The concept of small company restructuring (SBR) was first implemented as a new type of insolvency appointment in January 2021. This was primarily done as a response to the “flood” of expected corporate bankruptcies that would follow from COVID-19 business disruptions.
Since January 2021, Australia has been hit by a number of floods, although not in the sense that was anticipated by the metaphor.
Although it got off to a sluggish start, SBR is gaining popularity and is proving to be effective in its mission to provide small companies and creditors with a commercially acceptable alternative to the options of liquidation or voluntary administration.
We believe that the timing is right for a practical guide to SBR since we are getting up to the two-year anniversary of the beginning of this legislation, and we have already completed numerous successful appointments to SBR positions.
In this article, our experienced insolvency lawyers Sydney explain all you need to know about legal proceedings on corporate insolvency and insolvent trading claims. We believe that with adequate knowledge about the bankruptcy act, personal insolvency agreements, restructuring insolvency, legal process, and how to get the best insolvency advice, our insolvency practitioners will make sure you are well-positioned to make good choices with your legal processes.
A debtor who Possesses the Collateral
SBR is a new insolvency paradigm, not merely a new sort of insolvency appointment, according to a competent bankruptcy lawyer who was consulted on the matter. Insolvency procedures in Australia have traditionally followed a creditor-in-possession paradigm, in which directors are removed from control of the company.
A debtor-in-possession appointment known as SBR allows corporate directors to maintain control over the day-to-day activities of the firm. Unexpectedly, this has resulted in a higher level of participation from directors in the process.
The directors of the company get fresh insights into effectively managing their company as a result of their participation in the reorganization of the company alongside the creditors, restructuring experts, and their accountant.
Debts under $1m
In order for the corporation to be considered, its total liabilities cannot be more than $1 million. We have had interactions with directors who put plans into action prior to an SBR appointment with the goal of bringing the total debt of the firm down to below $1 million so that it may qualify for the program. This can be accomplished by a combination of the following methods:
- Secured debts discharged.
- Superannuation debts cleared.
- Notices of director penalties have been paid.
- Transactions with related creditors that include the exchange of debt for equity
Plans have also been observed to give safe harbor protection against an insolvent trading claim while directors implement the debt reduction strategy in the lead-up to an SBR appointment. This would take place while the directors are still in charge of the company.
Entitlements Must be Paid
Before an SBR plan can be put into action, all employee benefits and compensation must first be paid out. Companies that are unable to acquire sufficient capital to discharge employee entitlement liabilities will not be eligible to implement a plan as a result of this provision.
This is a reflection of the challenges that businesses have historically encountered when considering proposals for deeds of company arrangement. If a company’s financial situation is so dire that it cannot even pay its employees what they are owed, the only practical option left is to put the business into liquidation. That aspect of SBR has not been modified.
There is a Difficulty with Loans from Division 7A.
If a business owner takes drawings from their firm in a manner that is comparable to income but records the drawings as a loan owing to the company, the business owner should not anticipate that the SBR process would result in a compromise of that debt.
A recent SBR that was carried out by our office revealed that the directors’ proposed payment was lower than the total outstanding sum of all of their division 7A loans combined. The Australian Taxation Office, also known as the ATO, was the sole significant creditor.
After speaking with the loan’s creditors, it became abundantly evident that a plan proposing anything other than the complete repayment of the loan account would not be allowed. Thankfully, the directors were able to alter their plan and increase the contribution to an amount equivalent to the Division 7A obligations, and the creditors approved the revised proposal.
Obviously, this does not mean that this is a hard and fast rule. Offers that are lower than the value of the shareholder loans will be reviewed, as they should, based on their individual merits.
It has a lot of Leeway, but Cash Remains the Key.
There are many different methods to organize business transactions. Contributions from future trade, loan contributions, equity contributions, introducing new company partners, modifying equity structures, and any other reorganization program that is economically rational that you can conceive of can be included.
One piece of advice, however, remains consistent: giving creditors cash up front together with the assurance that they will be paid is the optimal strategy. According to our past experiences, creditors are far more inclined to approve a plan that guarantees a speedy resolution as opposed to one that extends over a longer length of time and has a bigger danger of failing.
ATO’s Approach Has Been Both Collaborative and Business-Like.
The ATO is the most important stakeholder in this new insolvency system by a significant margin. Soon after the law was passed, the ATO issued specific instructions regarding what it is looking for from SBR proposals and detailed the information that it liked to receive from restructuring experts. These were both done shortly after the law was implemented.
This original attitude has, to the ATO’s great credit, been maintained throughout. The ATO is actively participating in the early stages of the proposal process by engaging in early discussion, offering constructive input, and adopting an approach to voting on proposals that are commercially sound.
One positive aspect of the process for debtor firms is that they are able to engage it with a clear understanding of how the ATO may react to their strategy. Because the ATO is the main creditor for many firms, this helps to promote trust in the SBR process. You can also read about Property development, building, and renovating by visiting https://www.ato.gov.au/General/Property/Property-development,-building-and-renovating/
Even though adoption has been slower than anticipated and there hasn’t been a torrent of insolvencies, SBR is starting to gain more and more popularity. There is a sound rationale for this practice: as compared to alternative choices, it offers directors and shareholders an option that is less costly, more adaptable, and carries a lower level of risk.
Contact our insolvency professionals at Chamberlains to get started today, to know more about all your concerns on voluntary administration, the personal bankruptcy act, commercial disputes, bankruptcy trustees, insolvency administrations, and potential personal liability.