The need to know on the new small-business insolvency reforms

insolvency

The new corporate insolvency reforms that came into effect on 1 January this year were designed to give directors of SMEs with debts under $1 million the ability to resolve their situation, by making debt restructure and liquidation faster and lower cost – while enabling them to remain in control of their company and its assets and continue to trade.

Sounds good, doesn’t it? There are certainly some pros, however, as with any government legislation, the new reformed processes come with complex regulations and requirements and some shortcomings that may derail the good intentions.

What’s changed

Directors are required to appoint a Small Business Restructuring Practitioner (RP), who has 20 business days to develop a restructure plan and present it to creditors, who have 15 business days to vote on it. A minimum of 50 per cent of creditors by value are required to accept the plan for it to be implemented.

In addition to being able to remain in control of their company, the reforms further motivate directors to act by requiring all statutory taxation reporting completed and employee entitlements paid before the plan can be presented to creditors. The likely requirement to cashflow the business to trade through the restructuring period should further prompt directors to start engaging with the process earlier.

The Simplified Liquidation process is purported to shave off time and costs as the Liquidator is no longer required to prepare a report on the conduct of the directors and officers, statutory reporting to creditors has been reduced, and creditors’ meetings replaced with electronically distributed information and voting.

What to be aware of

  • The multitude of requirements and regulations, which add time and, if breached, can result in penalties for directors.
  • A proposed debt restructure plan is still deemed a point of insolvency, exposing directors to a potential breach of duty, such as insolvent trading.
  • The lack of transparency in the debt restructure process can penalise creditors and add costs and time because:
    • the RP’s report is no longer required to set out a recommendation. The creditors only see the assets, and not necessarily the full financial position, nor a comparison to other outcomes.
    • the RP’s declaration is only in respect to the company’s ability to meet the plan’s requirements. The RP still has to assess the company’s position in a winding up to satisfy the requirement to only continue the process if it’s in the interests of creditors.
    • No creditors’ meetings limits opportunities for the RP to explain the circumstances for the appointment.
  • Directors “seduced” by the new processes, may overlook other potentially more effective or relevant insolvency processes.
  • When a debt restructure plan fails, creditors remain out of pocket and there is no automatic winding up or option to wind up the company.
  • With the debt restructure process, there are double-up RP requirements and anomalies.
  • By calling the person who can action these processes a Small Business Restructuring Practitioner, some directors may be misled by unscrupulous and unqualified parties. An RP is required to be a Registered Liquidator – registered with ASIC.

Given the new processes’ complexity and uncertainty, it’s no surprise there has so far been relatively little uptake. Unfortunately, many directors view insolvency processes as terminal for their business, rather than safety nets and a legal way to maximise outcomes – when engaged with at the right time. And the right time? At the first signs of financial distress.

Andrew Spring, Partner, Jirsch Sutherland (