Small Business Restructuring Process
On 10 December 2020 the Federal Government passed the Corporations (Corporate Insolvency Reforms) Act 2020 (Cth) which included measures designed to assisting small business with restructuring as well as a simplified liquidation.
These laws commenced on 1 January 2021 and are now another option available to eligible small business that are suffering financial distress.
Over the course of two blogs we will provide a breakdown of the key components of both these new reforms.
SMALL BUSINESS RESTRUCTURING PROCESS
The key component of the reform is the introduction of a Small Business Restructuring Process (“SBR”) which allows for a “debtor-in-possession” model of restructuring. In lay terms – the company director remains in control of the business during the restructuring process.
Eligibility Criteria
For a small business company to be eligible for the SBR they must meet the hurdle requirements:
- All taxation lodgement obligations are up to date
- All outstanding employee entitlements (including super) are paid (this does not include accruals that are not due)
- Debts to external creditors of less than $1 million (excluding employees)
- Not have been through the process or used a simplified liquidation in the last 7 years – the same rule applies to directors of the company in the last 12 months
If a small business is eligible the director appoints a Small Business Restructuring Practitioner (“SBRP”). Registered Liquidators can act as SBRP’s automatically. There has also been an introduction of a specific class of liquidator that can only undertake SBRP’s and not other liquidations or external administrations. Please ensure that your advisor is appropriately qualified ARITA: Beware of Dodgy Advisors
Once appointed the company must disclose and advertise that it has commenced an SBR and appointed and SBRP.
The Restructuring Process
During the restructuring process (20 business days) the director is responsible for business decisions and continues to pay employees and creditors incurred after the appointment of the SBRP. These debts are not covered by the restructuring process. Suppliers to a company undertaking a SBR will need to consider on what terms and conditions they continue to supply in circumstances where there is no recourse against the company or the director should the proposed restructuring plan fail.
Directors must obtain approval from the SBRP if they wish to conduct a transaction outside the ordinary course of business.
If during the process the SBRP identifies that the eligibility criteria was not met the process ends. The process may also end if there was a material omission in the information provided to the SBRP by the company, the court orders the process end, and external administrator is appointed to the company or the plan is rejected by creditors (see below).
The Restructuring Plan
The role of the SBRP during an SBR is to assist to develop a restructuring plan. Creditors then get to vote on the plan during a 15 business day decision period. Related creditors do not get to vote. If the plan is accepted the company continues and creditors are paid in accordance with the plan by the SBRP who administers the plan.
The plan does not need to pay creditors in full.
The plan will bind all creditors whether they participated or not.
Secured creditors (banks and the like) are only effected to the extent its claim exceeds the value of the security or otherwise voted in favour of the plan. Otherwise a secured creditor is free to deal with their security.
A plan is considered accepted if a majority of creditors in value who have provided their statement to the SBRP, accept the plan.
Plan Acceptance
If the plan is accepted and completed then the company is released from all debts under the plan and continues to operate.
Plan Rejection
If the plan is not accepted control remains with the director of the company. It does not automatically result in an external administration of the company. However directors would need to be cognisant of their duties and their personal exposure to insolvent trading for debts incurred after the plan failed.
Plan Termination
If the plan is terminated due to non compliance with its terms, all debts under the plan become immediately due and payable. Again directors will need to be cognisant of the personal exposures including directors duties and insolvent trading. An external administrator being appointed is not automatic.
A plan can also be terminated if the plan is conditional and a condition is not met. Or an external administrator is appointed to the company.
Transition Period
Between 1 January 2021 and 31 March 2021 directors can lodge a notice of intent to access the restructuring process by publishing the declaration on the insolvency notices website maintained by ASIC and lodging the requisite form with ASIC notifying them that the declaration has been made. By doing so a director can continue to avail themselves of the temporary insolvency relief (including insolvent trading). See DyeCo COVID Safe Harbour blog for details on the temporary relief measures.
Want to know more
Please call anyone of our five registered liquidators at Dye & Co – who are all able to advise on the best options available for you, your company or that of your client, including acting as the SBRP.
Factsheets
Factsheet: Australian Government: Treasury
Australian Securities and Investments Commission (ASIC): Temporary Restructuring Relief
Australian Securities and Investments Commission (ASIC): Restructuring and the Restructuring Plan