Do you have a small business with too much debt? What you need to know about the new small business insolvency reforms.

On 1 January 2021, changes to Australia’s insolvency framework came into effect with new law implemented to assist in restructuring and relieving the debt burden of struggling small businesses. The changes are wide-ranging and particularly relevant for incorporated small businesses that have less than $1m in liabilities.

We have been working with our clients who meet eligibility requirements to determine which scenarios would warrant the development of a small business restructuring plan.

The plan relates to the small business restructuring reforms for financially distressed small businesses that are either insolvent or likely to become insolvent. Under the reforms, owners retain control of day to day trading operations while implementing a documented restructuring plan with creditors.

An appointed small business restructuring practitioner must work with the business and the company’s creditors to develop and implement the plan - otherwise known as a Corporate Debt Agreement.

It is essentially a debtor in possession (directors retain control) restructuring model and insolvency process, as opposed to the Voluntary Administration regime where an administrator is in control and makes all of the decisions in the day to day running of the business in administration.

The reforms aim to encourage distressed businesses to seek assistance early (i.e. at the first sign of potential insolvency). This improves the chances of implementing a successful restructuring – meaning better outcomes for stakeholders and creditors.  

When you may need a small business restructuring plan.

A small business restructuring plan can take many forms.

Here are some examples of what a small business restructuring plan could include and when it may be appropriate to implement:

• A compromise of debts with repayments to be made from future profits or revenue, or in combination with other asset realisations or cash advances.
• Plans to restructure due to a dispute between partners, members and shareholders; or directors or wider family groups.
• Crisis management in response to the sudden illness, death or incapacity of key management personnel within a business to enable stabilisation and a viability assessment.
• Exit strategies to finalise the sale of a business and compromise debts if there is likely to be a shortfall (i.e. mitigating the risk of serious financial loss while safely exiting and/or retiring).
• A simple repayment plan where a freeze on repayment is implemented for a particular period. This would allow for the realisation of difficult to sell assets, or the implementation of complex secured debt refinancing to pay creditors either in full or at an agreed percentage.
• Downsizing and/or redeploying existing resources with a view to ensuring ongoing viability by pivoting the business or expanding the scope of products and services.
• A freeze on debts followed by an influx of new capital or equity via separate investment, or otherwise including debt for equity arrangements.
• Partnerships or joint ventures with key trading partners, suppliers or other stakeholders such as lessors.
• Vendor financing arrangements and sale and leaseback scenarios.

The options are extensive and it’s important to think and act strategically to ensure the plan is “viable” and “reasonably likely to succeed”, as is required under the legislation.

Short window to seek advice under the temporary insolvency relief extension.

The COVID-19 insolvent trading relief expired on 31 December 2020, however, the Australian Government has provided a further three months of temporary insolvency relief in specific circumstances. 

This is purely to enable a distressed business to consider its position and appoint a registered liquidator as a small business restructuring practitioner to engage with creditors and develop the small business restructuring plan.

To access the ongoing insolvency relief, a Declaration of Intent to access the small business restructuring process needs to be published on ASIC’s insolvency notice board.

If you have insolvency concerns, it is imperative that you act promptly to mitigate personal liability exposure as a director and improve the chances of a successful restructuring.

Is your business eligible for small business restructuring?

As a broad summary, to be eligible and propose a small business restructuring plan your business must:

• be incorporated with less than $1m in liabilities
• be either insolvent or likely to become insolvent at some future time
• be substantially compliant with the payment of employee entitlements and tax lodgements (as opposed to payment) obligations
• not have had any of its directors (appointed within the previous 12 months) engage in the small business restructuring process for another company of which they’ve held office within a seven year period
• not be under other restructuring or administration including a Deed of Company Arrangement or liquidation

There are various technical elements to determining eligibility, including the consideration of insolvency and the extent of a company’s liabilities at a point in time.

If creditors approve the small business restructuring plan, the directors retain control of the business and it can continue trading with protections from participating creditors.

If the creditors reject the small business restructuring plan, the company and its directors may consider other options – including voluntary liquidation, such as the new streamlined liquidation process.

Don’t leave it to the last minute, seek trusted advice from a small business restructuring practitioner (SBRP).

Appropriate advice is vital before seeking to access the small business restructuring process.

The right mix of pragmatic and solutions-oriented advisers, together with an experienced and flexible small business restructuring practitioner (Registered Liquidator by law), will be required to ensure a successful outcome for the business in distress and its stakeholders such as creditors.

Whatever the position, it’s important for directors to remember that the requirement to act with due diligence and care has never changed throughout the government’s response to the pandemic.

If your business is struggling financially, get trusted advice from a small business restructuring practitioner early on.

Our insolvency and restructuring experts are on standby to assist you in making confident and informed decisions about the future of your business and can help you determine the best way forward. To get in touch with a small business restructuring practitioner, simply contact your local RSM office.