In its bid to continue to assist small businesses experiencing financial distress during the pandemic, the federal government has proposed new insolvency reforms for SMEs with liabilities of less than $1 million, these are referred to as debtor in possession and are similar to Chapter 11 in the United Stated. These reforms will require struggling businesses to work with restructuring experts in a cost effective manner to forge a path forward.

There were always concerns about what would happen when the government’s temporary relief measures expired at the end of the year, and the proposed reforms are designed to better serve Australia’s small businesses, their creditors and employees and will enable SMEs to quickly restructure, avoiding costly, and generally inefficient insolvency processes. Where restructuring isn’t possible, the reforms allow for businesses to wind up faster and more cost effectively, maximising returns for creditors and employees.

The approach to focusing on the business owner retaining control means that there is a highly probably of businesses remaining in business, and allowing for an approach that ensures that the process is reflective of the underlying business. Craig Dangar notes that this is a much more practically and commercially sensitive approach for businesses that are struggling, giving sufficient breathing space to make decisions, without necessarily pulling the insolvency trigger (which it is often difficult to come back from). He notes that several businesses in Brisbane and Sydney in particular are exploring their options under this framework, hoping to be able to use the protections to properly restructure their businesses.

Craig highlights that by enabling owners to remain in control, businesses are more likely to engage earlier and not wait until it is too late, giving them the opportunity to restructure and increase their chances of surviving. Eligible businesses can keep trading while they develop a debt-restructuring plan that will ultimately be voted on by creditors, working closely with professional advisors, this period of time can be used for preparing comprehensive business and restructure plans.

Under the “debtor in possession” model, eligible businesses will work with specialist Small Business Restructuring Practitioners (SBRP) to restructure existing liabilities under a plan approved by creditors. Working closely with these practitioners, C&D is the conduit for businesses wanting to navigate their options in an independent manner. Craig Dangar welcomes the involvement of the insolvency profession as they are often portrayed as being slash and burn, whereas in his experience they are commercially focused but often limited in what they can achieve on limited budgets and with restrictive creditor terms, the new rules will give businesses more options.

Directors will remain in control during this process, this is a substantially improved approach as compared with a formal insolvency appointment. The role of the SBRP is to help determine if the company is eligible for the process; help support the company to develop a plan and review its financial affairs; certify the plan to creditors; and manage the disbursements once the plan is in place.

The process can take up to 35 business days, which includes 20 business days to develop the plan and 15 to give creditors time to vote on it. If more than 50 per cent of creditors by value endorse the plan, it is approved and binds all unsecured creditors. The team at C&D will assist you through this process, developing the plan and working with the SBRP to devise a restructure that works for the success of your business.

To address any transitional issues, eligible small businesses will be able to declare their intention to access the simplified process to its creditors. Following this declaration, the existing temporary insolvency relief would then apply for a maximum period of three months, until the business is able to have access to a SBRP. Like most things in this realm, it is better to flag this earlier rather than waiting until the last minute.

Safe Harbour warning

Directors should also be aware that the Safe Harbour protections introduced in response to COVID-19 are due to expire on December 31, so now is the time to determine if their business can reasonably be expected to trade and meet their debts as and when they fall due. If you need guidance contact the team at C&D, we have offices in Brisbane, Sydney, Melbourne and Geelong.