Insolvency. Liquidators. Going into administration. These are words no director wants to hear or use about their company.
But, the facts are, a number of small businesses operated through companies get into financial difficulties each year. Very frequently, the Australian Taxation Office is one of the major creditors involved.
Company directors will be interested to know about a change in the law that is designed to help them when things get tough financially. The Australian Securities and Investments Commission (ASIC) has just released a report concerning these changes in the law.
In January 2021, there was an important change to the laws governing debt restructuring that were aimed at small businesses operated through companies. The aim of the new process was to put the control of the debt restructuring in the hands of the directors of the company.
Previously, in other forms of debt restructuring, such as the appointment of an administrator to the company, the directors lose control of the process. The process is run by the administrator, who is usually an accountant skilled in restructuring businesses. But, the directors are “out of the picture”.
The changes included a new simplified debt restructuring process for eligible small businesses and a new type of registered liquidator. The new type of registered liquidator is referred to as a “restructuring practitioner”. The new method keeps the directors in control of the process.
Two phases
Under the changes to the law, small business company restructures occur in two phases.
- The directors of the company appoint a restructuring practitioner to the company. The company must meet the eligibility criteria (discussed below) and the directors must resolve that the company is insolvent or likely to be so. A restructuring period of 20 business days then commences. During this time the company designs and proposes a restructuring plan to creditors.
- If the plan is approved by creditors, the restructuring plan is put in place and overseen by the restructuring practitioner.
Eligibility
To be eligible (among other things):
- The total liabilities of the company must not exceed $1 million.
- Broadly, directors of the company and the company must not have been through restructuring in the previous 7 years.
- Substantial compliance with the payment of employee entitlements and tax lodgements.
ASIC has just released a report reviewing the new process. It says the initial uptake has been slow. It suggests the reason for this is that the eligibility criteria of debt not exceeding $1 million is too low. Also, the need to have substantial compliance with the payment of employee entitlements and tax lodgements is too challenging for many companies when they are in financial difficulty. Nevertheless, the ASIC report says there have been 72 restructuring plans put in place since the new law was enacted.
While its not nice to have to think about the possible use of this new form of debt restructuring, it is useful to know that it exists. If you are in financial trouble, the worst thing you can do is adopt the ostrich approach of burying your head in the sand. The problem won’t go away unless you face it and do something about it. The new debt restructuring process might be one way that you can explore.
Source: ASIC
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This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or get professional advice from your accountants at KMT Partners.
