In our previous article (Understanding the Distinctions: Voluntary Administration and Liquidation) we considered two avenues available to businesses that are experiencing financial difficulties and verging on insolvency. While administration and liquidation have been the traditional means of dealing with financially distressed businesses, the 1 January 2021 saw the introduction of the Small Business Restructuring process.
The main policy reason behind this initiative is to allow company directors to retain control of the business, property and affairs while working with a restructuring practitioner to develop a restructuring plan that is to be entered into with creditors.
Companies are generally eligible for restructuring if:
- the total liabilities of the company do not exceed $1 million;
- no company director has been a director of a company who has undergone restructuring in the last 7 years; and
- the company has not undergone restructuring or simplified liquidation process within the last 7 years.
- Appointing a restructuring practitioner
Where the company meets the eligibility criteria and the directors have resolved that the company is (or is likely to be) insolvent, then they may appoint a restructuring practitioner by writing. The practitioner must be a registered ASIC liquidator and the appointment cannot be revoked by either the company directors or its creditors.
- Restructuring plan and restructuring proposal
A restructuring plan is created and executed by the company directors with the assistance of a restructuring practitioner. The plan identifies relevant company property and specifies how it is to be dealt with. The directors must also prepare a restructuring proposal statement that includes a Schedule of Debts and Claims.
- Restructuring proposal period
The company executes the restructuring proposal typically within 20 business days from the date that the restructuring began. After its execution, the restructuring practitioner provides the company’s creditors with a company of the plan and the proposal statement. The creditors must then decide whether to accept the restructuring plan.
- Acceptance of the plan
Once accepted, the plan is binding on all parties. Until termination, a person bound by the plan cannot make (or proceed with) an application for the winding up of the company. No other enforcement process can be taken against the company in relation to its property for the recovery of a debt or claim.
This provides the company with some breathing room to continue operating and discharge its obligations without the pressure of looming court proceedings.
The company’s restructuring plan terminates when either:
- the company discharges its obligations under the plan;
- the court orders for its termination
- a contravention has not been rectified within 30 business days of its occurrence
- a voluntary administrator or liquidator is appointed.
Role of Restructuring Practitioner
Unlike administrators and liquidators, restructuring practitioners do not seize complete control over the daily operation and financial affairs of the company. Instead, the practitioner occupies an advisory position and assists the directors in preparing a restructuring plan. The practitioner must also make certain declaration to the company creditors about whether they believe the company is able to discharge its obligations under the plan.
During restructuring, the directors must obtain the restructuring practitioner’s consent if they wish to enter into transactions that are outside the ordinary course of the company’s business. These include transactions for satisfying debts or claims, the sale or transfer of any part of the business and transactions that relate to the payment of a dividend.
Role of Directors
Under a Small Business Restructure, the directors can retain control and decision-making power over the company’s ordinary business activities. This means that directors continue to be involved in dealing with the company’s assets and do not surrender all their rights to the practitioner. Since the restructuring practitioner acts as the company’s agent, it is the directors who continue to have control over the company’s business, property and affairs during restructuring.
With the advice and assistance from the practitioner, the directors must also develop the restructuring plan and the restructuring proposal statement and execute these within the proposal period.
In summary, corporate insolvency may compel a company to elect to enter liquidation, voluntary administration, or small business restructuring. The biggest difference amongst the three avenues is the amount of control that the directors retain over the affairs of the company during the insolvency process. Small Business Restructuring provides directors the greatest degree of control. In addition to voluntary administration, it provides companies with the opportunity to recover from their financial difficulties whereas liquidation results in the ultimate winding up of the company.
We understand that you may be under increasing pressure if your business is experiencing financial distress. We can therefore use our expertise and experience to help you navigate your business through a path that achieves your desired outcome.
Disclaimer: This publication contains comments of a general and introductory nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional legal advice. You should always speak to us and obtain legal advice before taking any action relating to matters raised in this publication.