The government announced the most substantial change to Australia’s insolvency reform in 30 years. These changes, which took effect on January 1, 2021, established a new simple company restructure and liquidation procedure for small enterprises that gives directors more authority and freedom to either restructure or shut down operations.
If you are a small business owner, it is important to understand these changes and what they mean for you. From January 1, 2021, small businesses will have access to two new processes: small business restructuring plan and simplified liquidation framework. This article will discuss the small business insolvency reforms and how they may affect your business.

Small Business Restructuring Plan

The small business restructuring plan is a new process that gives small businesses greater control over their destiny by providing a stay on creditors’ claims, facilitating negotiation with creditors, and allowing the use of a deed of company arrangement to bind all unsecured creditors.
The small business restructuring plan gives you up to six months to negotiate with your creditors and propose a plan to restructure your business. If you reach an agreement with your creditors, you can bind all unsecured creditors by executing a deed of company arrangement.
If you cannot reach an agreement with your creditors or your restructuring plan is unsuccessful, the court may order that your business be wound up.

Eligibility for the Process

For eligible small businesses, the company must:

• have liabilities of less than $1 million;
• all employee entitlements that are due and payable have been paid (including superannuation)
• your tax lodgments should be up to date; and
• not already be in liquidation

If your business satisfies these criteria, you can apply to the court for an order to commence the small business restructuring plan. Once the order is made, a moratorium comes into effect, which prevents creditors from taking any action against your business without leave of the court. This includes enforcing security, commencing or continuing proceedings, or appointing a receiver or controller.
If a company is not eligible for the small business restructuring process, it may still be able to enter into a deed of company arrangement (DOCA). A DOCA is a formal agreement between a company and its creditors that allows the company to restructure its affairs and repay its debts over time.

To be eligible for a DOCA, a company must:

• be insolvent; and
• have debts of less than $1 million

Restructuring Plan Time Frames

A restructuring plan for the company’s debts must be developed and sent to creditors within 20 business days of the SBRP being appointed by a resolution of the Board of the company. The restructuring practitioner must be referred to as “restructuring practitioner appointed” in all company’s public documents.
Afterwards, creditors are given 15 business days to decide whether or not to accept the restructuring plan. For creditors to accept or reject a restructuring plan, the plan must provide enough information to make an informed decision.

Role of the Small Business Restructuring Practitioner

Under the small business corporate insolvency reforms, a restructuring practitioner (SBRP) must be appointed to oversee the restructuring process. The SBRP is a licensed and regulated insolvency practitioner who is independent of the company and its directors.
The restructuring practitioner’s role is to:

• assist the company and its directors in preparing and implementing a restructuring plan;
• liaise with creditors on behalf of the company;
• prepare a declaration with respect to the restructuring plan;
• choosing whether to terminate the company’s restructuring;
• resolve a dispute over a creditor’s admissible debts or claims; or
  execute or exercise any other role, duty, or power as the company’s small business restructuring practitioner

You are not required to appoint an SBRP if you propose a deed of company arrangement that does not bind all unsecured creditors. However, if you appoint an SBRP, they must certify that the deed of company arrangement is fair and reasonable.

Functions of the SBRP in the Debt Restructuring Process

SBRPs are required by law to perform the additional duties listed below:

• receiving and holding on to the company’s money;
• making payments to creditors in line with the plan,
• when asked by the board of directors:
• the realisation of any property that can be used to pay creditors in line with the plan.
• distributing the proceeds of any property realisation, in line with the plan,
• answering questions about their duties and responsibilities as a restructuring practitioner for the plan
  anything else that is necessary, convenient, or incidental to the plan’s administration is included.

Effect of Small Business Restructuring on Companies

During a company’s restructuring, third parties can’t use their property rights to do anything with the company’s property or property that the company uses, occupies, or has in its possession, unless the SBRP gives written permission or the Court says it’s okay. This is similar to how the voluntary administration process works.
Again, like with voluntary administration, court proceedings and enforcement processes are put on hold and can’t be started or moved forwards during the debt restructuring process unless the SBRP gives written permission or the Court gives permission.

If a secured party has a security interest in all or almost all of the company’s assets, they can enforce their security interest if they act before or during the “decision period,” which is 13 business days.
The decision period starts when the secured party is told about the debt restructuring process or when the debt restructuring process starts. It ends 13 business days after the restructuring process starts.
The Act says that a company’s debts that were made while it was reorganising can be proven if the company is later shut down. In the voluntary administration regime, where the administrator is personally responsible for such debts, this is not the case.

The Regulations say the following about creditors who must follow the restructuring plan:

• On and after the day a restructuring plan is made, it binds creditors with admissible debts or claims, the company, the company’s officers and members, and the restructuring practitioner to the plan.
• Secured creditors only have to follow the plan if they agree to do so and if their admissible debt or claim is worth more than the value of their security interest.
• After the restructuring plan is made, a secured creditor is not prevented from realising or otherwise dealing with their security interest, unless the secured creditor has agreed to be bound by the plan and the plan prevents them from realising or dealing with the security interest, or if a court orders them to do so.

