Insolvency reforms to support small business – useful or useless?
You may have heard about the Government’s recent announcement to introduce a regime in January 2021 that allows companies to restructure and trade out of (and avoid) liquidation. Where a restructure is not possible, the wind up process will be simplified with the hope that the costs to wind up will also reduce. This regime is being put in place to manage the expected high volume of business collapse when the COVID-19 protections finish on 31 December 2020. However, does introducing this new regime really provide any benefit to companies or is it delaying the inevitable and prejudicing creditors?
The restructuring regime
The Government is trying to simplify and streamline the insolvency process for SMEs (that meet certain criteria). Whilst the exact criteria is not yet known, the Government has stated that companies (not sole traders) which have liabilities of less than $1 million, they will be able to keep trading whilst a debt restructuring plan (DRP) is put in place. The troubled company must appoint a small business restructuring practitioner and he/she will need to:
be retained to assist the company in its preparation of the DRP;
certify the plan to the creditors; and
oversee payments once the DRP is in place.
It is proposed that once the small business restructuring practitioner is appointed, unsecured and some secured creditors will not be able to take any steps against the company or its directors for 20 days whilst a DRP is being drafted. Once the DRP has been certified by the small business restructuring practitioner, it is circulated to the creditors and the creditors have 15 business days to vote on accepting the DRP and the small business restructuring practitioner’s fees.
If the DRP is accepted by at least 50% (in value) of the creditors and it provides a better return to creditors than placing the company into liquidation, it is thought that directors of those companies may be able to avoid personal liability for insolvent trading claims.
The Government has said that there will be a criteria that must be met before a company can avail itself of this regime. The exact criteria is not known, but presumably, the criteria will not be able to be met by all companies. What we do know is that to access this regime, the company must have paid up all employee entitlements. This requirement may prove to be problematic for a cash-strapped company.
Directors are normally required to provide personal guarantees or indemnities to secure company debt. If the DRP is accepted by the creditors, it is unclear whether creditors can also rely upon any personal guarantees or indemnities provided by directors (or third parties). It will be unlikely that directors will be willing to secure the company’s financial position to the peril of their own so clarity around the interaction of personal guarantees and indemnities and this regime will be needed.
Creditors will lose the ability to control how the debt is managed and the timeframe for managing the debt. This may have a catastrophic effect on other SMEs.
The intention behind this regime is to allow companies (that were healthy pre COVID) to trade out of the financial headaches caused by COVID-19. Company directors will remain in control of the company and can continue to trade.
The communication process between the company and the creditors is more technology focused – the requirement for expensive face to face meetings has fallen away. The use of technology and the simplified process should equate to cost savings for the company – thereby allowing additional funding to either support the business or flow through to creditors.
Directors will only be able to avail themselves of this process once during a 7 year period. This restriction is hoped to reduce the number of phoenix companies.
The legislation reflecting these reforms has not been drafted, so the exact benefit to small business that these new reforms will have are not yet understood. A simplified process and the ability for once healthy companies to trade into solvency whilst attractive to many companies, may, for the reasons set out above, have limited application.
Once the legislation is drafted, we will update you on these reforms.
Millens provides understanding advice to clients managing the effect of COVID-19 on their business. If you would like advice on how to manage this current COVID-19 environment, please contact Ross Millen, Keith Hanslow or Sally Lloyd