New Restructuring and Insolvency Processes for Small Business
In our previous update in December we alerted you to the impending New Restructuring and Insolvency Processes for Small Business. On 1 January 2021 the changes came into effect.
Directors, accountants, solicitors and other advisors need to consider some key points in relation to the application to small company businesses.
For a small business to be eligible, it must:
- be incorporated under the Corporations Act;
- have total liabilities not exceeding $1 million (excluding employee entitlements);
- have employee entitlements (not entitlements which are not presently due); and
- have tax lodgements are up to date.
Initiating the process
To initiate the process the company must:
- resolve that it is insolvent (or likely to become insolvent at some time in the future); and
- appoint a SBRP to oversee the restructuring process, and help develop its debt restructuring plan and restructuring proposal statement. PKF can act as the SBRP.
The government extended the temporary insolvency relief, including relief from liability for trading while insolvent, for up to three months – to 31 March 2021.
To access this relief, a company can declare its intention to access the restructuring process by publishing the declaration on the ASIC Notices. The period of temporary restructuring relief begins on the day the declaration is published.
The moratorium begins when the company enters into restructuring, i.e. upon the appointment of a SBRP. This means that:
- unsecured creditors and some secured creditors are prohibited from taking action against the company;
- owners of property (other than perishable property) used or occupied by the company, or people who lease such property to the company, cannot recover their property;
- secured creditors cannot enforce their security interest in the company’s assets in some circumstances;
- personal guarantees cannot be enforced against the directors or their relatives; and
- there is a restriction on the operation of ipso facto clauses similar to that applying in a Voluntary Administration process.
In essence, this provides the company with ‘breathing space’ to develop a plan that will provide for the continuation of the business and the best return for creditors given its financial circumstances.
The SBRP oversees the debt restructuring but the company directors remain in control of the business.
There is a role for the company’s external accountant to assist the company with ensuring employee entitlements (including superannuation) due and payable are in fact paid and all taxation lodgements are up to date.
A multitude of commercial matters will usually arise during the process. There is a role for the company’s legal advisers to assist and take action on behalf of the company on issues as they arise.
A team of trusted advisors is required to ensure the success of any restructuring plan, and PKF is well versed in working with such advisors to achieve the best available outcome.
If you have a client who is experiencing financial difficulty, consideration should be given to declaring a company’s intention to access the restructuring process so as to extend the protection afforded to directors against insolvent trading claims.
The financial position of those clients should then be assessed to determine whether they are insolvent, or likely to become insolvent.
Our experienced practitioners at PKF are available to:
- assist you with assessing your client's solvency,
- educate your staff on the new regime to help you identify clients who may be at risk,
- act as the SBRP to oversee the process.
This is a new law and there will be circumstances that were not envisaged by the legislators. That is when experience in the insolvency and restructuring space comes into its own.
A useful fact sheet pertaining to Simplified Debt Restructuring can be found at: treasury.gov.au/publication/simplified-debt-restructuring