The regulations protect the company and its property in the following ways:

• While the restructuring plan is in place, a person who has to follow it can’t make an application to close down the company based on a valid debt or claim, or move forwards with an application made before the person had to follow the plan.
• Also, a person who is bound by the plan can’t start or continue a proceeding or enforcement process against the company or any of its properties to collect a valid debt or claim unless the Court gives them permission to do so and they follow the rules set by the Court.

Small Business Liquidation

The new laws also make it easier for small businesses to go out of business. This is meant to be a better way for small businesses with simple affairs.
The process can be used in any voluntary winding up of a company by its creditors, as long as the company meets the eligibility requirements, which are mostly the same as for debt restructuring (including the $1 million limit on liabilities), with the addition that the company must have all of its tax payments up to date. For the simplified process to work, the company doesn’t have to have gone through a debt restructuring process before going out of business.

When a company is being wound up, if the directors think the company meets the requirements for a simplified liquidation, they can tell the liquidator within five business days of the winding up starting. If the liquidator agrees that the criteria are met, a notice must be sent to creditors explaining how the simplified liquidation process works.
Creditors of the company can let the liquidator know that the simplified process shouldn’t be used. If 25% of creditors by value are against the process (excluding related creditors), the liquidator cannot use it. If that 25% mark isn’t reached, the liquidator can use the easier process.

Simplified Liquidation Process and Eligibility Criteria

A creditor-voluntary liquidation (CVL) is the only way to use the simplified Small Business Liquidation process. So, it can’t be used in a voluntary winding up by a member or a court-ordered winding up.
When a liquidator has good reason to believe that a company in a CVL meets the eligibility requirements, the liquidator can use the simplified Small Business Liquidation process instead of the general CVL process.

The requirements to be eligible for Small Business Liquidation are:

• the company must have decided to shut down on its own;
• the directors must have given the liquidator a report about the company’s affairs and a statement that the company will be eligible for the simplified liquidation process;
• the company’s total liabilities must not be more than $1 million;
• and the company’s tax payments must be up to date.

Liquidators can’t use the Small Business Liquidation process if more than 20 days have passed since the event that caused the company to go into liquidation or if at least 25% of the company’s creditors have asked the liquidator not to use the simplified liquidation process.

Implementation Time

The simplified liquidation process is not available if the company members have already appointed the liquidator, but more than 20 business days have transpired since that appointment. Prior to implementing the streamlined procedure, a liquidator must also provide creditors with at least 10 working days’ advance notice of its intention. To reiterate, a speedy turn-around is expected throughout the implementation phase.

Implementation requires a 75% majority of the vote.

The liquidation process cannot be executed if more than 25 percent of creditors object to it.

Features of the Simplified Liquidation Process

The Small Business Liquidation process does not include making a report to creditors under section 533 of the Corporations Act. This section says that a liquidator must report suspected wrongdoing to ASIC. The removal of this obligation is expected to save both time and money.

Some parts of the Insolvency Practice Rules don’t apply in a Small Business Liquidation, so creditors don’t have to meet. Instead, liquidators send information to creditors electronically, and proposals are made by letting creditors know about them. This is done so that creditors can vote electronically.

In two situations, a transaction in a small business liquidation process is not voidable under the Corporations Act, according to the regulations.

In a small business liquidation process, an unfair preference can only be undone if a creditor in a transaction that happened more than 3 months before the relation back date was a related entity of the company; and
For transactions that happened in the three months before the relation-back day or just after that day and before the winding up started, an unfair preference is only voidable in a liquidation if a creditor in the transaction was a related entity of the company and the worth of the transaction was more than $30,000. Stopping the process of liquidation was made easier.

The Regulations say that the liquidator must stop following the small business liquidation process if he or she has a good reason to think that the company or one of its directors has done something that has had or is likely to have a materially negative effect on the interests of all or a group of creditors. Also, the liquidator must have a good reason to think that the behaviour was dishonest or not honest.
Also, a company will have to leave the liquidation process if its liquidator finds out that the eligibility requirements are no longer met.

When should you seek assistance?

If your business is experiencing financial difficulties, it’s important to seek professional advice as soon as possible. This will give you the best chance of exploring all your options and finding the right solution for your business before it’s too late.
A business insolvency practitioner can help you assess your options and understand the implications of each option. They can also assist with negotiating with creditors, preparing financial statements and lodgement of documents with the court.

You should seek professional advice if your business is:

• Experiencing cash flow problems
• Unable to pay its debts when they are due
• Facing legal action from creditors

Would you like to learn more about your options? Click here to book a free 30-minute chat with one of our specialists.

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