Overhaul of small business insolvency – what does it mean for you?

If you’re a struggling small business owner, Frydenberg’s announcement may just be the help you need to restructure your debts and trade out of the ‘COVID’ trouble. If you’re a creditor to a small business, then getting paid may get just that bit harder… (again)

On 24 September 2020, the Treasurer announced significant changes to the way small businesses can ‘restructure’ their financial obligations. The key points of the proposed changes are:

  • The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million, drawing on some key features of the ‘Chapter 11’ bankruptcy model in the United States.
  • Moving from a rigid one-size-fits-all ‘creditor in possession’ model, to a more flexible ‘debtor in possession‘ model, which means that a small business owner can remain in control of their company and restructure their debts, without an external insolvency practitioner taking over.
  • A rapid 20 business day ‘restructure period’ to develop a restructuring plan with assistance from a small business restructuring practitioner, followed by 15 business days for creditors to vote on the plan.
  • A new, simplified liquidation pathway for small businesses to allow faster and lower cost liquidation.
  • Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to meet the needs of small business.

More information can be found on Treasury’s website here

In a nutshell, how will the reforms work?

The reforms will create the new concept of the ‘small business restructuring practitioner’ who will assist the small business owner to create a restructuring plan and put the plan to the business’ creditors for a vote. A restructuring plan will likely involve creditors agreeing to accept less than the amount they are owed, potentially with payment made over time. If 50% of the creditors by value accept the plan, then it is approved and binds all unsecured creditors.

As 50% of creditors by value must approve the plan, this will likely put the Tax Office in a powerful position to decide which plans succeed or fail. We expect to see the Tax Office having a clear mandate on voting in line with whether or not the business was paying its taxes before the disruption caused by COVID.

If a plan is not viable, or not approved by the creditors, then the reforms also allow for a streamlined liquidation process aimed at keeping costs down.

The obvious question is, will the proposed changes make a difference?

In our view, they definitely will make a difference. The bigger question is whether they will make a positive or negative difference.

For every distressed business not paying its bills, there are potentially hundreds of distressed creditors not getting paid what they are owed. The new proposals will result in these creditors not being paid what they are entitled, while allowing the business that owes them the money potentially continuing on its way. This is also bearing in mind that many of these delinquent businesses were in financial strife prior to COVID. In some respect, this is undermining a key pillar of Australian capitalism, and further kicking the proverbial ‘zombie company’ can down the road.

On the flip side, few would argue against the proposition that the small business insolvency regime was ripe for change. Advisors who are genuinely interested in helping small businesses with better focused solutions have been branded with the ‘pre-insolvency advisor’ label, together with the negative connotations associated with ‘illegal phoenix operators’ given the same name. The new reforms will bring these people out from the shadows and allow them to honestly try and help small businesses in their time of need, while also encouraging more oversight to weed out the dodgy advisors.

No doubt we will have much more to say on this big announcement once draft legislation has been released. Watch this space!

How we can help

Getting ahead of the curve is always the best option, and now is already a great time to try and restructure debt obligations. If you are feeling the COVID-related financial pinch, call us on 1300 654 590 and get ahead on sorting out your business’ financial obligations.

On the other hand, if you have extended credit without appropriate protections, this is also an ideal time to act to strengthen your position.

The information contained in this post is current at the date of publishing – 25 September 2020.

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