This article is the first in a series which examines how companies can benefit from the debtor in control restructuring process introduced by the Federal government earlier this year.
As we approach the end of the most recent lengthy lockdown, some companies will be carrying more debt than they expected. How they manage that extra debt burden could be the difference between recovering or liquidation. Avoiding a 'bury your head in the sand' mentality is critical to giving your company an opportunity to recover.
So, it's timely to remind ourselves that in January this year, the Federal Government introduced a new framework in response to the need to address the challenges faced by many businesses in financial distress. This Debt Restructuring process provides a tool for an eligible company to seek an arrangement with creditors to restructure the debts of the company and maximise its opportunity for survival.
What are the benefits?
Significantly, the process allows a director to retain control of the company and its property and affairs, throughout the process and, during the restructuring stage, not be exposed to the insolvent trading provisions in relation to debts incurred:
a. during the restructuring stage; and
b. in the ordinary course of business or with the consent of a restructuring practitioner or the court.
Other significant benefits during the restructuring stage include:
a. creditors cannot enforce guarantee against directors, their spouses and relatives without leave of the court;
b. no proceedings against the company or its property may be commenced;
c. there is a moratorium on any winding up applications or applications for the appointment of a provisional liquidator provided the court is satisfied that it is in the interest of the company to proceed with the restructuring; and
d. subject to certain exceptions, there is an automatic stay preventing counterparties from enforcing contractual rights triggered by the restructuring or financial position of the company.
A company may use the Debt Restructuring process if it meets the following criteria:
1. its total liabilities are less than $1 million (employee entitlements are not included in this threshold);
2. no person who:
a. is a director of the company; or
b. has been a director of the company within the previous 12 months immediately preceding that day;
has been director of another company that has used the debt restructuring process or simplified liquidation process within 7 years unless the other company:
i. was a related body corporate of the company; and
ii. its restructuring or simplified liquidation commenced not more than 20 days before the day on which the restructuring of the company began; and
3. The company has not already used the process within the last 7 years.
What are the phases / stages of the debt restructuring process?
The debt restructuring process is divided into two phases/stages:
1. the restructuring phase, which commences on the appointment of the restructuring practitioner and ends in specific circumstances, including when a restructuring plan is made; and
2. the restructuring plan phase, which commences when the restructuring plan is made and ends when the restructuring plan is terminated, such as when the restructuring plan is fully implemented.
During the restructuring phase, directors develop a plan to restructure the company's debt with the assistance of a restructuring practitioner.
What are the minimum requirements of a restructuring plan?
A debt restructuring plan will be void if it is inconsistent with the following standard terms:
1. all admissible debts must rank equally;
2. if total amount paid under the plan is less than all admissible debts, debts and claims to be paid proportionally;
3. no creditor may receive, in respect of their admissible debt, more than the debt or claim;
4. the amount of an admissible debt to be determined as at the time immediately before the restructuring began; and
5. a secured creditor will only be a creditor to the extent that its claim is greater than the value of its security.
In addition to containing the above terms, the plan must be in the approved form, identify what property is subject to the plan, provide for the remuneration of the restructuring practitioner and specify a date for the plan to be executed (which must be within 20 business days of the commencement of the proposal period).
What to remember and next steps
The debtor in control debt restructuring process offers companies an alternative to the appointment of an external controller which should not be overlooked in trying to restructure a debt burden. It allows those that know the business best, the current managers/owners, to find a solution with the assistance of a restructuring practitioner, whilst providing an opportunity for the company to continue trading whilst it prepares the plan.
In our next article we will look more closely at what is needed to get a plan approved and what are some of the practical considerations for a successful debt restructuring process.
In the meantime, if your company is weighed down by unforeseen or unplanned debt and you want to position it for recovery, whilst remaining in control, then you need to seriously consider the new debtor in control debt restructuring process.
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.