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Solving insolvency

We’ve all heard the term “Chapter 11” in Hollywood movies, but what does it mean for Australian small businesses? Someone who is incredibly well versed to explain the ins and outs is Luckbir Singh, Director practising in Commercial Law at MacDonnells Law.

“Chapter 11 actually refers to Chapter 11 of the U.S Bankruptcy Code. It allows businesses time to reorganise their debts whilst they continue operating. Australia didn’t follow the U.S model, so until now there has been no real comparison within Australian law. The closest Australia has is Voluntary Administration, but this comparison is still a way off. A Voluntary Administration gives a company in Australia some time to attempt to save a business, however it involves appointing a Voluntary Administrator, who takes control of the company.”

If you are a small business owner this subject is probably sending chills down your spine already, but don’t despair – knowledge is power, so understanding what options exist to help you out of financial difficulty and how to future proof your business puts you in the driver’s seat for long term success.

As Luckbir explains proposed changes may give some small business owners flexibility in tough times.

“The proposed changes in their present form, (which have not yet passed and are still subject to public consultation) will mean that some companies with less than $1 million in creditors, that are unable to pay their debts in the next 12 months, may be eligible to appoint a restructuring practitioner to their company in 2021. If the small business is being run by an individual however, and not a company, they won’t have access to these proposed changes.

If you find your business in financial difficulty the appointment of a Restructuring Practionier may give you room to breathe while you work together to develop a plan to tackle the debt.

“Appointment of a restructuring practitioner prevents a number of actions being taken by creditors to recover debts, including enforcement of guarantees by directors of the company or spouses or relatives of the director. The restructuring practitioner does not take over control of the company from the current directors, who continue to run the business over the next 20 business days whilst they and the restructuring practitioner develop a plan to restructure the debts of the company. The plan will include an allowance for the remuneration of the Restructuring Practitioner, as the Restructuring Practitioner will administer the plan if it is approved,’ says Luckbir.

If this process is undertaken there is a possibility to salvage and turnaround your small business, however you need to be prepared to work hard.  According to Luckbir preparation and planning are the key.

“Once the restructuring plan is finalised (within the 20-business day period), the plan and supporting documents are put to creditors by the Restructuring Practitioner. Creditors have 15 business days to consider and vote on the plan. All employee entitlements must be paid before creditors can consider the plan and if the plan is approved, the business continues, and the Restructuring Practitioner will administer the plan. If it is not approved, the company may go into voluntary administration, or undertake new simplified liquidation. For a plan to pass, it must have the support of 50% of creditors by value.”

If you are faced with a worst-case scenario it is not necessarily the end of the road however careful consideration needs to be untaken before embarking on another small business

“At present you may start another small business in the future, however a Company with a Director who has been a Director of a company which has previously been under the restructuring process, or the subject of a simplified liquidation, are not eligible for restructuring. This prevents a Director from being involved in multiple restructures. The exclusions are subject to regulations which have not yet been released and will provide for exclusions to this rule. The ability to commence a business will also depend on the particular business and any regulations specific to the industry.

The best way to avoid a restructuring process, however, is to future proof your business so you don’t need to negotiate your way through it. Luckbir suggests it could be as simple as early intervention.

“Intervention is definitely the key to preventing small problems getting out of hand. Registered Liquidators, who are the only people who are presently entitled to accept appointments as restructuring practitioners, are a great place to start. They can work with your accountant and any existing business advisors to put your business back on track.

“Knowing you must intervene early, however, is only half the picture. Without information on the performance of your business, its cash flow, and projections into its future performance it’s difficult to know if you need to seek help or not. If you don’t have this information about your business already, see your accountant. If you do, make sure you are reviewing it regularly, and that you understand the information that is being provided to you.”

With new restructuring processes presently slated for commencement on 1 January 2021, Luckbir says It’s good that it may be there if needed after the existing COVID induced insolvency protections expire on 31 December 2020.

“If you think you may need to use the new scheme don’t hold out, get in early and talk your accountant and a Registered Liquidator to understand how it might be applied to your circumstances. I have seen so many people in the past leave it right to the very end before they seek professional help and by then we as advisors have no arsenal left to deploy to help.  More generally, don’t hold on to a business which has no future, the best advice you can get is from someone who is prepared to call it what it is and then give you a plan to forge a new path to success.”

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