New Small Business Insolvency Process

On 31 December 2020, the temporary insolvency protections for directors that relieved them from COVID-19 insolvent trading claims ended. New insolvency legislation came into force as of Jan 1 2021, aimed at enabling more Australian small businesses to quickly restructure and survive the economic impact of COVID-19.

Small Business Restructure (SBR): a new debt restructuring tool

Akin to the existing Deed of Company Arrangement (‘DoCA’) process achieved after a Voluntary Administration (‘VA’), the SBR process is designed to allow companies with creditors of less than $1 million (excluding employee entitlements) to restructure their debts by proposing a compromise to its creditors without having to go through a VA first and without the complexity associated with a DoCA.

The key criteria for being able to propose a plan to restructure its debts is that the company must have (or substantially complied with the requirement to have):

  • paid all entitlements of employees that are due and payable;
  • given returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act 1997); and
  • reasonable grounds to believe that there are no voidable transactions.

Unlike a VA, the directors in a SBR remain in control of the company and are allowed to continue to trade in the ordinary course. The directors cannot be held liable for insolvent trading during this period.

The Registered Liquidator (who is to be called a Small Business Restructuring Practitioner (‘SBRP’)) is appointed by the company to work with its Directors. The role of the SBRP is limited to:

  • Assist the directors prepare the plan (20 business days)
  • Make reasonable inquiries and take reasonable steps to verify the information provided to them by the directors regarding the company’s affairs
  • Certify that it is reasonable to expect the company will meet obligations under the plan
  • Circulate the plan among the company’s creditors (giving them 15 businesses days to reply)
  • Adjudicate and collate creditor votes on the plan; and
  • If accepted, adjudicate on creditor claims and pay a dividend

Upon acceptance of the plan, all unsecured creditors of the company are bound by the plan.

It should be noted that unlike a VA, the SBRP is not liable for any goods supplied to the company during the restructure period.

If the plan is not accepted by the creditors, the process ends. There is no automatic winding up or option to place the company into liquidation – unlike in a VA.

What Is In A SBR Plan?

As the SBR is designed to be used with uncomplicated small businesses, the contents of the SBR plan are contained within an ASIC template. In this regard, the plan must:

  • identify property to be available to creditors (eg a lump sum installment held in a trust account)
  • specify how property to be dealt with
  • provide for remuneration of SBRP
  • specify the date the plan is to be executed
  • can be conditional for up to 10 business days after proposal accepted
  • cannot transfer property to a creditor (eg: real estate or equipment)
  • cannot go for more than 3 years

The plan is unable to compromise employee entitlements. As such, employees are unable to vote on the plan.

Creditor impact?

Once the SBRP has been appointed, creditors are unable to take action against the company during the restructure period. Those that hold security over assets supplied to the company are generally stopped from recovering any goods supplied despite holding any security agreements (including PPSA). The company can continue to deal with any goods it holds that are subject to PPSA registrations in the ordinary course of its business. Guarantees provided by its Director (or relatives) are also unable to be called up.

In a VA, two meetings of creditors are held – the first to share information with creditors and the second to decide upon the future of the company. In the SBR process, the proposal is forwarded to all creditors via email or post so meetings of creditors are not held.

Limited Information

Creditors of a company that is the subject of an insolvency appointment have been used to receiving reports from the Registered Liquidator setting out the financial circumstances of the company and potentially, if a DoCA is proposed, a comparison of the proposal versus the potential return they may expect in a liquidation. This information is not required to be provided in the SBR process.
Rather, the SBRP need only comment upon the ability of the company to fulfil the plan after having made reasonable inquiries and taken reasonable steps to verify the information provided to them by the directors regarding the company’s affairs.

Is It Right For My Client?

Simply put, the SBR process is an offer to creditors to compromise their claims against it for something less than 100c in the dollar and/or provide extended payment terms. This ‘light touch’ process is meant to have limited involvement by the Registered Liquidator handling the process – their role is predominantly an administrative one, thereby reducing the cost to implement. Further, if the plan doesn’t succeed, the company isn’t placed into liquidation.

Like all insolvency engagements each company’s circumstances will dictate whether this new process is appropriate for it to adopt and is not without its problems. Careful consideration should be undertaken in consultation with a Registered Liquidator by its directors prior to commencement.

As always, please feel free to contact us for guidance specific to you or your clients. You can read part two of the blog over here.

Adrian Hunter
Adrian Hunter

February 01

Adrian Hunter
Adrian Hunter

By actively working with all involved stakeholders, Adrian is able to formulate and deliver on agreed outcomes for the benefit of all parties involved