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Small businesses in financial distress – A new way

The Federal Government has announced a simpler and more flexible insolvency process for owners of “financially distressed but viable” small businesses.  This will make it easier and less costly for such businesses to restructure their debt and continue trading, making it a much more attractive option than the existing voluntary administration and liquidation regimes.​

Out of balance

Whilst sometimes we might lament the incursion of American culture into Australia, this initiative, drawn from America’s Chapter 11 bankruptcy model, is actually welcome.  The introduction of the voluntary administration regime in the 1990s was also a welcome softer alternative to liquidation, but both are costly, directors forfeit control of their business, and these regimes still harbour an element of punishment and public shaming for business owners.

These options currently available for distressed businesses are perhaps still out of balance with fostering entrepreneurialism and calculated risk-taking – essential ingredients in making a smaller business a bigger one, and creating employment and wealth along the way.  They are also not fit for purpose in the COVID-19 environment for many distressed, but not necessarily doomed, businesses.

A new way

The damage done to businesses in the wake of the COVID-19 pandemic has necessitated responsive changes to help them survive.  In this latest initiative, from 1 January 2021, a new formal debt restructuring process will be available for incorporated businesses (presumably including trustee companies) with liabilities of under $1 million.  The details of what counts as a liability, and quantifying them, are not yet known (eg, accrued employee entitlements, leases, contingent liabilities, etc).

The purpose of this new debt restructuring process is to offer small businesses in distress, but still viable, a simpler process for coming to an arrangement with creditors, and trade on to the other side of this crisis.  The features of this new process for eligible businesses include:

  • The directors maintain control of the business.
  • Appointment of a “small business restructuring practitioner”.  A wider range of practitioners (typically, Chartered Accountants, CPAs) beyond registered company liquidators will be able to register for this new class of insolvency practitioner, who will be limited to providing services under this new process.  The practitioner will not take on personal liability for any company debts, nor be responsible for managing day-to-day affairs.
  • A debt restructuring plan is developed with the assistance of the practitioner, and is put to creditors within 20 business days of appointment.  The vast majority of plans would likely involve creditors receiving something less than 100 cents in the dollar.
  • Creditors vote on the plan within 15 business days.  Voting power is weighted by value of debt owed to a creditor.
  • If more than 50% of creditors by value vote in favour, the practitioner oversees implementation of the plan.
  • If 50% or less vote in favour, the process ends, and the directors may choose another insolvency process.

There will be no change to the rights of secured creditors.

Existing temporary insolvency relief

Temporary relief measures implemented in March (eg, relief from insolvent trading liability) will cease after 31 December 2020.  As a transitional measure, eligible small businesses will be able to declare to creditors an intention to access the new simplified debt restructuring process.  Those temporary relief measures will then continue to apply to that business for up to a further three months, but not beyond 31 March 2021.

Who should consider this

This simpler debt restructuring regime is subject to the required laws passing Parliament, but that shouldn’t stop anyone who would be eligible from considering them now.  Ask yourself these kinds of questions:

  • Can my business pay its debts as they fall due?
  • Have my business’s creditor days been getting longer over the last six months?
  • If my business is receiving JobKeeper, will the above only get worse when the subsidy ceases?
  • What do I conservatively predict for revenue recovery in my business?
  • Will that predicted revenue recovery be sufficient to reduce creditor days in time?
  • Can my business service its finance obligations now?  If operating under any temporary relief from financiers, can the obligations still be serviced when that ends?

Other commercial and tax implications will need to be considered, such as the consequences under the commercial debt forgiveness rules, credit rating, and so on.  Also, in many cases, the Australian Taxation Office may well be the dominant creditor vote.

Talk to your trusted Nexia Edwards Marshall NT Advisor about this simpler debt restructuring process, and how we can help you avail yourself of it.  Although details are not yet available, we anticipate that Nexia Edwards Marshall NT will be offering the services of a registered small business restructuring practitioner.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.

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