The details of the Federal Government’s proposed new restructuring regime for small businesses were announced this week with the release of the draft Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth).
The Government plans to introduce the legislation into Parliament soon so that the new regime can be ready to start on 1 January 2021.
The draft legislation has two main features:
- a restructuring regime for small businesses that owe less than $1 million; and
- a simple liquidation procedure that may either follow the restructuring or operate as a stand alone regime.
Many of the details about how these new procedures will operate are to be provided in regulations, including what can be covered in a restructuring plan and how it will affect creditor rights as well as exactly what procedural obligations will be reduced in the simple liquidation.
The main features of the new restructuring plan are:
- the appointment of a Small Business Restructuring Practitioner (‘SBRP’) by the debtor company’s directors;
- the SBRP will be a registered company liquidator;
- the directors remain in control of the management of the company, although transactions outside of the ordinary course of business will need the permission of the SBRP or the court;
- the directors propose a restructuring plan to the creditors, which the SBRP must review and report to creditors on whether to approve it or not; and
- the creditors will vote electronically without a physical meeting and may approve the plan by a majority in value (with no class voting).
The restructuring plan is aimed at helping viable small businesses with financial difficulties to address their problems and try to avoid liquidation or voluntary administration.
The assumptions underpinning the legislation are that voluntary administration is too expensive for small businesses and that small business owners are concerned about losing control of their businesses while seeking to restructure it. I don’t disagree with either of those assumptions and the work that I’ve done over the past several years interviewing and surveying stakeholders in insolvency indicates that these assumptions are widely held.
I support the Government looking to introduce more flexible options for companies looking to restructure their affairs. However, I don’t believe that the proposal is enough to save the tens (if not hundreds) of thousands of small businesses that will fail once COVID-19 support by the government is wound back.
The metaphor I’ll use is a medical one. Michael Murray recently compared Australia’s voluntary administration with the US Chapter 11 procedure. He noted that this comparison could be described as representing a stay in hospital (VA) to recovering at home (Ch 11). I’d like to extend the medical metaphors further.
We know that many small business owners suspect (or most likely know) that their businesses are sick. The pandemic has wreaked havoc on businesses and consumers alike and has most likely accelerated major structural change in the economy that will see some industries shrink or maybe even disappear. Many businesses are terminal (including before COVID-19) and won’t survive, whether due to poor management, structural change or misfortune.
If we think of small businesses as sick people, where should they go for advice? Their accountant? A lawyer? A turnaround advisor? An Insolvency Practitioner? Kate Carnell’s office???
The small business restructuring reforms proposal are like sending people who feel unwell straight to the specialist’s office. Got a sore leg? Off to the orthopaedic surgeon. Suffering financial difficulties? Off to see the liquidator. What’s missing here is the role of the medical GP. If I’m not sure of what’s wrong, I go to the GP and they perform a basic filtering role, distinguishing:
- those have mild ailments that can be treated with over the counter medication and rest;
- those that need more assistance, perhaps from a range of allied health professionals;
- those that are seriously ill and need specialist help;
- those that are on death’s door and should be rushed off to hospital.
This new regime is missing the GP role.
There’s an old saying that springs to mind here: ‘if the only tool you have is a hammer, everything looks like a nail’. Insolvency practitioners are highly qualified and highly regulated professionals who are experts in dealing with dead and dying companies, amongst other things. While I wouldn’t describe them as business undertakers, they are also not the business equivalent of medical GPs. Asking highly specialist liquidators to do basic business viability assessments is not the best use of their skills and will render this new regime too expensive and unfit for purpose.
It should be noted that the Explanatory Memorandum to the draft Bill mentions a new class of registered liquidators with the registration requirements reduced to assist with ensuring sufficient practitioners are available for the potential numbers of companies that might want to use the new regime next year.
I’m not opposed to registered liquidators being appointed as SBRPs. This is the common model for similar small business regimes in Canada and in the UK. If the SBRP needs to report to creditors about the financial prospects of the company and compare potential outcomes in liquidation (including prospects of recovery proceedings) with the proposed restructuring plan, then these are matters that liquidators are highly skilled in performing.
My concern is that the expectation of a ‘VA lite’ regime will generate a procedure that is … a little bit cheaper than VA. That is not what the scores of struggling small businesses need and is not what the Treasurer spoke of in his press briefings when he announced the reforms.
The proposed reforms need to involve a quick and cheap assessment of the company’s financial position from an independent and knowledgeable person. A filtering mechanism is needed to help businesses choose the exit that fits the reality of the company’s financial position. Expecting an almost VA level of scrutiny, transparency and accountability will price the new regime out of the reach of most small businesses.
Compromises need to be made to meet the new economic reality, otherwise we risk pushing small business owners into the arms of pre-insolvency advisors who will happily tell them how to transfer assets and stiff the tax office.
There’s a reason that quick trips to the GP don’t cost $400…because few would go to them if they did.
Let’s not force small business owners to seek out the advice of ‘Dr Google’ and provide them with a GP type advisor. This could be provided by the Government taking up the ASBFEO’s suggestion of a business viability review voucher to help pay for some initial advice. The Government could maintain a pool of small business financial advisors drawn from accounting and turnaround specialists and then pay a flat fee of perhaps $5,000 to conduct a preliminary review of the business. This might help identify:
- those that have minor problems (eg disputes with one or more creditors that might be resolved through mediation from the state small business ombuds);
- those that could be saved through a restructuring plan and suggesting a SBRP be appointed;
- those that might need more intensive assistance, and suggesting a voluntary administration; and
- those that are clearly beyond help, and they should just go straight to a simplified liquidation.
The risk of putting low asset companies through the new small business restructuring process is that it will simply produce an extra layer of cost when the company should go straight to liquidation – because it is simply no longer viable.
No one wants to see their business go into liquidation, but some businesses should go there without a restructuring pitstop. Not all companies can be saved and we are gearing up for the business equivalent of the zombie apocalypse if we think that all businesses can and will be saved by an SBRP. Sometimes you just have to take your medicine and deal with your business problems rather than seeking out a parade of second opinions to find the one that tells you what you want to hear.