restructuring process known as “Small Business Restructuring (VA Lite) consists of a debtor in possession model where the director remains in charge whilst a small business restructuring practitioner is assigned to formulate a debt restructuring plan”.
During the restructuring process the business experiencing insolvency has 20 business days to develop a plan. The creditors will than have 15 business days to vote on the proposed plan. During this period all enforcement proceedings and court proceedings by creditors are stayed. Furthermore, the rights of the secured creditors and property owns are proposed to be consistent with those applying under the VA process. In order to proceed, the proposal must be supported by at least 50% of creditors who vote. Furthermore, related party creditors will be excluded from the voting process.
Craig Dangar believes that giving businesses 20 days to develop a plan and 15 days to vote on the plan is a reasonable amount of time for businesses hoping to restructure. “I think it is a reasonable amount of time. both creditors and the business operator need certainty and one of the criticisms of insolvency is that it often takes too long, the timing is perfect to get things under control” says Craig Dangar.
A process of simplified liquidation will also be available to reduce the costs of liquidation for small business with the intention to increase returns to creditors. A Liquidator has to give creditors a minimum of 10 business days’ notice before they can adopt the simplified process. The simplified process cannot be approved if 20 business days have passed after the Liquidators appointment. The simplified process can also not be adopted if more than 25% of the creditors request for the liquidator to not follow the simplified liquidation process.
Small Business Restructuring – What Makes A Business Eligible or Ineligible for Restructuring?
These new changes made to Australia’s insolvency framework will give eligible businesses experiencing financial distress access to a new and simplified debt restructuring process or will allow these businesses to enter a new simplified liquidation pathway to enable a quicker and cheaper liquidation process.
“We are heading into uncharted waters and there is a lot of unknown, I would argue that, at the very least, businesses need to examine their viability before they commit to any course of action” says Craig Dangar.
For struggling businesses looking to determine if they are eligible for a restructure the company must have reasonable grounds “for suspecting current, or a likelihood of future, insolvency”. Once this is determined a Small Business Restructuring Practitioner (SBRP) should be appointed to oversee the restructuring process. The company must also ensure that the total liabilities of the company doesn’t exceed $1 million dollars on the day that the restructuring process is set to commence.
The company will be deemed ineligible if the company has previously utilised Small Business Restructuring. It will furthermore be deemed ineligible if “any of its current, and some former, directors have utilised Small Business Restructuring for another company of which they are a director within the period of 7 years preceding the desired appointment of a SBRP”. The company will furthermore be deemed ineligible if they are already subjected to “other forms of external administration or restructuring arrangements”. Craig Dangar believes that “this is a good approach; seven years may be a little long but overall it is a good decision”.
Who Can Act as A Small Business Restructuring Practitioner (SBRP)?
There is also a new class of registered liquidators established with respect to SBRPs under the Insolvency Practice Rules. This asserts that a person who is ‘connected with’ a company is not allowed to be appointed by that company to act as a SBRP unless a leave of the Court has been given.
A person who is ‘connected with’ a company includes;
- a debtor or, subject to certain exceptions, a creditor of the company or its related bodies corporate in an amount exceeding $5,000;
- a director, secretary, senior manager or employee of the company or a company that is secured party with respect to the company; or
- an auditor, or a partner or employee of the auditor, of the company.
The Act outlines that once a SBRP has been appointed such appointment cannot be revoked. However, the SBRP can be replaced if the SBRP chooses to resign. The Court also has the power to appoint a SBRP when a company is ‘under restructuring’ but doesn’t have a SBRP acting.
More About Insolvency Reforms
When asked about how these newly introduced insolvency reforms could have been improved Craig Dangar says that “this is a hard question and to one that there is no simple answer, if we compare ourselves to the rest of the world the Government response has been excellent, certain sectors would argue otherwise, but overall the response has been solid. I would propose that the thresholds may be expanded and that there should be a level of financial support for businesses to seek this advice” says Mr. Dangar.
For businesses that are ineligible for Small Business Restructure under the latest guidelines Craig Dangar suggest that “We are recommending that all businesses examine their options, one of which may be an informal arrangement or a structure negotiation with creditors where the Small Business Restructuring may not be appropriate. The primary concern is whether there is a viable business and often where a small business is ineligible there has to be a question mark over their solvency” says Craig Dangar.
The insolvency waters are rough and finding advice that focuses on you and your business can be difficult. For advice that is independent and without agenda give the team at C&D a call on 07 36086800 or schedule a meeting here via Calendly. We focus on commercial and practical solutions and are not afraid to have the tough conversations.
The team at C&D Restructure and Taxation Advisory are here to help. As part of the Vault Group we can offer the full suite of financial products and advice to help you navigate the business landscape. Schedule a meeting here via Calendly or give us a call on 1300 1 VAULT (1300 182 858)
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