- Struggling small businesses with debts of A$1 million or less could access simplified insolvency processes under the government proposal.
- Owners of insolvent businesses could continue to trade while they look at a restructure, rather than administrators being brought in.
- Business owners and directors would control what restructure plans are put to creditors.
The proposed overhaul of insolvency rules, announced on 23 September, helps struggling small businesses with debts of less than A$1 million to restructure.
These new reforms would mean small business owners can keep trading and restructure their debts rather than being placed in the hands of an administrator or liquidator. Companies with more than A$1 million in debts would still be required to work under existing insolvency rules.
The changes would go a long way to reducing the destruction in business value associated with formal insolvency appointments, and allow viable businesses to survive the COVID-19 pandemic.
Picture: Abi Curtis CA.
“The changes would go a long way to reducing the destruction in business value associated with formal insolvency appointments, and allow viable businesses to survive the COVID-19 pandemic. ”
Keeping business owners in control
The current emergency protections for business owners, put in place during the COVID-19 downturn, expire at the end of 2020. These new reforms, slated to begin in January 2021, would enable struggling small businesses to restructure their debts while the directors remain in control.
Traditionally, the cost of putting a business into administration or liquidation leaves nothing for unsecured creditors.
Complex processes and fees erode cash, while the stigma of administration destroys asset value. In addition, businesses in administration are often not run as efficiently and effectively as they would if business owners and directors were still in charge.
With these reforms, struggling small business owners would remain in control of their companies and assets.
20 days for a business restructure plan
Under the changes, an insolvent small business will have 20 days to come up with a restructuring plan. Creditors will have to vote on the plan within the following 15 days.
If creditors reject the proposal, the business would be liquidated under a new streamlined scheme that cuts the number of liquidators’ investigative processes, mandatory meetings and reporting requirements.
A key difference to the usual insolvency process is that business owners and directors would control what restructure plans are put to creditors – not administrators who may reject offers that might be better for creditors but are too risky for the administrator.
A wave of insolvencies
A wave of insolvencies is expected once COVID-19 relief ceases. Some businesses receiving the relief are not viable and simply shouldn’t survive.
But if a business was viable pre-COVID, there’s a good chance it will be again.
“If a business was viable pre-COVID, there’s a good chance it will be again.”
These proposed changes provide an opportunity to put a circle around the ‘COVID depression’, draw a line in the sand and turn things around.
Although debts that have mounted during the pandemic are still going to be there when COVID moratoriums are removed, business owners don’t have to just sit on their hands and wait for the writing to be on the wall.
There are other options to insolvency, even now.
Other options to insolvency
Business owners could use the package of COVID reliefs as a springboard to restructure or compromise debts now. For a small upfront cost, business owners can get on the front foot in a restructure, before the metaphorical gun is put to their head.
The emergency protections limit statutory demands by creditors, give companies more time to respond to creditors’ demands and remove personal liability for trading while insolvent.
However, while these current COVID protections will undoubtedly assist businesses, they are temporary and these proposed new laws will encourage business owners and directors to seek out a restructuring.
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