Small Business Restructure (SBR) – To help businesses that may have trouble coping following the withdrawal of its COVID-19 incentives, the government has introduced new reforms — specifically the small business restructuring reforms — to give financially challenged SMEs with debts under $1 million the ability to restructure their debts while the directors remain in control.
As we move through 2022, the levers of policy are being adjusted to reflect the new post-pandemic world for small to medium enterprises (SMEs) within Australia. Although revenue streams are still fluctuating somewhat throughout various industries, various support mechanisms and incentives related to the pandemic have gradually expired, creating a new environment for businesses that may be highly leveraged, or experiencing cash flow issues. While subsidies have been available, not all obligations get written off – bills for the Australian Tax Office (ATO) and incidentals still need to be paid. Within this context, many SMEs are exploring restructuring options, in order to create greater assurances and longevity for businesses experiencing financial difficulties.
The ATO has remained primarily focussed on trying to ensure that as many businesses as possibly experiencing insolvency issues are able to keep their doors open, and workers employed. Insolvency numbers are the quietest they have been in years, and the ATO and banks have been largely inactive in pursuing corporate debts. This is gradually changing as post-pandemic business conditions settle, however numerous restructuring options remain available to business owners across the country.
We recently sat down with Michael Hogan from Hogan Sprowles to discuss the new insolvency reforms and how they will impact businesses of all sizes. As experts in restructuring, turnaround and liquidation, along with being members of the Institute of Chartered Accountants Australia and New Zealand (ICAA), Australian Restructuring, Insolvency and Turnaround Association (ARITA) and Turnaround Management Association (TMA), Hogan Sprowles are well placed to provide both formal and informal advice to their clients across numerous industries.
What Are The Business Restructuring Changes?
The ‘Simplified Debt Restructuring Process’ allows for a qualified change to the restructure options available to certain businesses, should it meet certain eligibility criteria. In simple terms, should your business have debts amounting to less than $1 million AUD at the commencement of the process, then you may be able to restructure your debts whilst retaining directorial control of the business.
Contained within the application for this process is an acknowledgement that your business is either currently insolvent or likely to be. Insolvency refers to the inability for a business to make repayments on their liabilities as they are due.
If a business qualifies for the Simplified Debt Restructure Process, then they will begin the process of creating a debt restructuring plan. Essentially it is a self-managed option, allowing an eligible small business to retain control of the company throughout, as opposed to handing the reins over to a liquidator to manage the process and business.
A key outcome is to provide a formal repayment plan which, if enacted, will detail a predetermined return for creditors in certain cents-on-the-dollar or percentage terms. Accompanying this will also be a restructuring proposal statement, outlining a schedule nominating the company’s creditors and the amount owed within a certain number of business days.
So What Are My Options For Restructuring?
With the Australian Tax Office (ATO) recently notifying companies that are in arrears that they are intensifying their debt collection efforts, and issuing Director Penalty Notices (DPN), now is the time to be proactive in exploring all options.
Michael Hogan, from Hogan Sprowles, mentions the base advice to SME business owners and management teams remains the same “Early Intervention is key. Someone like Kapil, and the Equil team, can identify 6 months, 18 months, 2 years in advance. When we have a potential problem we should talk about it now. It’s why we love working with their team – the foresight and clarity they can provide is such a crucial advantage for any client business to have”.
Experienced financial service providers are essential to forward plan for any such eventuality, looking many months or years ahead into your business’s financial future to be able to identify if/when you need to commence restructuring proceedings. We asked Michael to share what he felt were the main signs of potential insolvency triggers. Michael stated, “There are some key challenges businesses could be facing such as lacking the working capital to support growth, balance sheet issues, creditor arrears, or problems with the working capital cycle.”
We absolutely agree early intervention is crucial, and can mean the difference in the survival of the whole operation whilst ensuring that the interests of creditors are addressed. Michael went on to outline four distinct pathways that businesses take in regards to their situation:
Looking at deals with creditors
Creditor businesses offer further leverage arrangements that restructure the debt by ensuring repayments on due credit are made, while taking a potentially more highly geared position for the business overall due to the additional interest. In other words, there is often potential to take out a loan to cover your existing loan repayments.
A business may choose this option if they feel confident that revenue streams are going to pick up in the foreseeably close future, enabling them to ultimately service any and all repayments as this cash flow increases.
Small business restructuring process (SBRP)
This pathway is the one affected most by the adjustments of the Simplified Debt Restructuring Process. In coordination with expert financial advisors, the business will undertake a process whereby they reorganise their business and debt obligations, nominating both the creditor, how much they are owed, and outlining a repayment plan that schedules how any liabilities will be accounted for.
As mentioned above, legislative changes allow SMEs with debts totalling under $1 million when they commence this process to remain in charge as directors of the company. Additionally they may continue to undertake transactions, so long as they are associated with the ordinary course of business.
Voluntary administration (Deed of Company Administration)
Voluntary administration involves handing the reins of the business over to a registered administrator/liquidator, who operates the business with the express purpose of being able to cover any outstanding debt obligations whilst keeping regular operations ticking to some degree, through insolvent trading. Usually this pathway is taken when the determination is made that the company may still potentially be a profitable future operation, presenting a more attractive option than complete liquidation.
As an experienced registered liquidator, Michael Hogan notes that inherent within this process for business is a Deed of Company Administration (DOCA) document, that outlines to both creditors and those involved with the company exactly how any operations will continue under external administration in order to potentially allow the company to survive whilst servicing its repayments.
Liquidation
Liquidation is often seen as the final straw for a business in financial distress, the dissolving of any and all assets, combined with any remaining cash, to maximise a final repayment of as much of a business’ debts as possible. It is a shuttering of the doors – closing any shopfronts and discontinuing any employment and employee entitlements.
Ideally a business may be able to enact one of the three pathways prior, allowing operations to be maintained on some level whilst addressing money owed to any secured creditors. The simplified liquidation process isn’t so much a restructuring mechanism as it is an acknowledgment of no other option. Once the process is entered into the business is essentially no more.
When Entering This Process, What Are the Keys?
As an experienced provider within this field, Michael Hogan details a few key considerations that every business owner should make when considering any and all potential restructuring options, that may allow them to make a better informed decision for their particular circumstances:
- SMEs need to be proactive and diligent with providing information and communicating information about their business affairs with their accountant. Transparency is absolutely vital, as your accountant will not be able to provide the most appropriate information unless they are fully across the facts and all admissible debts.
- Your accountant needs to have a broad understanding of insolvency, as well as the indicators to look out for – in order to be proactive and potentially prevent the nuclear option of liquidation. Any ability to get out ahead of such circumstances might make all the difference when it comes to the long-term survivability of the business.
- It is imperative that your accountants work closely with highly-skilled and regarded liquidation and restructuring specialist firms. The specialist advice provided by such an insolvency practitioner, with intimate knowledge of any regulation frameworks, corporations act and applicable actions, is invaluable throughout this process.
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As ever, should you wish to receive restructuring advice tailored specifically to your business, and its particular circumstances, it is always advisable to contact an expert accounts service provider with a broad understanding of insolvency, such as Equil Advisory or registered liquidator Hogan Sprowles, as we will be able to more accurately advise you on a case-by-case basis. Mitigating the worst outcomes in these situations requires expert advice from a trusted financial partner who can guide and support you.
Should you wish to further explore the options as they pertain to your specific business, you can speak with our Equil Advisory team.
