New restructuring regime for small business

Against the backdrop of the financial crisis, created by the global pandemic, and the need for a restructuring system that works for small business, the Federal Government introduced the Small Business Restructuring Plan on 1 January 2021. There had been a growing call from a number of people, including the Australian Small Business & Family Enterprise Ombudsman, for a new regime to allow small business to access the benefits of voluntary administration without the costs and disruption of that system. The ever-increasing cost and regulation of the voluntary administration system meant that small-business owners were not able to resurrect their business in a majority of cases.

1. New regime

The Federal Government introduced a new regime on 1 January 2021, specifically for small business, with the aim of allowing those businesses the realistic opportunity to restructure and to continue in existence.

The restructuring regime is available for small businesses that are either insolvent, or likely to become insolvent (use this link to learn when a company is insolvent) and that company owes less than $1 million to creditors.

It is important to understand that the company can only use the new regime if neither the director nor the company has been through the process in the preceding seven years. Further, in order to access the regime, tax lodgements and employee entitlements (excluding leave) must be paid up to date.

The main features of the new regime are:

· the appointment of a Small Business Restructuring Practitioner (SBRP) by the debtor company’s directors;

· the SBRP will be a registered company liquidator, but will not take control of the company like an Administrator;

· the directors remain in control of the management of the company, although transactions outside of the “ordinary course of business” will need the permission of the SBRP or the court;

· the directors prepare a restructuring plan (Plan), with the assistance of the SBRP, that is then provided to the creditors for their consideration; and

· the creditors vote electronically without a physical meeting and may approve the plan by a majority in value; and

· if the Plan is not successful, the company will go into liquidation.

The new regime re-establishes many of the key elements of voluntary administration that were introduced to allow companies to rehabilitate, except that the company owners/directors will remain in control of the company. This is designed to reduce the lack of continuity of an external administrator taking over the company. Use this link to learn more about voluntary administration.

2. Plan

The company develops the Plan for the directors to remain in control and to continue to trade. The plan sets out how the creditors are to be paid the agreed proportion of outstanding debt. The Plan includes a list of creditors of the company and the amounts that they are each owed.

The Plan is presented to the creditors, with a recommendation from the SBRP, which must be accepted by more than 50% of the creditors voting.

Upon the Plan being accepted by the creditors, the payments to the creditors must be paid in accordance with proportion set out the Plan. Once the payments have been made under the Plan, the company will be released from all debts it owes. If the Plan is either not accepted by the creditors, it fails or otherwise terminates, the company will owe the full value of all of the debts to creditors prior to the start of the Plan.

3. How long does the process take?

The company has to put up the Plan to the creditors within 20 business days of nominating to enter the restructuring process. An SBRP has the ability to extend this period of up to 10 business days where they consider that extra time to be reasonable in the circumstances.

Once the Plan has been provided to the creditors of the company, they have 15 business days to vote for or against. The process is deliberately short to decrease instability caused by a long period of uncertainty.

4. Support of creditors

One of the most important features of the new regime is that the creditors are required to support the Plan, by more than 50% voting in favour of it. Like a deed of company arrangement (DoCA)in voluntary administration, the Plan needs to have a good reason why creditors should vote in favour of it, as opposed to the company going into liquidation. This is important on the basis that the Plan will propose that creditors will only be paid a percentage of their debt and sometimes a small percentage.

The most compelling argument for acceptance of a Plan in which the creditors would only be paid a small percentage is if the owners of small business had protected the often very substantial personal investment they make in their company as a secured loan registered on the PPSR. The reason that this would be more likely to encourage creditors to vote in favour of the Plan is that if the company were to go into liquidation in that case, the owners (as secured creditors) would get a return from the assets before the unsecured creditors get anything and in reality the unsecured creditors would probably get nothing. Use this link to read more about the crucial benefits of owners protecting their personal investment as a registered secured loan.

If small businesses are properly set up, including protecting the personal investment of owners, and they get early expert advice in the face of financial difficulty, they stand a far greater chance to save their business using either the new regime or voluntary administration.