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New Restructuring and Insolvency Processes for Small Business

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New Restructuring and Insolvency Processes for Small Business

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Welcome to 2021!

In our previous update in the December Quarterly Newsletter (read here), we provided an overview on the New Restructuring and Insolvency Processes for Small Business. Roll forward to 1 January 2021 and the changes have come into effect for eligible small businesses.

The Australian Government has compiled a useful fact sheet pertaining to Simplified Debt Restructuring which can be found here.

Below are some key points for consideration whether you be a Director, Accountant or Solicitor for the Company that operates a small business.

 

Eligibility Criteria

For a small business to be eligible, it must:

i. be incorporated under the Corporations Act;

ii. have total liabilities which do not exceed $1 million on the day the company enters the process. This excludes employee entitlements;

iii. be in substantial compliance with the following requirements:

a) employee entitlements which are due and payable have been paid,

b) tax lodgements are up to date meaning all relevant tax returns and activity statements are lodged with the ATO.

 

Initiating the Appointment

The company must:

    • resolve that it is insolvent or likely to become insolvent at some future time and that a small business restructuring practitioner should be appointed; and
    • appoint a small business restructuring practitioner to oversee the restructuring process, including working with the company to develop its debt restructuring plan and restructuring proposal statement.

 

Transitionary period

The Government has extended the temporary insolvency relief (including relief from liability for trading while insolvent) for up to three months ie. 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 Website (https://publishednotices.asic.gov.au/).

The company’s period of temporary restructuring relief begins on the day the declaration is published.

Within 5 business days of the declaration, the Company needs to lodge with ASIC a Form EX07 – Temporary restructuring relief documents, found here.

 

Moratorium

A moratorium begins when the Company enters into restructuring ie. upon the appointment of a small business restructuring practitioner. 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 voluntary administration.

In essence, this provides the Company with some ‘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 Role of Advisors

Whilst the small business restructuring practitioner (RP) oversees the debt restructuring, the Company’s directors remain in control of the business.

The RP will assist the company to:

    • prepare its restructuring plan and restructuring proposal statement; and
    • circulate the restructuring plan and restructuring proposal statement to creditors.

Once the restructuring plan is made (ie. acceptance by creditors), the RP manages the disbursement on the terms set out in the plan.

Noting the eligibility criteria, there is a role for the Company’s external accountant to assist the company with ensuring that:

    • all employee entitlements due and payable are in fact paid, in particular superannuation obligations,
    • all taxation lodgements are up to date.

Noting the moratorium provisions of the restructuring process, and the multitude of commercial matters that can arise as a result of such an appointment, there is a role for the Company’s legal advisers to provide advice, and take action on behalf of the Company, on such matters as they arise.

Given the above, we are of the view that a team of trusted advisors is required to ensure the success of any restructuring plan.

 

What Next???

If you are aware of 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.

The financial position of those clients should then be assessed to determine if those companies are insolvent, or likely to become insolvent at some future time.

Article written by Darren Vardy – Director

SV Partners NSW South

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