Business owners to note aspects of new insolvency reform
The Federal Government’s insolvency reform package will operate from 1 January to provide a debt restructuring process that enables flexible salvation of many eligible businesses stricken by the COVID-19-pandemic.
The process will be administered under precisely defined terms and conditions by specifically qualified “restructuring practitioners” having the right to proceed or terminate it under the new laws.
A company in financial difficulty will only be eligible to retain a restructuring practitioner if its core business is essentially viable (see “New restructuring laws” in this newsletter).
Restructuring practitioners will terminate the process in the planning stage if they discover a business is ineligible for assistance, or there is no benefit in it for creditors. Currently there are no guidelines for practitioners to exercise their discretion.
However directors can also elect to terminate restructuring during its planning. Termination will be automatic if they don’t complete a required declaration on their company’s affairs, or the company hasn’t completed a plan during the prescribed time.
Plan certification
A major responsibility for practitioners is certification of restructuring proposals. Once a proposal is certified it rates as a credible plan that can be put to creditors for consideration. Certification gives them assurance the document they are considering contains all relevant information necessary for making a fully informed judgement on whether to accept the plan or reject it.
There are no prescribed criteria for certification, but it seems to us the legislation implies restructuring practitioners are expected to apply those they would use in a voluntary administration.
A proposal won’t be referred to creditors unless the company has paid all due employee entitlements and is up to date with returns, notices, statements, applications or any other documents required by the Australian Taxation Office (ATO) within the meaning of the Income Tax Assessment Act 1997.
According to regulation 5.3B.22 “substantial compliance” with these obligations will suffice – although what constitutes “substantial compliance” isn’t specified. However it’s obvious many small businesses in financial difficulty that’s likely to be terminal, will have arrears in superannuation payments and outstanding tax lodgements – yet another reason why the sooner a restructuring practitioner can be appointed the better.
Further observations to note
A collapsed small business’s largest creditor is usually the ATO or some other statutory body, so the fate of a restructuring proposal is essentially in their hands. Although we’ve had no indication from tax officers of their likely attitude to restructuring proposals, we’d be surprised if their voting were not based essentially on standard criteria for ATO voting in external administrations.
Offering or giving valuable consideration to a creditor to influence their vote on a restructuring proposal is an offence.
A company is deemed insolvent when its restructuring plan is sent to creditors -- who can be expected to use it as grounds for a winding up if for any reason the plan is terminated or otherwise not completed as agreed. Because deeming provisions aren’t specified, we suggest this could deter directors of companies not yet insolvent but close to it, from seeking and possibly benefitting from early intervention.
Secured creditors are subject to similar moratorium provisions applying in voluntary administrations, and will therefore only be bound by a restructuring proposal to the extent they agree to be bound. Because we don’t know their view of the new restructuring laws, we suggest it’s important financially stressed business owners keep banks and other lenders advised of their intentions in light of the new laws.
Termination by completion
An accepted restructuring plan, completed by meeting all terms and conditions, is terminated with the proposer freed of all specified debts.
A plan can also be terminated by court order, if it’s conditional on something occurring by a certain time (a “condition precedent”) and this event doesn’t occur, if any breach of the plan exists for 30 days, or if an administrator, liquidator or provisional liquidator is appointed to the company.
A court order is necessary to vary an accepted plan, but cost of the procedure in most instances would tend to render the plan commercially unviable.
A new liability identified after a proposal becomes a plan is admissible under regulation 5.3B.29, provided the creditor is unrelated to the plan’s proposer and the debt is substantiated. If the debt exceeds the limit of $1m, the plan won’t automatically terminate, but the creditors only means of having it included in the plan is by way of court orders.
Restructuring practitioners’ remuneration
Restructuring practitioners are to be paid a fixed fee by agreement with a client before appointment, for work in planning and voting phases. Subject to creditors’ approval, they are also to receive a percentage of recoveries for administering the restructuring plan. While business owners may benefit from competitive pricing, they should bear in mind that a cheap restructuring practitioner is unlikely to have the skills, experience and empathy necessary to maximise clients’ options in this reform package.
Opinions on a debtor-in-possession regime differ. This one needs on-going review and modification, but as it stands it has plenty to offer, and Macks Advisory is ready to help companies make the most of it.
