It’s no secret that clients rely on their accountant to keep up to date with the latest tax rules. As their most trusted professional advisor, client’s will also frequently turn to their accountant first when facing financial struggles. In order to better serve them, you need to remain on top of new laws and reforms that affect and can benefit them. They might not be aware of opportunities designed to help them through any cash flow challenges they may be facing in the current climate.

The new insolvency reforms are an excellent example.

The new processes recently introduced are intended to help small businesses by providing additional options for those businesses facing financial difficulties. The new reforms aim to reduce the complexity and cost of a formal insolvency appointment. Small businesses may be able to restructure as a strategy to address the challenges posed by COVID-19. If restructuring is not a viable option, a simplified liquidation process has been introduced.

Here we look at the new insolvency reforms and the opportunities the reforms present to address COVID-related financial challenges your clients may be experiencing.

The reforms provide two new options for companies facing financial distress:

Small Business Restructuring:
This formalized restructuring process makes it easier for struggling small businesses to undertake a process to restructure their existing debts so they have a higher chance of remaining in business. The company can continue to trade during the restructuring process with the company’s directors remaining in control of the business while a restructuring plan is formulated.

Simplified Liquidation:
Should the business not be in a position to restructure its debt, the simplified liquidation process makes it easier and more cost-effective to wind up a company, increasing the potential for a return to employees and other creditors.

Together these measures provide additional options to the usual formal insolvency processes, opening up the possibility for more small businesses to survive.

As mentioned above, the goal for the new small business restructuring process is to make it easier for companies to restructure their existing debts. During the restructuring period the Company can continue to trade with the directors remaining in control. In essence, the process involves:

• Determination of a company’s eligibility
• Formulation of a restructuring plan by directors and Restructuring Practitioner
• Voting by creditors on the proposed restructuring plan
• If approved by creditors, implementation of the restructuring plan with Restructuring Practitioner overseeing the disbursement of funds

Here is how the new restructuring process is different from the Voluntary Administration process.

When a business owner opts for voluntary administration and appoints an external administrator, the administrator takes control of the business during the administration period, with all decisions concerning the company including whether it should continue to trade and how to deal with company assets, being made by the administrator. 

Creditors are not able to commence or continue recovery action against the company during the administration period.

If the directors wish to put a proposal to creditors, they must submit the proposal to the administrator, who prepares a report for creditors detailing the directors’ proposal and its comparison to a liquidation scenario plus the administrator’s investigations into the company and his recommendation regarding the directors’ proposal.

A meeting is then held where creditors vote on the proposal. If a majority of creditors (in value and number) vote in favour, the company enters into a Deed of Company Arrangement, otherwise creditors may reject the proposal and vote to place the company into liquidation. 

If the directors’ proposal is accepted, control of the company returns to the directors who can then continue to trade the business.  The administrator becomes the deed administrator who then receives and distributes funds pursuant to the terms of the Deed of Company Arrangement.

Due to the obligations placed on external administrators, including the need to conduct detailed investigations, hold meetings of creditors and comply with other statutory responsibilities, the voluntary administration process often involves significant costs.  Whether those costs are paid out of company assets or directly by the business owners, they can result in reducing the funds available for distribution to the company’s creditors.

In many cases, the potential cost of the voluntary administration process has forced business owners to simply liquidate their companies, leading to the possibly unnecessary closure of some businesses and lost jobs for employees. Creditors often end up receiving little, if any, of what was owed to them. These outcomes also have a negative impact on the economy.

In the new small business restructuring process, the company’s directors appoint a small business restructuring practitioner to assist with formulating a restructuring plan. During the restructuring period, the business can continue to trade with the directors retaining day to day control of the business (ie, “debtor in possession”). As with a voluntary administration, the restructuring process also provides some protection to the company with creditors unable to commence or continue action against the company during the restructuring period.

The restructuring process sees the directors and the small business restructuring practitioner working together to develop a restructuring plan. The proposed plan is then sent to creditors who vote by way of postal vote. If a majority of creditors (by value only) vote in favour, the restructuring plan is then implemented, overseen by the small business restructuring practitioner. If creditors vote against the restructuring plan, the restructuring process simply comes to an end and it is then up to the directors to consider whether the appointment of a liquidator or external administrator is necessary at that stage.

The restructuring plan is preferably structured in a manner that will appeal to creditors while also ensuring that what is proposed is manageable for the company, increasing the odds of a successful outcome. The new process is intended to result in lower costs due to the directors retaining control of the business, potentially leading to better outcomes including increased returns to creditors. Employees are also likely to benefit from retaining their jobs. 

To be eligible, the company must meet certain criteria including ensuring its taxation returns are up to date, that amounts relating to outstanding employee entitlements are paid and that the company’s liabilities to unrelated creditors total less than $1 million.

Should small business restructuring not be an option for your client, the simplified liquidation process offers a modified liquidation process that is intended to reduce the cost and duration of the liquidation process. While your client still appoints a liquidator to wind up the company in the usual manner, and the liquidator remains responsible for realising company assets and distributing funds to creditors, the following changes are intended to reduce time and costs:

• There are no meetings of creditors 
• There are no committees of inspection
• There are reduced requirements for liquidators to investigate a company’s affairs and report to ASIC
• There are fewer circumstances in which a liquidator can claw back an unfair preference payments from creditors not related to the company
• The procedures for the distribution of dividends to creditors have been simplified 
• The reforms maximise technology neutrality to facilitate easier communication and voting

The simplified liquidation process does not modify the rights of secured creditors or the statutory rules affecting payments to employees and other priority creditors.

Like the small business restructuring process, to be eligible for a simplified liquidation, the company must meet certain criteria including having liabilities to unrelated creditors totalling less than $1 million.

The purpose of the new insolvency reforms is to provide options for businesses facing insolvency that are simpler and more cost-effective than existing insolvency processes.

The reforms are designed to apply to small businesses, classed as companies with unrelated liabilities of less than A$1 million. To be eligible, companies must meet certain other criteria including that the company or its directors have not undertaken a similar process in the preceding 7 years and, in the case of small business restructuring, that the company’s taxation returns have been lodged and outstanding employee entitlements paid.

Knowledge and understanding of the new insolvency reforms will enable you to advise your clients experiencing financial difficulties about the new options available to them. However, insolvency can be a complicated area and working with an external insolvency expert is really the best way to assist your clients with confidence. This will maximise the chance of your clients weathering the financial storm and coming out the other side with as few bruises as possible!

For more information, message me here on LinkedIn to discuss how we might partner to assist your clients through these difficult times.