In its bid to continue to assist small businesses experiencing financial distress during the pandemic, the federal government has proposed new insolvency reforms for SMEs with liabilities of less than $1 million. These reforms will require struggling businesses to work with Registered Liquidators to determine the best course of action.
There were always concerns about what would happen when the government’s temporary relief measures expired at the end of the year, and the proposed reforms are designed to better serve Australia’s small businesses, their creditors and employees and will enable SMEs to quickly restructure. Where restructuring isn’t possible, the reforms allow for businesses to wind up faster, thus enabling greater returns for creditors and employees.
The proposed changes are expected to move from a one-size-fits-all model of “creditor in possession” to a more flexible “debtor in possession” that reflect aspects of the US Chapter 11 bankruptcy protection model.
By enabling owners to remain in control, businesses should be more open to enter into the insolvency process sooner, giving them the opportunity to restructure and increase their chances of surviving. Eligible businesses can keep trading while they develop a debt-restructuring plan that will ultimately be voted on by creditors.
Registered practitioners key to success
Under the “debtor in possession” model, eligible businesses will work with specialist Small Business Restructuring Practitioners (SBRP) to restructure existing liabilities under a plan approved by creditors. Only Registered Liquidators can act as SBRPs – a requirement welcomed by the industry, including ARITA.
ARITA CEO John Winter says the proposed restructuring process recognises the critical expertise of Registered Liquidators.
“With the proposed creation of SBRPs, the government needs to take the opportunity to fully regulate the provision of insolvency and restructuring advice to shut down the exploding level of dodgy, unqualified advisers who facilitate phoenixing and asset stripping,” he says.
Winter adds that the biggest issue is going to be in the expectation that creditors – from banks, through to suppliers, employees, subbies and the like – are going to keep allowing businesses to rack up more debt while this restructuring occurs, knowing that they may end up being owed more and getting nothing.
Bradd Morelli, Jirsch Sutherland’s National Managing Partner, says navigating the maze can be daunting for business owners and directors – which is why having a Registered Liquidator as an SBRP is important. “Creating and negotiating a debt restructuring plan and conducting a liquidation are complex procedures that come with a multitude of challenges and legal compliance requirements, and therefore require specialist expertise and extensive experience. With a Registered Liquidator, businesses are guided by an experienced and qualified insolvency practitioner who has met ASIC’s stringent requirements,” Morelli says.
“At Jirsch Sutherland and WA Insolvency Solutions, our WA division, we have 17 Registered Liquidators, many with over 20 years’ experience. We are well placed to assist SMEs when the new legislation is in place.”
Directors will remain in control during this process, while working with the insolvency practitioner on the plan. The role of the SBRP is to help determine if the company is eligible for the process; help support the company to develop a plan and review its financial affairs; certify the plan to creditors; and manage the disbursements once the plan is in place.
The process can take up to 35 business days, which includes 20 business days to develop the plan and 15 to give creditors time to vote on it. If more than 50 per cent of creditors by value endorse the plan, it is approved and binds all unsecured creditors.
To address any transitional issues, eligible small businesses will be able to declare their intention to access the simplified process to its creditors. Following this declaration, the existing temporary insolvency relief would then apply for a maximum period of three months, until the business is able to have access to a SBRP.
Supporting the system
A range of permanent and temporary measures to increase the number of insolvency practitioners to help deal with the expected increase in businesses seeking help have been introduced by the federal government. These include:
- Temporarily waiving fees associated with registration as a Registered Liquidator for approximately two years until 30 June 2022 to encourage more practitioners to enter or re-enter the market.
- Making changes to allow for more flexibility in the registration of insolvency practitioners by removing rigid requirements.
- Making the key parts of the process set out in the Corporations Act 2001 ‘technology neutral’ so that external administrations can be carried out more efficiently.
- Establishing a new classification of insolvency practitioner whose practice will be limited to the new simplified restructuring process only.
The proposed reforms have also been welcomed by the Association of Independent Insolvency Practitioners. The AIIP President says there is some concern that such reform should not be rushed but “we understand the general industry predictions are that there needs to be a different system to attempt to save businesses and jobs”.
“We hold that the industry is ready, willing and able to perform its role,” he says. “We also believe that automatic deregistration will likely be at an all-time high. Some directors have abandoned their post and there are no assets left to warrant a liquidator or a SBRP.”
Safe Harbour warning
Directors should also be aware that the Safe Harbour protections introduced in response to COVID-19 are due to expire on December 31, so they should be acting now to determine if their business can reasonably be expected to trade and meet their debts as and when they fall due. If directors are not confident about their solvency then they may need to appoint an administrator or a liquidator on or before December 31 to avoid potential personal liability for company debts and receive COVID-19 Safe Harbour protection.
Submissions for feedback from the industry regarding the insolvency reforms closed on October 12 and the measures will commence on January 1, 2021, subject to the passing of the legislation.