On 11th December 2020 Federal Treasurer Josh Frydenberg announced that the Australian Government would be making changes to Australia’s insolvency framework to help small businesses who have been affected by the economic impacts of COVID-19.
The proposed changes came into effect on 1st January allowing businesses with liabilities of less than $1 million to restructure their debt, similar to the Chapter 11 bankruptcy model in the United States.
The one-size-fits-all “creditor in possession” model has been replaced with a new “debtor in possession” model. This new model will enable businesses to restructure their debts without giving up control to appointed administrators.
Small business restructuring practitioners are given a twenty-business day period for the development of a business’ restructuring plan, followed by fifteen business days for creditors to vote on the plan.
Craig Dangar from C&D Restructure & Taxation Advisory believes that debtor in possession offers many benefits for Australian businesses who are currently struggling to recover from current global pandemic. “Debtor in possession offers many advantages. The business dealing with hardship will be given a small amount of time to negotiate with creditors and potentially avoid insolvency. Debtor in possession is substantially more advantageous than liquidation or administration as the costs are substantially lower. It is also estimated that the returns to creditors will be substantially higher. For a business needing to restructure its operations the opportunity that arises from these new rules are significant and have huge ramifications as they may be the difference between continuing to operate or needing to close down permanently” says Mr. Dangar.
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 now and into early 2021” says Mr. Dangar.
“The opportunity for businesses to cost effectively restructure is important”, says Craig Dangar. He notes that the general costs for restructure to date have been prohibitive and for many businesses are simply out of reach. Where businesses can cost effectively seek advice, there is a better chance for the business to continue”. He is concerned however, about businesses that may only be utilising the rules to kick the can down the road for a few months and that there may not be a viable business long term. These changes need to result in a business being able to commercially restructure and have longevity.
Craig Dangar continues by predicting that since the new changes are at a lower cost this may result in some businesses undertaking an unnecessary restructure. He says that “there is a worry that some businesses might need to undertake liquidation rather than simply be restructured and consequently time and money may be wasted through this process”.
Transitional arrangements made for directors and practitioners to familiarise themselves with the governments new process have been proposed to operate until the 31st March 2021. “Arbitrary dates are always a concern, and there is a worry that there will be a rush to new applications prior to this without necessarily understanding the long-term implications”. Craig Dangar cautions that businesses should understand what the future looks like, and to engage early with their advisors to determine the best course of action.
The newly introduced insolvency reforms cover about 76 percent of Australian businesses subject to insolvencies, and 98 percent of those eligible businesses have less than 20 employees. Craig Danagr says that “for larger businesses it may be an informal approach that results in an insolvency lite, or a reduced cost approach. For these larger firms communication is the key. It is recommended that these businesses understand their options early and that any determination is made in conjunction with their professional advisors says Craig Dangar.
As the Australian economy continues to recover from the fall out of the covid-19 pandemic it is crucial for distressed businesses to be given an opportunity to either restructure or liquidate in a quick and inexpensive manner.
Craig Dangar believes “the new rules have given us a better approach for smaller businesses that were priced out of the traditional insolvency route. These will allow smaller businesses to explore their options and to develop commercially sensible approaches. In the absence of these changes many businesses would have simply shut the door and let the process run its course, without necessarily achieving the best results for stakeholders says Craig Dangar.