Insolvency law has long been a blunt instrument for resolving the financial pitfalls of small business. Lacking the resources, knowhow and sheer resilience of their larger cousins, small businesses are ill-equipped to survive the insolvency process, often leading to sub-optimal outcomes for both owners and creditors.

Thankfully, change is here. The federal government has passed through the most wide-ranging reforms of Australia's insolvency framework in at least 30 years. While the changes are a direct response to the coronavirus pandemic – a catastrophe that has disproportionately affected small businesses – they're a long overdue reimagining of how debt restructuring can work for those with liabilities of less than $1 million.

The new simplified Small Business Restructuring Process will allow small business owners to continue operating their company for up to 35 business days while a debt restructuring plan is agreed to between owners and creditors. This is split into two phases: an initial 20-buisness day period to create the restructuring plan; and a 15-business day window for creditors to vote on and approve it. Importantly, once the business owner has registered their intention to start this process, no action can be taken against them until it has been completed.

Key to the new regime is the creation of the Small Business Restructuring Practitioner (SBRP).  These new advisors, while not required to be registered liquidators,will have insolvency experience, allowing them to assist their clients through this difficult process.

It remains unclear whether SBRPs will be covered by their current professional insurance, so there may be some initial hesitance to register with the new system. However as more practitioners enter the market it is expected that the costs of the new programme should drop considerably.  Our own simplified restructuring service will start at $5,500; while a traditional voluntary administration process typically starts at $25,000.

The dominant effect of these changes will be to return a sense of control and autonomy to business owners reeling from the economic effects of the coronavirus pandemic. Rather than external administrators controlling the process, directors actively participate in the preparation of the proposal while they continue to operate the business on a day-to-day.

Given the rushed nature of the reforms, the legislation isn't perfect. For one, it gives business owners too much time to create a plan, thereby prolonging uncertainty for creditors, themselves often at-risk small businesses.  Further, if owners and creditors can't agree on a viable restructuring plan in seven days, they're unlikely to in seven weeks.  It also doesn’t allow for further negotiation of a proposed plan, a common feature in traditional insolvency processes.

A further key concern that as a result of job keeper some small businesses have accrued large unpaid superannuation liabilities and haven’t prepared all their outstanding BAS lodgements a requirement to participate in the new regime.

We are suggesting to legal and financial advisors that if they have a client considering the new regime, that is under the $1.0m limit, but hasn’t met the other criteria, that they lodge a declaration with ASIC that they intend to use the programme and then use the related moratorium time to address the other requirements by focusing on paying down superannuation liabilities if they can and completing their ATO lodgements.

Additionally, concern has been voiced that by lowering the qualification threshold for those able to undertake insolvency work it could open the door to unscrupulous or ill-trained SBRPs, who could do great harm to already struggling business owners. However, given the focus on small business – and the marginal sums involved – we think the risk posed by such operators is small.

Indeed, rather than thinking about these reforms in terms of the risks and routines of traditional insolvency law, we need to approach it as a brand new process, with practitioners, service offerings and prices that will, over time, evolve to suit the customers and businesses the laws have been designed to assist.

Despite the legislation’s shortcomings, we believe this is a vitally important first step in the creation of a fairer, more equitable approach to debt restructuring. For too long, small business owners have been little more than rounding errors in a clinical, creditor-focussed insolvency system. This new framework places them at the centre of the process, helping them to navigate these difficult waters with confidence and clarity – and giving them a better chance of still having a business on the other side.

About Olvera First

Olvera First is a division of Olvera Advisors one of Australia’s leading company side restructuring practices.

We are experienced turnaround and restructuring practitioners that can guide your clients through developing and administering a small business restructuring plan.

https://olverafirst.com/