InsolvencyLaw

The New Small Business Restructuring Process

By 15 December, 2020 No Comments

Further to our article on 24 September 2020, from 1 January 2021, the way in which small businesses are able to restructure will substantially change. Here you can find what you need to know, before it all starts.

Legislation

The changes are as a result of new legislation being introduced by the Federal Government in response to the COVID-19 economic down turn. The following pieces of legislations have now been passed by the Parliament:

  1. the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) (Bill);
  2. the Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 (Regulations); and 
  3. Insolvency Practice Rules (Corporations) Amendment (Corporate Insolvency Reforms) Rules 2020.

How the changes will affect you will depend on how you engage with the restructuring and insolvency space. If you are:

  1. a liquidator or insolvency practitioner;
  2. a self secured creditor of a company or work on behalf of a secured creditor; and
  3. an individual that would like to understand the process set out in the Bill and regulations.

Insolvency Practitioners

The most significant change for insolvency practitioners in respect of the Bill and the Regulations is the creation of the concept of small business restructuring practitioner (SBRP). The main issues with the SBRP concern:

  1. registration and remuneration;
  2. powers; and
  3. obligations.

Registration

To be an SBRP, an individual must satisfy all of the following criteria:

  1. membership of CAANZ, CPA Australia, or IPA;
  2. be able to demonstrate that they have the capacity to perform the functions and duties of a registered liquidator satisfactorily; and
  3. satisfy the conditions of the Insolvency Practice Schedule.

Powers

The SBRP is empowered through the Regulations to investigate the company’s business, property, affairs, and financial circumstances for the purposes of:

  • to certify the proposed restructuring plan; 
  • deciding whether to terminate the restructuring of the company;
  • resolving a disagreement as to the amount of a creditor’s admissible debt or claim; and
  • performing or exercising any other function, duty, or power as the SBRP for the company.

Further, SBRPs will be provided with a statutory defense if qualified privilege. This will assist SBRPs to be open and frank when speaking or writing in relation to the company. This protection is only afforded however to the extent the publications are made in respect of carrying out their duties as an SBRP.

Obligations

SBRPs are under no obligation to investigate the company’s affairs. However, it will be an offence for an SBRP to prepare a certificate if they do not make reasonable inquiries into, or take reasonable steps to verify, the company’s business, property affairs and financial circumstances.

It is also proposed that, any time prior to issuing the certificate, the SBRP will commit an offence if they:

  • become aware of incomplete or inaccurate information in the plan and has reasonable grounds to believe that, if the plan is made, the information pertaining to the plan is likely to impact the company’s ability to meets its obligations; and
  • do not notify the company, as soon as practicable after becoming aware and provide an opportunity for the company to address the incomplete or inaccurate information. 

The above offences are strict liability offences, with a maximum penalty of 50 penalty units. 

Impact on Secured Creditors

The key issues to be considered by secured creditors of a company that may undergo restructuring include:

  1. the total liabilities for eligibility; 
  2. disputing the amount of admissible debts or claims; and
  3. the extent to which secured creditors are bound by the restructuring plan.

Liabilities Test for Eligibility Criteria

In order to meet the necessary criteria, the total liabilities of a company must not exceed $1 million on the day the restructuring proceeds. It is proposed that related-party debt and secured debt will contribute to the $1 million threshold. However, contingent liabilities are not admissible for the purposes of a restructuring plan. 

Disputes about the value of admissible debts or claims

A schedule of admissible debts and claims must be included in the ‘restructuring proposal statement’ which accompanies the restructuring plan. If a secured creditor does not agree with the schedule, they must notify the SBRP within 5 business days of receiving the restructuring plan. 

Extent to which secured creditors are bound by the restructuring plan.

A secured creditor will only be bound by the restructuring plan to the extent:

  • of their unsecured debt; or
  • they agree to be bound if the entire amount of their debt is secured. 

The Restructuring Process

The following sets out the small business restructuring process:

Source: ‘Insolvency reforms to support small business’, The Treasury (Government Factsheet, 24 September 2020) <https://budget.gov.au/2020-21/content/factsheets/download/insolvency-reforms-factsheet.pdf>.

Creditor’s Approval and Voting on the Restructuring Plan

Upon the proposal of the restructuring plan, the SBRP will ask the creditors to:

  • provide a written statement accepting or declining the proposed plan; and
  • verify or dispute the company’s assessment of the admissible debts or claims.

As set out in the above diagram, the acceptance period is 15 business days beginning on the day the SBRP provides the creditors with the restructuring plan and accompanying documents. As previously mentioned, a creditor only has 5 business days to dispute the amount of the admissible debt or claim, commencing at the same time. 

The restructuring plan will be accepted if it receives majority in value of the company’s affected creditors who respond during the acceptance period. The value is determined by the creditor’s admissible debt or claim at the date of restructuring.

Termination of Plan

The restructuring plan will terminate on the day that all obligations under the plan have been fulfilled, and all admissible debts and claims have been dealt with in accordance with the plan. 

However, the restructuring plan may terminate upon the following occurring:

  • The Court orders the plan be terminated if it is satisfied with various matters mainly concerning malfeasances, such as material omissions from the plan or false or misleading information about the company’s business; 
  • The plan is expressed to be subject to the occurrence of a specified event, and that event does not occur within the specified period (which must not exceed ten business days);
  • If a contravention of the plan by a person bound by the plan has occurred and has not been rectified within 30 business days; or 
  • If a voluntary administrator, liquidator, or provisional liquidator of the company has been appointed and the company enters voluntary administration or liquidation.

Should you have any queries, please contact Nick Malone at nick@pragma.law or Aaron McDonald at aaron@pragma.law.