Thousands of Australian businesses impacted by the covid-19 pandemic have been thrown a lifeline following the Federal Government’s decision to introduce small business restructuring reforms on 1st January 2021. 

The Federal Government’s insolvency reform package was passed by Federal Parliament on 11th December 2020. The new rules will offer a debt restructuring process intended to give eligible small businesses the opportunity to restructure their debts while the directors remain in control of the business. The reforms also offer a new and simplified liquidation process for small businesses. 

Eligible small businesses will be given access to a ‘debtor-in-possession’ restructuring process where a restructuring plan can be proposed to deal with creditor claims. Under the legislation, a secured creditor will only be bound by a restructuring plan to which the extent of the claim exceeds the value of its security, or if it votes in favour of the plan. 

Federal Treasurer Josh Frydenberg has labelled the reforms as the most significant changes made to Australia’s insolvency laws in the past three decades. According Mr. Frydenberg the changes are intended to: “reduce access costs for small business, reduce the time small business spends in the insolvency process, ensure greater economic dynamism and to help small businesses survive and avoid insolvency”.

The new processes aimed to help Australian businesses will be available to incorporated businesses with liabilities of under $1 million. The $1 million liabilities cap will cover close to 76% of Australian businesses currently subject to insolvency.

Prior to proposing a restructuring plan to its creditors, the insolvent business must make sure it has paid all employee entitlements that are payable, and that all of its tax lodgements are up to date. If it meets those requirements, it can commence with executing a plan and propose the plan for its creditors to vote on.

The timeframe for developing a plan is 20 business days and the timeframe for accepting the plan is 15 business days. However, this period can be extended where a creditor disputes the assessment of its claim in the proposal statement and a varied schedule is provided to creditors as a result.

The plan will be accepted if the majority of the company’s creditors vote to accept the proposal. Related creditors are ineligible to vote. Creditors with an acquired debt are only allowed to vote to the value of the price paid for the debt and the debts face value.

Craig Dangar contends that “for businesses wondering what the next twelve months will bring, this offers a circuit breaker, a chance to assess your business, but more importantly a re-start where the trading conditions during 2020 may have tested the financial capacity of the business to continue. Businesses should be comfortable to start their planning process now, as some hard decisions will need to be made in early 2021” says Mr. Dangar.    

Once the plan has been made, the directors and the restructuring practitioner implement it. The restructuring practitioner is responsible for receiving money and holds it on a trust, and then distributes it to the creditors.

The restructuring practitioner is also allowed to be involved in selling the property of the business for the benefits of the creditors. However, this can only be done if the directors request this form of assistance and the plan provides for it. The practitioner is unable to sell any company property subjected to a security interest, other than in the ordinary course of business, with consent given by the secured party or with leave of the court.

Even after the restructuring plan is accepted by creditors, the process can still be ended at any time by a resolution of the company’s directors or if the restructuring practitioner believes the company doesn’t meet the eligible criteria or if they believe it is in the best interests of the creditors for the restructuring to end.

The restructuring process will also end if the company fails to propose a plan to its credits within the timeframe of 20 business days or if the creditors vote against the plan. The restructuring process can also end the process if the restructuring practitioner cancels a proposal to make a plan after they become aware of relevant information being omitted or was incorrect or if there has been a material change in the company’s circumstances. The process can also end if an administrator or liquidator is appointed or if the courts decides to order that the process should end.

Craig Dangar says that “we are recommending that all businesses examine their options, one of which may be an informal arrangement or a structure negotiation with creditors where the Small Business Restructuring may not be appropriate. The primary concern is whether there is a viable business and often where a small business is ineligible there has to be a question mark over their solvency” says Craig Dangar.