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Small Business Restructuring – what we now know and how you can take advantage of the regime

In December 2020, we published an article discussing the impending small business restructuring regime that was still being developed. For more information read - Insolvent trading tips for directors

Now that we are well into 2021, the new regime is in place with clearly defined parameters and eligibility criteria. As will become clear from our comments below, directors need to act swiftly to take advantage of the reforms.

To have ongoing access to the temporary relief measures that were put in place last year in response to the COVID-19 pandemic, a company is required to file a notice of its intention to access the restructuring process to its creditors on ASIC’s publication website. This measure is only available until 31 March 2021. Any notice published is valid for three months from the date of publication and if no restructuring practitioner (RP) is appointed during those three months, the standard laws regarding creditor’s statutory demands and insolvent trading are restored. 

This bulletin seeks to provide some high-level guidance to directors on the four key stages of the restructuring regime:

1.     eligibility

2.     proposal

3.     acceptance

4.     plan.

This article should not be considered a substitute for individual tailored advice specific to you or your company. If you would like further advice, Bartier Perry can help.

Stage 1 - Eligibility

The eligibility criteria are important to consider and includes:

  • the business must be operated as a company

  • the company has no more than $1 million in liabilities

  • before a plan is offered to creditors, the company:

    • can pay all entitlements of its employees that are due and payable; and

    • has lodged all outstanding documentation and returns with the ATO

  • neither the company, nor its current or previous directors in the last 12 months, have utilised small business restructuring or simplified liquidation in the 7-year period preceding the appointment of the RP.

Directors will need to sign a declaration that the company is eligible however you should consult with a RP or lawyer to confirm your company’s eligibility.

Stage 2 - Proposal Period

The proposal period is a duration of 20 business days in which a company must appoint a RP and develop a restructuring plan and documentation. This strict timeframe might be extended for a further 15 days in some circumstances.

Appointment of RP

To appoint an RP the directors of a company must hold a meeting in which they resolve that the company is insolvent or likely to become insolvent and an RP should be appointed. An RP is required to provide written consent before they can be validly appointed as an RP of a company.

The RP is paid a fixed fee for the restructuring, agreed between the RP and the company prior to appointment.

Once the RP is appointed the Company is required to disclose the appointment.

It is important to be aware that once a company has appointed an RP the company is restricted from the future use of an RP or simplified liquidation again for the next 7 years. Further, this restriction extends to all directors of the company and effectively bars those directors from appointing an RP (or utilising simplified liquidation) in any other company of which they are a director.

Development of restructuring plan and documentation

The job of the RP is to help the directors of the company develop a three-year (or shorter) plan for the company and put together the required information to be sent to the creditors, and not to unilaterally dictate the plan the company should adopt. This is another benefit of the new regime, allowing directors to maintain a higher level of control over their companies and the plan adopted by creditors.

The required documents are the plan (which needs to set out the cost of administering the plan, among other things) and a restructuring proposal statement which includes a list of each of the company’s creditors and how much they are owed.

The plan and proposal statement are then sent to the creditors.

Continued trading during proposal period

The directors remain in control of the company during the restructuring period which means the business can continue trading, if the directors decide this is feasible.

Directors and the company continue to be responsible for the operation of the business, should they continue to operate it, and for paying employees and any creditors for debts incurred after the date that the RP is appointed. These debts are not included in the restructuring and must be paid in the ordinary course of doing business.

Stage 3 - Acceptance Period

Once the creditors have been sent the plan and the restructuring proposal statement, they have a period of 15 business days to review the material and decide whether to accept the plan.

Creditors can dispute the quantum of the debt owing to them as it is declared in the restructuring proposal statement during this period. The RP is required to deal with these disputes.

The plan is accepted if the majority in value of creditors accept it. Related creditors do not get to participate in the process of accepting a plan, such as non-arm’s length loan entities.

Stage 4 - Plan

Once a plan is accepted by the creditors, it is important that the company adheres to the steps in the plan. If a plan is not able to be complied with, for whatever reason, the RP needs to be informed immediately.

A plan can come to an end in a number of ways, including:

  • the terms of the plan are completed

  • there is a contravention of the plan not remedied in 30 days

  • the plan is terminated because the terms cannot be complied with

  • the court makes an order terminating it

  • an external administrator, such as a liquidator, is appointed.

If the plan is complied with and completed, the company is released from all debts disclosed in the plan, and able to continue operating.

In the scenarios where the plan is terminated because it cannot be or is not complied with, all debts dealt with in the plan become due and payable immediately. At this point the directors will be required to make the usual decisions about the future of their company, whether to put the company into voluntary administration or appoint a liquidator.

It seems likely that the latter position would apply subject to the views of the court and the external administrator in the event the other scenarios occur.

Key takeaways and comments

The new regime has been generally well received, in theory, as it is a genuine attempt by the government to simplify and de-cost the insolvency process, something which segments of the business community have been hoping for years.

However, being a new untested regime, it will be interesting to see what, if any, amendments become necessary for the actual implementation of the regime. Anecdotal reports to date are that SME’s are not rushing to take advantage of the small business restructuring regime.

Some of the questions and concerns raised in relation to the reforms to date are:

  1. whether allowing the directors who governed the company into trouble in the first place to remain in office is the best approach. Of course, this will depend on the circumstances of the financial distress a company finds itself in and for many COVID-19 could not have been predicted and even the best director would have difficulty navigating a once profitable business through these unprecedented times.

  2. whether suppliers would be willing to, or could reasonably be expected to, extend credit to a business that is employing this new regime. This will be challenging to navigate when almost all businesses are facing financial headwinds to some extent in the current climate.

  3. whether the regime will ultimately end up being sufficiently low in cost to make adopting this approach attractive to small businesses and their owners.

  4. whether directors will be keen to use the simplified restructuring process over the regular DOCA process, in circumstances where related parties are unable to vote on any restructuring plan.

The moratorium on directors’ liability for insolvent trading during the COVID-19 period from March 2020 ceased on 31 December 2020, however, theoretically, these claims can be pursued later if the company goes into liquidation. Using the new regime may be a good way to clean up a company’s debts, and deal with any hangover insolvent trading claims. It is worthwhile for directors to be aware of this issue and take steps to proactively manage insolvent trading claims, if applicable.

While the actual impact and effect the new small business restructuring process will have on business is still largely unknown, by all accounts it is a step in the right direction on the journey to simplify and de-cost insolvency for businesses that have no other choice. This can only be a good thing as businesses, and the world generally, continue to adapt to the new normal and viable businesses are needed to remain productive into the future, even if after a period of temporary financial distress and restructure.

If you have read this article and think that the small business restructuring regime might be able to help you or your company, our insolvency and restructuring team can help. Reach out to the team at Bartier Perry for tailored advice and assistance.

Authors: Gavin Stuart and Emma Boyce