New restructuring laws help struggling businesses
Many businesses stricken by the COVID-19 pandemic will benefit from laws passed by the Federal Parliament last month and operative from 1 January, giving them flexibility to restructure debts while directors remain in control of their companies. There is also provision for new, simplified liquidation, all of which will reduce the costs and complexity of insolvency processes for business owners.
Early in the New Year banks and other creditors can expect to see restructuring proposals under the new regime and should be prepared to act quickly. Time frames for considering the proposals and handling the informal voting process are comparatively short.
This will be a period of significant challenges for Macks Advisory and other firms like ours as we help clients make the most of opportunities under the new legislation while it’s still possible to exercise options.
Companies are expected to be prime users of the new provisions, also available to other corporate entities. Sole traders don’t have equivalent options under the personal insolvency regime – although Part IX of the Bankruptcy Act 1966 could produce comparable outcomes in some cases.
Is restructuring the best option?
The new laws allow a business in financial strife to appoint a small business restructuring practitioner, a new category of insolvency practitioner who is a registered liquidator.
However, directors will need to decide whether a business can be restructured effectively. Is the business viable in the light of changes forced upon it and its industry by the pandemic? If the core of the business is not viable other options may need to be considered. The success of restructuring will to a large extent depend on how promptly it is undertaken.
Directors who heed the early warning signs of financial difficulty and seek expert advice before the situation is dire, may not need formal intervention as a possible solution to their problems. Businesses in the late stages of insolvency usually lack sufficient capital, customer and supplier support to continue trading, and this eliminates restructuring as an option.
Eligibility for restructuring
Under the new laws a company can appoint a restructuring practitioner if total liabilities don’t exceed $1m, and within the past seven years it hasn’t undergone restructuring, been through simplified liquidation, and none of its directors (including former directors who resigned within the previous 12 months) was a director of another company that went through these processes.
Appointments can be made only by resolution of directors, following a resolution that their company is either insolvent or likely to become insolvent.
Restructuring proposals can include in liabilities debts to related parties, but contingent liabilities are excluded – which may therefore remove restructuring as an option in some cases.
Within five working days after restructuring begins (or a longer period if approved by a restructuring practitioner) directors must formally declare their company hasn’t entered into a voidable transaction under section 588FE of the Corporations Act 2001 (excluding unfair preferences in the event the company is wound up), and also that they believe on reasonable grounds the company meets eligibility criteria, and why.
We suggest because transactions outside the ordinary course of business --such as material asset transfers and forgiving related party debts -- might be voidable in liquidation, directors consider seeking expert advice before making the declaration.
Companies have been able to apply for “temporary restructuring relief” from 1 January and can do so until 31 March. Thus they can be protected from having their company wound up while they’re making reasonable attempts to appoint a restructuring practitioner.
The three restructuring phases
Companies have up to 20 business days to prepare a restructuring plan and a restructuring proposal statement. This must include how property will be dealt with, what creditors can expect to receive, and among other things a schedule of debts and claims and how it’s proposed these be accommodated.
The second phase begins when the proposal is sent with supporting documentation to creditors, where a majority in value of money owed them have 15 business days to accept or reject it.
Acceptance triggers administration of the proposal by the restructuring practitioner under its specified terms to complete the third and final stage of the process.
As is the case with voluntary administering there is a moratorium on enforcement actions by creditors during restructuring.
The restructuring practitioner’s role
According to an explanatory statement to the legislation, the restructuring practitioner’s role during the planning phase is “largely supportive in advising and assisting company directors”. Input from a company’s accountant, solicitor, other business advisers, employees, suppliers and various stakeholders could also be required.
Restructuring plans must include prescribed terms and conditions – for example that admissible debts and claims must rank equally and receive a pro-rata share of funds available for distribution (including to related creditors); that creditors can’t receive a transfer of property other than money; and the plan is operative only for a specific period (say five years).
However, it should be noted restructuring practitioners will have the right to terminate restructuring as early as during the planning phase.
A further article in this edition of our newsletter will discuss termination of restructuring and other important matters associated with the new legislation.
