Running a successful business takes a lot of hard work and with the covid-19 pandemic many Australian businesses are facing an uncertain future. Sudden lockdowns and social distancing rules have made it difficult for businesses to generate the amount of revenue that they used to make in a world before covid-19.

Once the governments covid-19 funding packages are discontinued in March, it is highly possible that there will be a large number of zombie businesses in Australia. This means that many businesses will only be able to afford to employ individuals who are on a JobKeeper subsidy and when that disappears more people will eventually lose their jobs.

When facing financial difficulty, it is important to be aware of the warning signs. Common signs of a financially distressed business include; poor cash flow, ongoing losses, creditors not paid within usual terms, suppliers putting the company on COD terms; letters of demands, judgments or warrants issued against the company; overdue taxes and superannuation liabilities or overdraft limit reached or defaults on loan or interest payments.

It is critical for businesses who are facing insolvency to be proactive and seek advice from a trusted advisor. A trusted advisor such as your; lawyer, accountant and financial advisor will work with you to formulate a plan to help your business undergo a successful restructure or assist you with finding a suitable pathway into liquidation.

On 1st January 2021 the Australian federal government’s small business insolvency reforms came into effect thus replacing the temporary insolvency protections which were introduced on 25th March 2020 during the peak of the covid-19 pandemic.  

The reforms in the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 were passed through federal parliament on Friday 11th December as part of the 2020-21 federal budget. 

These new changes made to Australia’s insolvency framework will give eligible businesses experiencing financial distress access to a new and simplified debt restructuring process or will allow them to enter a new simplified liquidation pathway to enable a quicker and cheaper liquidation process. 

The new processes aimed to help Australian businesses will be available to incorporated businesses with liabilities of under $1 million. On top of this businesses will need to have paid all entitlements which they owe their employees and furthermore must be up to date with their tax lodgements.   

The Small Business Restructuring Plan”, provides a process for a company to formulate a tailored plan to deal with its creditor’s claims. Creditors will determine whether the plan is accepted, with the outcome determined by the majority (by value) of affected creditors who reply during the acceptance period.

The new legislation in many ways copies the concepts and conduct of Voluntary Administrations, which have been around for a long time. The key difference between the two is that the new legislation envisions the process being largely driven by the company and its directors, with the control of the day-to-day business operations being placed into the hands of directors while creditors consider the plan. 

An insolvency practitioner will provide the vehicle for the plan to be put to the creditors. Limiting the role of the insolvency practitioner will most likely reduce the costs of the process, which will ultimately leave more funds available for creditors.