A second chance for businesses: the debt restructuring process
For many SMEs, the financial impact of COVID-19 continues, with tax and other operational debts still keeping blood pressure high. However, new significant insolvency reforms to support small businesses deliver further hope that surviving and thriving is possible.
In effect from 1 January 2021, the small business restructuring process replaces the current COVID-19 stimulus measures, which ended on 31 December 2020. The process gives a new and more straightforward option to negotiate with creditors. It allows eligible businesses to restructure their existing debts while continuing to trade.
Nationally, there have been very few actual engagements of this type. We think this is because the criteria are not quite right i.e. the debt threshold is not high enough. However, it is a massive improvement on the current voluntary administration process regarding costs and efficiency. The implementation process will get refined over time.
The success of the process will remain with a compelling message for creditors.
STEP 1: Determining Small Business Restructuring Eligibility
The first step in the small business restructuring process is determining whether you or your client are eligible. That is the point in time when you can engage us to inform and guide you through this process.
To be eligible, you must:
· Be a small business facing insolvency.
· Be an incorporated business (i.e. a Pty Ltd company);
· Have total liabilities (including secured and related-party debt) under $1M; and
· Not already be subject to an insolvency administration.
We will design and develop a practical turnaround plan and ensure the best outcome through this process for the most profitable and sustainable future for your business.
The company must be substantially complying with obligations to lodge returns with the tax office and must have paid all employee entitlements, including superannuation.
STEP 2: Appointing a Small Business Restructuring Practitioner
We would then engage a small business restructuring practitioner (SBRP) to handle the administration aspects of this process. The SBRPs are not turnaround experts and do not have the power to manage or take control of your business.
Once an appointment is made, ASIC and the company’s creditors must be notified within 1 business day by the SBRP. At this point, unsecured and some secured creditors are prohibited from taking actions against the company and any personal guarantees cannot be enforced.
STEP 3: Drafting the Small Business Restructuring Plan
From the date when appointing a SBRP, we have 20 business days to develop a proposal for creditors to compromise their debts. During that time, you continue to trade the business and implement the practical initiatives in the turnaround plan.
That proposal will include the amount to be paid to unsecured creditors (over a period of no more than three years) and must:
· Be in the approved form;
· Identify the property that is being dealt with and how it will be dealt with;
· Provide remuneration for the SBRP appointment; and
· State the date on which it was executed.
As part of the proposal, a business restructuring statement and a certification certificate must be prepared and signed and ASIC must be notified of the plan within five business days.
STEP 4: Presenting the Proposal to Creditors
We must then provide the proposed compromise deal to affected creditors. It must contain the details of the proposal and certain statements and certificate documents as soon as possible after the plan is finalised.
Before this happens, we must ensure:
· All employee entitlements have been paid; and
· All tax reporting obligations are up to date; or
· The company is substantially complying with the above.
STEP 5: Acceptance or Rejection of the Plan by Creditors
Once the creditors have received the plan, they have 15 business days to accept or reject the proposal.
If a debt is disputed, the creditor must provide specifics of the dispute, such as a statement of account and invoices. The claim must be resolved in five business days.
If the majority in value of creditors accept the proposal, the plan will be approved and binding to all unsecured creditors. The business will continue to trade, we will continue to implement and manage the turnaround initiatives and the SBRP will administer the debt compromise process.
If not approved, the restructuring process ends with control of the company remaining with the directors. The company is likely to have been insolvent on commencing the process so may not be sustainable and then may fall into liquidation.
If successful, the process comes to an end once the company has paid the agreed monies to creditors.
Admitting your small business is in trouble and taking action is a sign of strength and clarity.
The sooner you act, the better your chances of personal financial survival. The small business restructuring process offers a simplified, lower-cost opportunity to compromise unsustainable debts while allowing the business owner to remain in control.
Get the assistance you need to assess your prospects and plan accordingly.
We specialise in helping directors of small businesses in financial distress and have your best interests at heart.