The proposed changes will allow businesses to keep trading while they develop a debt restructuring plan. Photo: Supplied.
Federal Treasurer Josh Frydenberg has announced plans to overhaul insolvency rules in an effort to help small businesses that are struggling because of the coronavirus pandemic.
The changes will apply to businesses with liabilities of less than $1 million and would see small business owners remain in control of their company and assets, rather than immediately being placed in the hands of an administrator.
The Treasurer says the changes will help viable small businesses to trade out of the current crisis “rather than going into a liquidation process where they lose control of the company”.
“We want those businesses to stay in control, to restructure their balance sheet, to work out an agreement with the creditors and then to get out on the other side of this virus,” Mr Frydenberg said.
RSM Managing Partner Frank Lo Pilato welcomes the changes, calling it a positive step for businesses struggling with their cashflow. He says by allowing owners to remain in control, businesses will be more open to enter into the insolvency process sooner, and provide them with an opportunity to restructure, increasing their chances of surviving.
RSM Managing Partner Frank Lo Pilato. Photo: Michelle Kroll.
Under the new process, incorporated businesses would be able to keep trading while they develop a debt restructuring plan with the help of an insolvency practitioner. Under current rules, control is handed over.
Once the process is started, the insolvent small business would have 20 days to come up with a restructuring plan. For the plan to be approved, it must be supported by more than 50 per cent of the creditors by value.
While the practitioner is engaged in the restructuring process, there will be a moratorium on unsecured and some secured creditors taking actions against the company. Employee entitlements that are due and payable must be paid out in full before the plan is voted on by creditors.
Also included are protections for small businesses that announce they want to restructure but can’t get immediate access to an insolvency practitioner. But Mr Lo Pilato does not expect any shortage of insolvency practitioners in the ACT.
For small businesses that can’t be revived, liquidation will be made quicker and easier too. To help reduce time and cost, the Federal Government wants to cut liquidators’ investigative processes, mandatory meetings and reporting requirements.
Mr Lo Pilato says keeping the business owners in control and still trading will significantly reduce the cost of a liquidator coming in and taking over the business.
“The risk of continuing to trade is that business gets further into trouble but under this simplified system, the liquidator can come in early, make an assessment and make a plan together with the owner.”
There is concern in the financial sector that many unviable small businesses, propped up by the Federal Government’s JobKeeper wage subsidies, are putting off restructuring and incurring greater debt as a result. As a consequence, a wave of insolvencies is anticipated once emergency protections for business owners expire at the end of the year. But Mr Lo Pilato expects Canberra businesses to fare better than other states.
“Whether a business can be revived or not will still need to be assessed by the liquidator but this system will provide more clarity and may help more business get to the other side. The liquidator will be able to work on a compromise with the creditors and give the business an opportunity to put the debt to bed and work towards a finish line.”
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