Jones Partner

Insolvency Reforms to Support Small Business – Will You Be Eligible?

18/11/2020 by Bruce Gleeson

The Federal Government announced reforms in October 2020 aimed at assisting small business to restructure when they are in financial distress, which has been particularly evident during the Covid 19 pandemic. The reforms have been designed to reduce the complexity and costs of the small business in restructuring their financial affairs with a view to continuing into the future when compared to the present option available, that being a Voluntary Administration (“VA”) process.

In what some industry participants are calling a VA light process and likely to be available from 1 January 2021, after all the temporary relief measures regarding insolvent trading and pursuit of debts end, the Small Business Restructuring Plan will be available.

So why reform now?

  • During Covid 19 the number of corporate insolvencies have dropped by approximately 50% when compared to the same period in 2019. This is largely due to the temporary measures that were put in place to keep businesses afloat which will expire as at 31 December 2020. Consequently, it is forecast when these measures end that financial difficulty is likely to increase in 2021 and therefore it is important that small business have other options available to them.
  • The reform is part of the Federal Government’s Jobmaker plan and it is hoped that it will enable more Australian small businesses to quickly restructure and better survive the economic impact of Covid 19.
  • Small businesses are historically at the highest risk of insolvency. For example:
    • approximately 80% of corporate insolvencies involve less than 20 employees; and
    • 75% of corporate insolvencies have < $1million in liabilities.

The Process

Step 1 – up to 20 business days

  • The directors of a financially distressed company appoint a small business restructuring practitioner. The practitioner confirms the company is eligible to access the restructuring process.
  • A notice of process commencement is provided to creditors by a technology neutral means, which outlines how information relevant to the process can be accessed.
  • A restructuring plan is developed by the company directors with the support of the practitioner. The practitioner certifies the plan based on their assessment of the company’s financial affairs.
  • The plan, accompanying information and the certificate are made available to creditors.

Step 2 – up to 15 business days

  • Creditors vote on the plan, and verify proof of debt through an online portal or other tech neutral means. Approval requires a majority of unrelated creditors by value who respond by the deadline.
  • If a majority of creditors vote for the restructuring plan, the plan commences and the practitioner is appointed to oversee the plan.
  • If a majority of creditors vote against the restructuring plan, the process ends and the directors may choose to enter another insolvency process.

During steps 1 and 2 above, the small business directors stay in control of the day to day affairs of the business. This makes it significantly different to the VA process where control is handed over to the Voluntary Administrator when they are appointed.

What are the eligibility criteria?

  • The small business MUST be an incorporated entity.
  • It CANNOT have liabilities that exceed $1million – this includes related party liabilities.
  • MUST have all tax lodgements up to date – even if they have not been able to pay associated liabilities.
  • MUST have paid any employee entitlements which are due and payable before the plan can be commenced and put to creditors.

What about trading trusts?

Unfortunately, the reform does not deal with trading trusts used by small business and how trust assets would be dealt with.

What should small businesses (or their advisers) who may be in financial distress do?

With this impending reform, there are now more options to be considered for small business directors when looking at how they can move forward. My key tips are:

  • Small business directors should be actively encouraged to seek advice as soon as they are experiencing financial distress.
  • Such advice should be obtained from a trusted advisor and someone who has the appropriate professional experience and registrations.
  • As a Registered Liquidator that has specialized in advising small business directors for over 25 years, I am able to help determine if the small business may be eligible for a restructuring plan, or if this is not possible, discuss and assist in implementing another plan to deal with financial affairs of the business.

For small business, they don’t need to take the trip alone, the sooner they get the right professional advice, they can start to focus on what their core skillset is, rather than being crisis managers and move forward.

If you would like to know more about the reforms and how they might work, please do not hesitate to get in contact with me.