Small Business Restructuring ‘Debtor in possession’ model

On 24 September, the Federal Government announced a set of reforms to radically streamline the restructuring and insolvency process for small business in 2021.

The proposed reforms include a simplified formal debt restructuring process for small businesses with under $1 million of creditors. The reforms resemble the US style Chapter 11 bankruptcy protection model, including a ‘Debtor in Possession’ workout focus.

The proposed reforms will allow business owners to remain in control of their business and continue to trade whilst working with a specialist restructuring practitioner to formulate a restructuring plan to put to creditors.

Key Takeaways

Treasury has released an initial Fact Sheet on the proposed changes with more detail to come as the proposed legislation is drafted. Key points from the information provided so far is:

The reforms involve a simplified restructuring process to give viable small businesses a better chance of survival
To be eligible, businesses must be a company, have debts of less than $1 million and be up to date on all employee entitlements.
The new small business restructuring process will allow the existing directors to remain in control of the business whilst working with a small business restructuring practitioner to present a restructuring proposal to creditors.
The directors and the restructuring practitioner will have 20 business days to develop a proposal to restructure the debts of the business. Creditors will then have 15 business days to vote on the plan.
During this period, a moratorium will come into effect, preventing unsecured creditors from taking action against the company whilst it works through the restructuring process.
For the plan to be approved, it will require at least 50% of creditors by value to vote in favour of the plan. Related party creditors are not allowed to vote and there are restrictions around what secured creditors can do.

Given the aim to implement the changes identified in Treasury’s Fact Sheet by 1 January 2021, prior to the anticipated wave of insolvencies post the lifting of protection mechanisms on 31 December 2020, it is likely further details will be provided rapidly over the coming months.

As a result of the relatively short period of time to implement such a major reform, and the need for insolvency practitioners to prepare to operate under the new system, businesses will be able to extend their ability to rely on the current protection mechanism up to 31 March 2021 by notifying of their intention to undertake the small business restructuring process.

Next Steps

Given the short time frame for these measures to come into effect, it is important to act now.

Business owners have a limited window to ensure you are meeting the eligibility criteria and to prepare your financials to be in a position to formulate a restructure plan if needed.

It is also important for business to understand their exposure to creditors effecting a small business restructuring proposal (or voluntary administration / liquidation) and take measures to implement security registrations early.

If you would like to know more about how the reforms may impact your business please contact us for a free initial discussion.