On 10 December 2020, the Government passed new insolvency laws, which include the extension of the existing COVID safe harbour laws to the 31 March 2021, and the introduction of a new debt restructuring process.
Advisors and their small business clients should be alert to these changes and are encouraged to act immediately so they don’t risk trading insolvent or exacerbate existing cash flow problems.
In this blog we explore the safe harbour provisions currently in place for businesses, the eligibility criteria for the new restructuring options, as well as the new debt restructuring reforms coming into effect now that the automatic safe harbour period has ended.
Safe Harbour Provisions currently in place for small businesses
The existing temporary relief, or safe harbour provisions in place were implemented by the national government to support small businesses and allow them to continue to operate during the pandemic.
Eligible businesses have until before 31 March 2021 to make a declaration to receive the following temporary restructuring relief support.
Note: businesses will only receive this if they make the necessary declaration and publish it on ASIC’s published notices website. Once published, the business is entitled to the relief for a period of 3 months, which can be extended by a month on making a further declaration that is published no later than 2 weeks before the end of their initial 3 month period.
The temporary restructuring relief support includes:
- Increasing the amount that must be owed to a creditor from $2,000 to $20,000 before the creditor can issue a statutory demand for payment on the company;
- Increasing the time a company has to respond to a statutory demand from 21 days to 6 months; and
- Providing a director with a temporary safe harbour from personal liability for insolvent trading for debts incurred in the ordinary course of business before any appointment of an administrator or liquidator of the company during the period of safe harbour protection.
New debt restructuring reforms
The new debt restructuring process, which involves a ‘debtor-in-possession” model, entails the following:
- Directors to work with small business restructuring practitioners (SBRP) to create and propose a debt restructuring plan to creditors.
- This allows Directors to remain in control of their business, property, and affairs whilst they develop the restructuring plan.
- It also means that insolvent companies can continue trading whilst restructuring debt, both during the acceptance period and during implementation of the restructuring plan – which could be up to 3 years.
- During this timeframe, creditors are unable to take action against company during the restructuring of the company, which ordinarily would end when the restructuring plan is made (which is after the 20 day proposal period), but could also end for other reasons.
- Once a debt restructuring plan has been formulated this will be submitted to creditors who have 15 days to either accept or decline the plan.
- The plan can be implemented if a majority in value of responding creditors accept it, however, if more than half decline it then the business can enter voluntary administration or liquidation.
It’s important to note, that even after the restructuring plan has been approved by creditors, it can end prematurely if; the plan is conditional and the conditions are not satisfied; an administrator or liquidator is appointed by the company; or if the court orders that the plan should be terminated.
Eligibility criteria for the new restructuring process
There is a strict eligibility criterion for small businesses wanting to utilise the new debt restructuring process. One of the more important criteria’s being that the business’s liabilities must be no more than $1 million, including secured and related party debt and excluding employee entitlements.
What business directors should consider when restructuring
- The eligibility criteria of the temporary relief and new debt restructuring makes it available to a selection of small businesses – understanding this is crucial. If unsure on whether your business is eligible, speak to an insolvency practitioner.
- If wanting to restructure its important Directors move quickly and start the process early to ensure they can receive the full benefits.
- Businesses only have one chance when submitting a restructuring plan – if it is declined by creditors there is no opportunity to try again and businesses only get one opportunity every seven years.
- Creditors will be more likely to support simple restructuring plans, so when working with the SRBP remember to keep it succinct.
- The restructuring plan should be formulated using high quality cash flow forecasts and assumptions, hence finding the right accountant is crucial.
- The plan will need to include proof that the company has the post-restructure liquidity to survive and thrive.
- Directors can remain in control as they restructure and reach a binding compromise with creditors – something that would not be possible if the business were to file for voluntary administration.
For more information on the new restructuring processes put in place by the Government, ASIC has published the following:
Cash flow solutions for small businesses
One of the most important aspects of running a business is being able to manage its cash flow. This is something that may be neglected a lot of the time, however, staying on top of your cash flow is vital for the success of the business.
There are various finance solutions to help with your business cash flow, which may even prevent you from going through a debt restructuring process. Speak to your Ledge Finance Executive today to see what cash flow options are available for your business.
If this blog has sparked any questions or queries about your business, speak to your Ledge Finance Executive today, or contact our office on (08) 6318 2777. Whether it’s regarding questions on the new restricting processes, wanting to get in touch with an insolvency practitioner or you simply want to know what cash flow solution/s is best for your business.
At Ledge, we work with several referral partners in accounting, law, insolvency, financial planning, and so on, who will be able to assist with whatever it is you may need.