The Federal Government has announced a simpler and more flexible insolvency process for owners of “financially distressed but viable” small businesses. This will make it easier and less costly for such businesses to restructure their debt and continue trading, making it a much more attractive option than the existing voluntary administration and liquidation regimes.
Whilst sometimes we might lament the incursion of American culture into Australia, this initiative, drawn from America’s Chapter 11 bankruptcy model, is actually welcome. The introduction of the voluntary administration regime in the 1990s was also a welcome softer alternative to liquidation, but both are costly, directors forfeit control of their business, and these regimes still harbour an element of punishment and public shaming for business owners.
These options currently available for distressed businesses are perhaps still out of balance with fostering entrepreneurialism and calculated risk-taking – essential ingredients in making a smaller business a bigger one, and creating employment and wealth along the way. They are also not fit for purpose in the COVID-19 environment for many distressed, but not necessarily doomed, businesses.
The damage done to businesses in the wake of the COVID-19 pandemic has necessitated responsive changes to help them survive. In this latest initiative, from 1 January 2021, a new formal debt restructuring process will be available for incorporated businesses (presumably including trustee companies) with liabilities of under $1 million. The details of what counts as a liability, and quantifying them, are not yet known (eg, accrued employee entitlements, leases, contingent liabilities, etc).
The purpose of this new debt restructuring process is to offer small businesses in distress, but still viable, a simpler process for coming to an arrangement with creditors, and trade on to the other side of this crisis. The features of this new process for eligible businesses include:
There will be no change to the rights of secured creditors.
Temporary relief measures implemented in March (eg, relief from insolvent trading liability) will cease after 31 December 2020. As a transitional measure, eligible small businesses will be able to declare to creditors an intention to access the new simplified debt restructuring process. Those temporary relief measures will then continue to apply to that business for up to a further three months, but not beyond 31 March 2021.
This simpler debt restructuring regime is subject to the required laws passing Parliament, but that shouldn’t stop anyone who would be eligible from considering them now. Ask yourself these kinds of questions:
Other commercial and tax implications will need to be considered, such as the consequences under the commercial debt forgiveness rules, credit rating, and so on. Also, in many cases, the Australian Taxation Office may well be the dominant creditor vote.
Talk to your trusted Nexia Edwards Marshall Advisor about this simpler debt restructuring process, and how we can help you avail yourself of it. Although details are not yet available, we anticipate that Nexia Edwards Marshall will be offering the services of a registered small business restructuring practitioner.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.