Directors no longer have the protection of the “COVID Safe Harbour” insolvency rules put in place to deal with the impact of the pandemic.
These rules, which absolved directors from personal liability if their businesses traded while insolvent, have been replaced by legislation that includes a new, streamlined SME restructuring process that came into force on January 1st.
The process essentially enables a business to draw up a “restructuring plan” for paying back creditors. Along with a proposal statement that includes a schedule and amounts, the plan can specify repayment options, such as repaying as proportions of debt owing or proposing the precise ‘cents in the dollar’ creditors would receive.
Importantly, the restructuring plan includes all unsecured debts (apart from employee entitlements) that were incurred prior to restructuring.
Now, a company with debts due and payable that they cannot pay is technically insolvent and its directors are at risk for those debts incurred by the company.
If small business owners need to restructure their business, there are a number of upsides and potential pitfalls within the new insolvency model – they must be fully aware of the consequences.
- There may be a spike in Australian businesses experiencing difficulties and requiring turnaround funding in the first half of 2021, especially as government stimulus measures such as JobKeeper end and protective measures around statutory demands and winding up petitions are withdrawn.
- Under the new laws, businesses operating in the same manner as 2020 could risk trading insolvent once stimulus measures are removed.
- Now, SMEs with liabilities under $1 million and who are up to date with their tax lodgements and up to date with employee entitlements that are due and payable, such as wages and superannuation, can work with an expert to restructure the business.
- Owners will be able to stay in charge of running the business while experts (the new Small Business Restructuring Practitioners) work on a turnaround plan to put to creditors.
- SME directors can lodge with ASIC an intent to enter into the new arrangement within three months. Effectively, this protects them from the implications of trading insolvently while their arrangement is put in place.
- The new insolvency laws aim to make restructuring a less complex and less expensive process for many small businesses – but it’s important for owners to be aware that restructuring under the new rules will very likely have a negative impact on cashflow.
As the effects of the pandemic continues to spread across the business community, the restructuring change-up is yet another potential pitfall that business owners need to look out for.
Craig Michie, senior executive at Australia and New Zealand SME lender ScotPac, says this is a period in which leaders need to be actively pre-empting cashflow issues and how they could be affected by restructuring.
“One impact of the pandemic is that there are so many businesses who, in early 2020, could not have imagined that they’d be looking down the barrel of insolvency,” Michie says.
“The million-dollar question for small business directors is: once support and protection measures are withdrawn, will they have sufficient cashflow?
“Directors need to review their position and seek considered advice – sooner rather than later.”
Contact ScotPac on 1300 207 345 to learn about their range of finance options that can be tailored to fit you and your business.