The Federal government has released draft legislation to amend Australia's insolvency framework for the purposes of establishing a streamlined restructuring process for small businesses. This new legislation is slated to commence on 1 January 2021.
The reforms are designed to provide a new low-cost arm to the current one-size-fits-all system that can be prohibitively expensive for small businesses seeking to restructure their affairs. It is hoped that the reforms will encourage small business directors to proactively engage with the insolvency framework earlier, thus increasing the chance of a successful restructure. This goal is commendable.
At BRI Ferrier we, unfortunately, observe numerous cases where a successful restructure may have been viable had the subject company entered external administration at an earlier juncture. In many of these instances, indicators of insolvency were not apparent to the directors, and the cost of appointing an external administrator were perceived to be too high relative to the Company's recoverable value.
A Formal Debt Restructuring Process and a Simplified Liquidation are just two proposed elements of the reforms that have been subject to public consultation in recent days.
Formal Debt Restructuring Process
Under the draft legislation, a formal debt restructuring process for certain eligible companies is proposed that will act as an alternative avenue for restructure where a voluntary administration and deed of company arrangement are deemed to be unviable from a cost perspective.
This draft legislation carries greater parallels with personal insolvency agreements under the Australian bankruptcy regime than anything currently enshrined in Australian corporate insolvency law. In particular, it is noted that the proposed legislation provides that directors would retain control of the Company's business, property and affairs during the restructuring process. For directors heavily involved in a company's operational affairs, this may prove to be an appealing feature of the process.
It is also important to note that the draft legislation provides that only a registered liquidator may consent to act as a Small Business Restructuring Practitioner (SBRP) for the proposed debt restructuring process. At BRI Ferrier, we have the capabilities to provide such services.
The draft legislation also proposes a streamlined creditors' voluntary winding up process whereby certain procedures relating to ASIC reporting, convening meetings, the appointment of reviewing liquidators and committees of inspection are disapplied. Upon first glance, the proposed changes may not actually reduce costs on a practical level when taking into account company eligibility criteria.
The anticipated eligibility liability threshold for both the proposed debt restructuring and simplified liquidation processes is $1 million. This relatively large creditor pool threshold may capture a significant body of distressed businesses in Australia if enacted and may be subject to revision following public consultation. The federal government's intent with such a threshold remains to be established.
As with all proposed reforms which are subject to public consultation the final legislation may be materially amended from the current form, in particular noting differing opinions on creditor value thresholds (be they related party or otherwise), SBRP qualifications and conflict of interest rules. We shall provide updates in due course as the final position becomes clearer.
Solutions to financial distress are often more easily achieved than first imagined, with the obvious albeit uncomfortable decisions being regularly avoided by directors and business owners (who wants to acknowledge bad news?). The proposed amendments will reward those who address their financial problems head on sooner rather than later as these solutions only work with creditor support. Experience tells us, the bigger the financial hole, the harder it will be to get that support.
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