The Treasurer Josh Frydenberg has announced these as the most significant insolvency reform in 30 years to navigate the coronavirus-induced recession. On 10 December, these changes were passed in both Houses.
The Small Business Restructuring Process is designed to assist small businesses with liabilities under $1 million (representing approximately 76% of businesses currently subject to insolvencies) restore operational liquidity by severing the financial burden of legacy debts through a formal debt compromise with creditors. In a first for Australian corporate restructuring, the reforms allows for Company Directors to remain in control of (‘debtor in possession’) and continue to trade their business during the restructuring period.
While the reforms may be welcome relief for companies with unmanageable legacy debts, the debtor in possession model itself and the introduction of a suite of moratoriums on enforcement activity present an increased risk to those supplying on credit to small businesses.
Qualifying for the SBRP
Companies wishing to utilise this process must be able to demonstrate the following:
- less than $1 million in liabilities (excluding liabilities to employees of the Company);
- all outstanding employee entitlements, including superannuation, must have been paid (nb. this does not include entitlements not yet due for payment, such as annual or long service leave); and
- all tax lodgements for the company must be up to date.
To learn more about the specifics of the new process and your eligibility .
What does this mean for suppliers?
If you are a supplier to small businesses, the reforms will mean the following should your customer enter into a SBRP:
- The process is designed primarily to compromise debt rather than restructure the operations of a business and the profitability of a business’s underlying operations is unlikely to be materially improved as a result of the process. As such the ability of the business to demonstrate viability both during and following the restructuring period should be closely considered.
- Unlike a Voluntary Administration, there is no personal liability assumed by the Restructuring Professional in relation to supplies made during the SBRP. As such, there is no certainty that you will be paid for goods provided on credit during this period.
- Like a Voluntary Administration, suppliers are unable to pursue recovery of Retention of Title (ROT) claims during the restructuring period however the Restructuring Professional is not liable to account for the value of ROT stock sold by the insolvent entity during the restructuring period. This credit risk remains with the insolvent company. As such, a supplier with $100k worth of liquor stock in a restaurant on the day an SBRP commences, has no guarantee of payment for same.
- The increased level of risk associated with a business subject to SBRP will likely result in a reversion to COD supply terms. The ability of the business to demonstrate funding sufficient to support continued supply and recapitalisation sources will be critical in determining whether the SBRP results in business failure rather than rescue.
- Personal guarantees cannot be enforced against the Director during the restructuring period in relation to credit that has already been granted. Restructuring plans may run for up to 5 years and it remains unclear whether this moratorium applies for the duration of the restructuring plan, or the initial 7 week period.
Directors of qualifying small businesses should be aware that while on its face the SBRP may appear an attractive proposition, failure to properly consider key stakeholder concerns (funding continued supply, lender support and recapitalisation sources) prior to formally entering into a SBRP could result in business failure rather than rescue.
As Government support and stimulus measures are withdrawn over the coming months, suppliers should be conscious of the changing credit risk profile of its customers and potential erosion of recovery prospects under the SBRP reforms.
Key to optimising outcomes is early intervention. For more information on the SBRP please see:
- Factsheet: Insolvency reforms to support small business (Australian Government)
- How to access extensions to temporary restructuring relief (ASIC)
- Information about entering Restructuring and the Restructuring Plan (ASIC)
- Information on Small Business Restructures (ARITA)
To learn more about the SBRP or to discuss your specific circumstances, please reach out to your local partner or the contacts below.