![Jonathon Colbran and Frank Lo Pilato](https://the-riotact.com/wp-content/uploads/2021/02/2021-03-16-RSM-Jon-Frank-10-1-810x540.jpg)
Reforms to small business insolvency rules are designed to relieve the debt burden on small businesses hit hard by COVID-19. Pictured: Jonathon Colbran and Frank Lo Pilato from RSM. Photo: Thomas Lucraft.
Small businesses struggling with debt have been offered a lifeline through reforms to small business insolvency rules.
The changes to Australia’s insolvency rules were designed to assist with restructuring and relieving the debt burden of small businesses impacted by the COVID-19 pandemic.
The changes, including a new debt restructuring process and a simplified liquidation process, will apply to incorporated small businesses that have less than $1 million in debts. Small businesses comprised around 76 per cent of the companies that entered into external administration during the 2019 financial year.
Announced by the Australian Government in September 2020, the insolvency law reforms came into effect on 1 January, 2021, and are designed to support small business recovery following the expiry of the temporary COVID-19 insolvent trading safe harbour, and the temporary extension of the amount of time creditors had to wait to make a call on their funds.
The new rules are in response to liquidity challenges currently faced by many Australian small businesses, and in recognition that current insolvency processes are always the best option for small business insolvencies. Business owners previously had no choice but to hand over control of their business to voluntary administrators or liquidators.
Shifting eligible small businesses to a ‘debtor in possession’ restructuring model allows eligible businesses to restructure existing debts while remaining under the control of directors. It is anticipated for the majority of businesses that face financial distress, this model will streamline the process and reduce costs of the formal debt restructuring process.
RSM partner Jonathon Colbran says the new rules can help financially distressed small businesses that are either insolvent or likely to become insolvent.
![Jonathon Colbran](https://the-riotact.com/wp-content/uploads/2021/02/2021-03-16-RSM-Jon-Frank-1-1-810x540.jpg)
RSM partner Jonathon Colbran. Photo: Thomas Lucraft.
“Under the new regime, directors get to retain control of the day-to-day trading operations of their business while working on a restructuring plan with the help of a small business restructuring practitioner who must be a registered liquidator,” he says.
Under other types of insolvency appointments, such as voluntary administrations, the administrators take control of the day-to-day running of the business and the directors lose the ultimate decision-making power until the creditors make a decision about any proposed restructure.
“The debtor-in-possession model is perhaps not as confronting as voluntary administration,” says Jonathon. “Under the new rules, a small business restructuring practitioner can help the company to develop a restructuring plan and review its financial affairs, make declarations to the creditors about the plan, and manage cash disbursements once the plan is in place.
“Directors have an opportunity to review the operation and structure of the company, work to make the business a leaner operation and come to an arrangement with creditors to pay off the debts.”
The timeline can vary, but generally restructuring plans have to be developed within a 20 business day period. Creditors then have 15 days to vote to approve the plan.
“Restructuring can be an opportunity for a positive outcome for all parties,” says Jonathon. “Business owners may be able to give their company a chance to survive and give creditors a clear idea of how and when they will be paid.”
“Overall, these insolvency law reforms add another option for businesses in financial difficulty, but it has to fit the individual business’ circumstances. In fact, in many situations, the other existing types of appointments will still be a better fit and deliver better outcomes. My advice is to seek a professional opinion so you know which option is best for your business and your needs.”
For more information about the reforms and what to do if you are struggling with debt, read how to develop a restructuring plan, or contact RSM in Canberra.
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