Small Business Restructuring: Act now to be protected from insolvent trading liability
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Reforms to Australia’s insolvency laws became operative on 1 January 2021, allowing eligible small businesses experiencing financial distress to access a new debt restructuring process or to wind up through a simplified liquidation pathway.
This article provides an overview of the small business restructuring process (‘Restructuring’). For detailed information about the simplified liquidation process, click here.
Restructuring adopts a debtor-in-possession mode which allows directors to stay in charge of the business during the process and is intended to reduce the complexity and costs associated with having an external administrator taking control of the debtor company.
Act now to access relief from insolvent trading
While the temporary relief from insolvent trading liability has expired on 31 December 2020, financially distressed companies may extend the same relief for up to 3 months if they declare an intention to access the restructuring process before 31 March 2021. To do so, they will need to publish a declaration on ASIC’s published notices website and provide ASIC with a copy of their declaration within five business days after it is made.
Entering into restructuring
A company is eligible for restructuring if the company:
- is insolvent or is likely to become insolvent;
- has total non-contingent liabilities of less than $1 million;
- has paid all employee entitlements in full;
- has ensured all tax lodgements are up to date; and
- No director (including former directors who resigned within the previous 12 months) was a director of a company that went through restructuring or was subject to simplified liquidation in the previous seven years.
Directors must provide a declaration within five days of the appointment of a restructuring practitioner stating that
- they believe on reasonable grounds that the company meets the eligibility criteria; and
- the company has not entered into a voidable transaction other than unfair preferences in the event that the company is wound up.
Process of restructuring
During the restructuring, directors remain in control of the company and there is a moratorium on enforcement action by creditors similar to the effect of a voluntary administration. The restructuring has 3 main phases:
- The planning phase: Directors have up to 20 business days to prepare a restructuring plan with the support of the restructuring practitioner. The plan must:
-
- Outline the debts and claims addressed through the restructuring plan;
- Set out how the company’s property will be dealt with and what will be distributed to creditors; and
- contain all relevant information necessary for creditors to make an informed decision on whether to accept or reject the proposal.
The restructuring practitioner then must certify the restructuring plan and send the proposal to creditors.
- The voting phase: Creditors have 15 business days to vote on the plan. The plan is approved when a majority in value of voting creditors are in favour. It is important to note that related creditors cannot vote on the plan.
- The administration phase: If the restructuring plan is approved by creditors and duly executed, it will then be administered by the restructuring practitioner in accordance with its terms.
Termination of restructuring
When an approved restructuring plan is fully effectuated in accordance with its terms, the company is automatically discharged from the debts covered by the plan and the restructuring process terminates.
Restructuring can be terminated in the planning phase if:
- The restructuring practitioner determines the company is ineligible or believe it would not be in the creditors’ best interests to consider a restructuring plan;
- The directors fail to complete the declaration; or
- The company does not propose a plan within the prescribed timeframe.
In the administration phase, restructuring can be terminated if:
- a condition precedent of the plan does not materialise within 10 business days after the plan is approved;
- there is a breach of the plan that goes unremedied for 30 days; or
- an administrator or liquidator is appointed to the company.
The team at Collins Wentworth are experienced in business financial matters. If you have concerns about the financial position of your business and wish to know more about how we can assist you, contact us today.
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