What is the proposed new Debt Restructuring Process?

There was a new formal debt restructuring process announced by the Federal Government recently.   What I call “Debtor in Possession Debt Restructuring”.  The ultimate aim of the process is to have a debt restructuring plan in place for the company to repay its existing debts, thereby enabling the company to stay in business and avoid being wound up.

Based on the draft legislation, here are the key components of the proposed Debtor in Possession Debt Restructuring process which is planned to commence on 1 January 2021.

The Debtor in Possession Debt Restructuring process as currently proposed, allows eligible business owners, to trade in the ordinary course of business whilst they are taking steps to restructure their debts.  They can do this without being personally liable for debts incurred in the ordinary course of business, in the period they are trying to implement this debt restructure.

The process

It is important to note that only the directors of the business can commence this debt restructuring process.  Creditors and other third parties cannot commence the process or force the company to enter the process.

The very first step is for the directors to have reasonable grounds for suspecting that the company is insolvent, or is likely to become insolvent at some future time.  And this will need to be documented by way of board resolution.

The next step is to determine if the business meets the eligibility requirements (see below).  Note the determination of the eligibility requirements would usually be done with the assistance of a small business restructuring practitioner” (“SBRP”), but at this stage they are not formally appointed as such.

The third step is to formally appoint the SBRP.  The SBRP must be a registered liquidator.  Existing registered liquidators are therefore eligible.  There is supposed to be a new class of registered liquidators who can become a SBRP, but very little details of this currently exist.

This appointment is announced to creditors.

This announcement then prevents unsecured and some secured creditors from taking action against the company.

The business and the SBRP then have 20 business days to prepare a debt restructuring plan to be sent to creditors.  Associated with the debt restructuring plan is sufficient information about the business’s financial affairs to allow the creditors to make an appropriate assessment of the debt restructuring plan.

Once the debt restructuring plan and associated information is provided to creditors, the creditors have 15 business days to vote on the plan (after proof of debt is confirmed).  Related party creditors can’t vote on the plan and secured creditors can only vote to the extent their debt exceeds the recoverable amount of their security.

If more than 50% of the creditors who voted, vote in favour of the debt restructuring plan, then the debt restructuring plan can proceed under the control of the business owners and they can do this without being personally liable for debts incurred in the ordinary course of business.

If this is not achieved, the business owner has limited options.  Either place the business into voluntary administration or use the proposed simplified liquidation process.

Am I eligible to use the Debtor in Possession Debt Restructuring Laws?

The key eligibility criteria as currently proposed include:

• Only operational from 1 January 2021, assuming the legislation is passed.
• The business must be insolvent, or likely to become insolvent. But it can’t already be under administration, in liquidation or operating under a deed of company arrangement
• Business must have liabilities of less than $1 million on the day that the small business restructuring practitioner” (“SBRP”) is appointed.
• You must retain a “small business restructuring practitioner” (“SBRP”).
• Paying all entitlements currently due and payable to your staff by the time they fall due. For example, paying superannuation on time.  This does not mean you have paid unused annual leave for example.
• Your tax lodgements are up to date, but does not mean they have to be paid if you have a payment arrangement with the ATO
• You can’t have used these laws previously (may be some flexibility in the regulations when finally issued).
• You have taken appropriate steps to ensure you have appropriate financial records and you are properly informing yourself of the company’s financial position.
• The restructuring plan can only deal with debts incurred by the company prior to entering debt restructuring

Note these may change once the legislation is passed by Parliament and the associated regulations formalised.

Pros

• Provides protection for your personal assets against properly incurred business debts (as long as you meet all other director duties).
• You as the business owner are in control of the restructuring process, providing the creditors vote in favour.
• Your debt repayment plan may involve creditors accepting less than 100% of what is owed.
• A simpler, cheaper and possibly quicker option than voluntary administration.

Cons

• Your business is taken to be insolvent if it proposes a restructuring plan to its creditors.
• Your business liabilities must be below $1 million to access this.
• Public process where creditors, staff, customers and competitors can see your financial information. Also, on all business paperwork such as invoices, you need to disclose “restructuring practitioner appointed”.
• You need to meet the eligibility criteria which includes making sure all staff payments including superannuation are up to date.

If you are suffering from financial distress and you want to try and save your business, without putting your personal assets at risk, we are happy to come and have an obligation free chat with you to see whether utilising the new Debtor in Possession Debt Restructuring or the existing Safe Harbour laws is the best option for your business

Contact Wayne Wanders for to see if you can access the Safe Harbour Laws

To ensure I help your business specifically, the best approach I have found is to have an obligation free session with you.  In this session we will review your current business in a factual and objective manner, to better understand the challenges that you face.  And this session does not need to be face to face.

At the end of this session, you will have some clarity around whether you can access the Safe Harbour Laws..

Simply fill in the contact form below or email me at wayne@aRealCFO.com.au or call me on 0412 227 052 to organise one of these obligation free sessions.

To get help you successfully navigate your way through your financial challenges so your business can survive and thrive in these uncertain times, simply use the contact form on the left to email Wayne or call him on 0412 227 052.

Let Wayne Wanders, a fully qualified and experienced CFO, help you successfully navigate your way through your financial challenges so your business can survive and thrive in these uncertain times.

Wayne Wanders, A Real CFO

wayne@aRealCFO.com.au