Small Business Restructuring

The Australian government introduced two significant new insolvency solutions following the enactment of the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth), as part of the federal government’s JobMaker Plan in response to the COVID-19 pandemic. The second of these solutions is the Small Business Debt Restructure Process (SBDRP).

The benefits of entering a SBDRP include:

1. Reduced costs;
2. Shortened turn-around times;
3. Increased and easier access; and
4. Retained control by business owners/directors (through the debtor-in-possession model).

The process is available to incorporated companies if its liabilities are less than $1,000,000.00 (excluding employee entitlements) and all of its tax lodgements are up to date. Under the process, all employee entitlements that are due and payable must be paid before the plan can be put to creditors. Additionally, the process can only be used once in a seven-year window, by both the company and its directors, including former directors who resigned in the 12 months prior.

Within 5 business days after the restructuring process beginning (or longer if approved by the restructuring practitioner) directors must provide the restructuring practitioner with a signed declaration stating that:

• The company is eligible;
• Whether the company has entered into any voidable transactions; and
• The director(s) believe on reasonable grounds that the company meets the eligibility criteria, and state the grounds of that belief.

If you are unsure about whether particular transactions are voidable, you should seek legal advice before making the declaration.

Under a SBDRP, directors are allowed to continue to trade in their company’s normal course of business (subject to certain control and restrictions) while undergoing the restructuring process. The process can take up to 35 business days and can be generally divided into two phases:

1. The proposal phase, where directors and external practitioner work on a plan for up to 20 business days (highlighted in green below); and
2. The acceptance phase, where creditors have up to 15 business days to vote to approve or reject the plan (highlighted in orange below).

A SBDRP can be contingent on a future event, such as a sale of property/asset after a certain period following the creditors accepting the plan. Additionally, all restructuring plans must include several prescribed terms and conditions, including that:

• A creditor cannot receive a transfer of property other than money;
• Admissible debts and claims must rank equally and receive a pro-rata share of the funds for distribution; and
• The SBDRP must be limited to 3 years.

The SBDRP is also available to other incorporated entities such as registered clubs and cooperatives. Sole traders do not have an equivalent option under the personal insolvency regime, although a part 10 agreement under part X of the Bankruptcy Act 1966 (Cth) may produce a similar outcome.

A SBDRP will be terminated if one of the following occur:

1. The SBDRP is completed by virtue of all the terms of the process being satisfied;
2. A creditor obtains a court order terminating the SBDRP;
3. The plan is conditional on a specific event occurring, and that event does not occur;
4. There is a breach of the SBDRP that remains unremedied for a period of 30 days; or
5. An administrator, liquidator, or provisional liquidator is appointed to the company.

Approved plans can also be varied via court order, however you should consider the relevant commercial implications before taking such action.

For personalized and results-driven legal representation in Litigation and Dispute Resolution, contact us now.

 

This article was prepared with the assistance of Matthew Theophile.