Take up of restructuring for small businesses provided by the legislation enacted 1 January 2021 has been slow, but this may change now JobKeeper assistance has come to an end. The small business restructure reform is intended to provide a path back to solvency for companies impacted by the global pandemic.
The goals of the latest reform and eligibility parameters
Key elements of the legislation include a new debt restructuring process for eligible small businesses. This regime, supervised by a Small Business Restructuring Practitioner (SBRP), enables financially distressed companies to restructure their existing debts by proposing a restructuring plan to creditors within 20 business days.
During the restructuring period, the director will remain in control of the company, and capable of both entering into transactions and dealing with company assets - in the ordinary course of the company’s business. The SBRP will have to grant permission for any transactions or sale of assets outside of the ordinary course of the company’s business.
To access the Small Business Restructuring process, companies must satisfy the following eligibility criteria:
Liabilities
The total liabilities of the company on the day that restructuring begins does not exceed $1 million (a liability is defined as any liability to pay an admissible debt or claim. The Corporations Regulations include the test for relevant liabilities and their calculation.)
Entitlements
Outstanding employee entitlements are all up to date and remain that way (including any new instances of employee resignation, in which case employee entitlements must be paid out.)
Taxes
All ATO lodgements are up to date. A company may have tax debt, but lodgements must not be overdue. In many cases, poor accounting systems may result in everything not being properly lodged, and directors will have to rectify this for their business to be eligible for restructuring.
The role of a Small Business Restructuring Practitioner
Companies eligible to appoint a SBRP will have already met the eligibility criteria, and the board will have resolved that it has reasonable grounds for suspecting that it is insolvent, or likely to become insolvent.
The SBRP acts as an agent for the company in respect to the restructuring process, preparing a declaration in relation to the restructuring plan, administering the plan, and resolving disagreements relating to a creditor’s admissible debts or claims. The SBRP also manages the distribution to creditors under the restructuring plan.
While the latest legislation created a special class of SBRPs, which are qualified only for the newest restructuring processes, it is advisable to retain the services of a fully qualified insolvency practitioner who can provide advice on all available options, whether that is restructuring, liquidation or another option.
Initial slow take up
Thus far, the new restructuring option has seen very little take up. In the past three months only 19 companies declared with ASIC they were eligible to access the Small Business Restructuring regime, however less than 10 have progressed to appointing an SBRP. It is expected this slow take up is in part due to the tight liability cap set on eligibility. Companies with more than $1 million in liabilities simply are not eligible to access this regime. The cessation of the JobKeeper program on 28 March 2021 may see more small businesses seeking assistance and professional advice.
Common obstacles to continued trading
Directors continue to control and trade the business during the restructure. This differs from other insolvency appointments where the external administrator takes control, and provides reassurance and comfort to suppliers that ongoing trade expenses will be met.
Directors need to carefully consider the impact entering restructuring has on secured creditors, any overdraft facilities and key suppliers. Businesses that rely on credit may find these terms restructured or cancelled. Key stakeholder considerations must be addressed, including how future trade will continue and be funded and ongoing financier and supplier support.
Some practical obstacles include:
Limited access to credit
Credit extended by banks or finance companies may be withdrawn once a business announces it has entered restructuring.
Limited access to payment acceptance options
Banks may suspend merchant accounts, making it impossible to accept credit card payments (to limit the bank’s risk of chargebacks.)
Impacted trading accounts
Suppliers may withdraw support, or demand COD arrangements.
Staff turnover
Once restructuring is announced, employees may become concerned about job security. Staff may leave, triggering payouts of employee entitlements.
Secured creditors and third party rights
While the company is preparing their restructuring plan, they are protected from third parties enforcing their security (some exceptions apply). It is vital companies consider and consult with their financier/lessors as to how their security will be dealt with. Secured parties are not bound by the restructuring plan, unless they choose to be, and after the plan is voted upon, will be free to enforce/sell or otherwise deal with their security interest.
When to seek help
Early intervention is key to exploring all available options for a business in distress. The restructuring legislation is complex so it’s vital to obtain professional advice from qualified practitioners. If you need help, contact your nearest BDO adviser.
Article originally published on AICD: https://aicd.companydirectors.com.au/membership/membership-update/directors-slow-to-file-for-small-business-insolvency-under-latest-reforms