Small Business Restructuring: Is it the answer to your client’s problems?

This note has been prepared to guide company directors, their advisors, and creditors about the operation of the Temporary Insolvency Relief provided by the Federal Government.  It is not legal advice.  FerrierSilvia can assist you with further information about how this relief works.

Covid has brought with it a lot of change. One is a new way to restructure small businesses, contained in Part 5.3B of the Corporations Act and subordinate legislation, which has been heavily promoted on social media platforms like LinkedIn, known as ‘Small Business Restructuring’ or SBR.

SBR is available to companies with liabilities less than $1 million, the directors of which have not previously sought to use the regime within 7 years. It provides for a moratorium on creditors’ rights for up to 20 business days, during which a ‘Plan’ can be formulated by a Liquidator (called here, a ‘Restructuring Practitioner’ or ‘RP’) working with the company. The Plan will then be put to a postal vote of creditors. If a majority in value of unrelated creditors support the Plan, it can allow up to 3 years to pay creditors, with any amount unpaid at the end of the Plan discharged. It is very similar to procedures available to consumer-debtors under the Bankruptcy Act – so called ‘Debt Agreements’.

While the scheme sounds simple enough, we suspect it won’t work for many small businesses in difficulty, for several reasons.  Most importantly:

  • Suppliers will be reluctant to extend credit to a business once they find it is in Restructuring. Unlike Voluntary Administration, suppliers will not be protected by the personal assumption of liability by the RP.  This is a radical change from the position adopted in the early 1990s when the law imposed personal liability on Receivers and Voluntary Administrators.
  • The regime tries to avoid ‘cost blow-outs’ in the process by requiring that the RP and Plan Trustee’s remuneration be fixed in advance – for the initial phase as a lump sum, and for the subsequent phase as a share of the amount paid to creditors. This means remuneration is payable regardless of the work required of the RP.  It is hard to see how competent and careful liquidators will be able to accept work of an unknown nature and extent on these terms.
  • Creditors will not get the benefit of a detailed report by an independent Liquidator. The RP is the agent for, and likely to be very sympathetic to, the client company.  While there are often concerns about appointee independence, most Insolvency Practitioners take pride in their independence and seek to provide candid and timely advice to creditors.  Creditors will not have the benefit of this endorsement; they will be relying very heavily on information provided to them and to the RP by company directors and management.
  • The process is only available to companies. While companies are common, they are far from the only form of business structure used by micro and small businesses.  SBR isn’t available to sole traders or partnerships, and its interaction with Trusts remains to be explored.
  • While attempts have been made to simplify the administrative processes, in fact the scheme has ended up more complicated than the workhorse of Australian insolvency, Voluntary Administration. Many of the complexities have emerged from attempts to reduce cost; but these have come at the price of potentially less accurate and reliable information being provided to creditors, something which is likely to discourage acceptance.

In our view, the SBR won’t work in most cases, and even when it could, it will offer few advantages over Voluntary Administration. More importantly, where a business has only one or two large creditors, informal arrangements (that is, private negotiations) overseen by an insolvency practitioner are likely to involve greater trust and significantly lower costs than a scheme which has, unfortunately, involved compromises that suit no-one.

Author: Peter Sheppard, Director

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