Small Business Restructuring Reform

EFFECTIVE 1 JANUARY 2021 - SMALL BUSINESS RESTRUCTURING PROCESS

What is the Small Business Restructuring Process (SBR)?

On 1 January 2021 some of the most significant changes in insolvency law in three decades were introduced following amendments to the Corporations Act.

The new laws allow small businesses the flexibility to restructure their debts whilst, allowing directors to remain in control of the business. The new laws also provide for a new simplified liquidation process.
The new simplified liquidation process will be covered in a subsequent newsletter.

Who is Eligible?

To be eligible for the restructuring process, the total liabilities of the company must not exceed $1 million.  This includes secured debts and related party debts, but excludes employee entitlements.

In addition, the company must not have been under restructuring or been subject of the simplified liquidation process within the preceding seven (7) years and a director of the company or a former director of the company has not been a director of another company that has been under restructuring or subject to a simplified liquidation process within the preceding seven (7) years.

How does the Process Commence?

Before director(s) consider that a restructuring plan is to be proposed to creditors, the company will have or substantially complied with the requirements to have:

•  Paid entitlements of employees that are due and payable; and
• Given all returns, notices, statements, applications and other documents as required by taxation laws.

Directors of a company that is eligible for the SBR process would pass a resolution to the fact that the company is insolvent or is likely to become insolvent at some future time and that a small business restructuring practitioner (RP) should be appointed.  The directors then appoint the practitioner.  It is important to note that only a person registered with ASIC as a Registered Liquidator may act as a RP of a company or for a restructuring plan.

RP appointment cannot be revoked or removed / changed by creditors.

Role of RP

The RP will:

• Provide advice to the company;
• Assist in preparation of the restructuring plan;
• Make a declaration to creditors about the restructuring plan;
• Comply with other statutory functions;
• Act as the company’s agent;
• Not deal with day to day trading;
• Be required to authorise transactions outside the ordinary course of business.

Effect on Creditors

Once an RP is appointed; creditors:

• Cannot begin, continue or enforce claims against company;
• Court action is adjourned unless deemed in creditors interests to wind up company;
• Cannot exercise property rights without consent of RP;
• Cannot enforce personal guarantee during proposal period.

What Happens when the Process Commences?

The company has twenty (20) business days from the appointment of the RP to prepare their restructuring plan and send it to its creditors (Proposal Period). This process can be extended by the RP by no more than ten (10) business days at the request of the company or the Court may, on application of the company, extend the proposal period.

The director(s) must trade in the ordinary course of business.  If the director(s) choose to enter into transactions or dealing with company assets that are outside of the ordinary course of business, the director(s) must seek the authorization of the RP.  The following circumstances are deemed not to be in the ordinary course of the company’s business:

• A transaction or dealing for the purpose of satisfying an admissible debt or claim;
• If the transaction or dealing relates to the sale or transfer of the whole or part of the business; and
• A transaction or dealing that relates to the payment of a dividend.

Importantly, the director(s) must do the following:

• Develop and propose a restructuring plan and a restructuring proposal statement;
• Execute the restructuring plan during the proposal period;
• Compile a schedule of debts and claims to be included with the company’s restructuring proposal; and
• Assist the RP and give him / her information about the company’s business, property, affairs and financial circumstances.

A company is deemed to be insolvent at the end of the Proposal Period when the plan is forwarded to creditors.

What must be Included in the Restructuring Plan?

The company’s restructuring plan must identify the company property to be dealt with, specify how that property is to be dealt with, provide for the remuneration of the RP for the plan and specify the date on which the restructuring plan was executed.

The plan must be accompanied by a proposal statement setting out a schedule of debts and claims which are to be dealt with under the plan, declaration signed by the RP stating that the practitioner believes on reasonable grounds that the company meets the eligibility criteria for the process and that the company will be able to discharge its obligations created under the plan as and when they become due and payable.  If the practitioner does not have the belief, the practitioner must explain the reasons for that conclusion.
In this regard, the RP needs to make reasonable enquiries into the company’s affairs and to take reasonable steps to verify information provided by the director(s) so as to give creditors confidence in respect to the company’s restructuring plan. In essence, the restructuring plan must:

• Last less than three (3) years;
• Treat all creditors equally;
• Allow for only one (1) dividend.

Voting on the Restructuring Plan

The RP is to invite all creditors except those who are related to the company to indicate in writing whether or not the plan should be accepted and whether they dispute the debt stated in the plan.  

The period for accepting a plan is fifteen (15) business days from the end of the proposal period (Acceptance Period), although that period can be extended if a creditor disputes the assessment of its claim in the proposal statement.  A varied schedule is to be provided to creditors as a result.

A plan is accepted if at the end of the Acceptance Period, the majority in value of affected creditors who return the statements to the RP stating that the plan should be accepted.  The plan is taken to be effected on the day after the end of the acceptance period or on the day that the specified event (according to the plan) has occurred.

When does the Restructuring Process End?

The restructuring process ends when the following occurs;

• If the restructuring plan is accepted by creditors;
• If the company’s director(s) pass a resolution that the restructuring process is to end;
• If the RP believes that the company does not meet the eligibility criteria or that the RP believes that it would be in the best interest of creditors for the restructuring to end;
• The company fails to propose a plan to creditors;
• If creditors vote against the plan;
• The RP decides that it is in the best interest of creditors to not go ahead with the restructuring proposal as relevant information has been omitted or was incorrect or if there has been a material change in the company’s circumstances;
• An Administrator or Liquidator is appointed to the company; or
• The Court orders that the process should end.

How is the Restructuring Plan Terminated?

The company’s restructuring plan terminates:

• When the company’s obligations under the plan have been fulfilled and all admissible debts have been dealt with according to the plan;
• If the Court terminates the plan;
• If the plan is subject to an occurrence of a specified event within a specific period and the event does not occur, the restructuring plan is terminated the next business day after the end of the specified period;
• If there has been a contravention of the plan by person bound by the plan and that contravention has not been rectified within thirty (30) business days of the contravention occurring - on the next business day after the end of the thirty (30) day period; or
• On the day a Voluntary Administrator, Liquidator or Provisional Liquidator is appointed.

The above intends to give readers an overview of the new restructuring laws.  Should you need expert advice, please do not hesitate to contact a staff member at Smith Hancock.