The Federal Government has proposed a new, simplified small business restructuring process for eligible small businesses. The process will allow businesses to compromise their debts and maximise their chances of trading profitably in the future. It also allows for business owners to remain in control of their business during the restructuring period.
Which Businesses Can Use the New Restructuring Process?
Companies with less than $1 million in debt will be able to access the restructuring process. It is not currently clear if this $1 million figure includes related party debt. In addition, companies seeking to take advantage of the process must have paid all outstanding employee entitlements including superannuation and have their tax lodgements up to date.
It is envisaged by the Government that the new provisions will be operational around January 2021.
How Will the New Process Work?
An insolvent company engages an insolvency practitioner to assist with the process and pays them a fixed up-front fee. The company and the insolvency practitioner create a restructuring plan, which will generally include a proposal to creditors to compromise their debts. At the appropriate time during this process the company formally appoints the insolvency practitioner as their small business restructuring practitioner for a period of 20 business days.
Once the small business restructuring practitioner is officially appointed:
- Unsecured and some secured creditors are prohibited from taking action against the company;
- A personal guarantee cannot be enforced against a director or one of their relatives; and
- There is a protection from clauses in agreements that allow creditors to terminate the agreement because of an insolvency event.
Importantly for business owners, during the 20 business day restructuring process, they retain control of their company without the oversight of an insolvency practitioner. This will help minimise costs and also business disruption caused by an insolvency process.
At the end of the 20 business day period, the small business restructuring practitioner sends a proposal to creditors to restructure the business, which will more than likely include creditors' compromising their debts. Creditors will then have 15 business days to vote on the plan and (at this stage) it appears that the plan will be approved if a majority, in value, of unrelated creditors vote for it.
If the restructuring plan is approved, the company continues trading and the small business restructuring practitioner administers the plan and distributes funds to creditors.
If the restructuring plan is not approved, the process ends, and the company's directors can then decide whether to place the company into voluntary administration or liquidation (or a new simplified liquidation process which is also proposed).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.