Are you a sub-contractor operating in the property sector and struggling with too much debt? Are you owed money by small-to-medium enterprise (SME) businesses that cannot get their accounts up to date?

This article outlines the new Small Business Restructuring arrangements recently introduced by the Federal Government in response to the anticipated increase in insolvencies following the COVID-19 induced train wreck that was 2020 and how it applies to the Property and Construction industry.

Small business insolvency reforms – will they really help the property and construction industry?On 1 January 2021, changes to Australia’s insolvency framework came into effect with new law implemented to assist in restructuring and relieving the debt burden of struggling small businesses.

As recovery from the impacts of COVID-19 begins, it will be key for developers, investors, and other members of the housing sector to keep a watchful eye on the small business restructuring arrangements in place as the changes are wide-ranging and particularly relevant for incorporated small businesses that have less than $1m in liabilities. 

We have been working with our clients who meet eligibility requirements to determine which scenarios would warrant the development of a small business restructuring plan.

The plan relates to the small business restructuring reforms for financially distressed small businesses that are either insolvent or likely to become insolvent. Under the reforms, owners retain control of day-to-day trading operations while implementing a documented restructuring plan with creditors.

How do the Small Business Restructuring arrangements work for the property industry?

Directors that are concerned with the solvency of their Company resolve to appoint an insolvency practitioner as their restructuring adviser who is able to assist the directors to develop and implement the plan, otherwise known as a Restructuring Plan.
It is essentially a debtor in possession (directors retain control) restructuring model and insolvency process, as opposed to the Voluntary Administration regime where an administrator is in control and makes all of the decisions in the day-to-day running of the business.

The reforms aim to encourage distressed businesses to seek assistance early (i.e. at the first sign of potential insolvency). This improves the chances of implementing a successful restructuring of the business, resulting in better outcomes for stakeholders and creditors. 

When you may need a small business restructuring plan

A small business restructuring plan can take many forms. 
Here are some examples of what a small business restructuring plan could include and when it may be appropriate to implement:

  • A compromise of debts with repayments to be made from future profits or revenue, or in combination with other asset realisations or cash advances.
  • Plans to restructure due to a dispute between partners, members, and shareholders; or directors or wider family groups.
  • Crisis management in response to the sudden illness, death, or incapacity of key management personnel within a business to enable stabilisation and a viability assessment.
  • Exit strategies to finalise the sale of a business and compromise debts if there is likely to be a shortfall (i.e. mitigating the risk of serious financial loss while safely exiting and/or retiring).
  • A simple repayment plan where a moratorium on outstanding debt is implemented for a particular period. This would allow for the realisation of difficult-to-sell assets or the implementation of complex secured debt refinancing to pay creditors either in full or at an agreed percentage.
  • Downsizing and/or redeploying existing resources with a view to ensuring ongoing viability by pivoting the business or expanding the scope of products and services.
  • A freeze on debts followed by an influx of new capital or equity via separate investment, or otherwise including debt for equity arrangements.

The options are extensive and it is important to think and act strategically to ensure the plan is ‘viable’ and ‘reasonably likely to succeed’, as is required under the legislation.

Small business restructuring planShort window to seek advice under the temporary insolvency relief extension.

The COVID-19 insolvent trading relief expired on 31 December 2020, however, the Australian Government has provided a further three months of temporary insolvency relief in specific circumstances.

This is to enable a distressed business to consider their position and appoint a registered liquidator as a small business restructuring practitioner to engage with creditors and develop the small business restructuring plan. To access the ongoing insolvency relief, a Declaration of Intent to access the small business restructuring process needs to be published on the Australian Securities and Investments Commission (ASIC)’s insolvency notice board.

If you have insolvency concerns, it is imperative that you act promptly to mitigate personal liability exposure as a director and improve the chances of a successful restructuring.

Is your property industry business eligible for small business restructuring?Is your property industry business eligible for small business restructuring?

As a broad summary, to be eligible to propose a small business restructuring plan your business must:

  • be incorporated with less than $1m in liabilities
  • be either insolvent or likely to become insolvent at some future time
  • be up to date with the payment of employee entitlements, including superannuation
  • compliant with your obligations to the Australian Taxation Office (ATO) in terms of lodgements, but not necessarily payment obligations
  • not have had any of its directors engage in a prior restructuring process for another company of which they’ve held office
  • There are various technical elements to determining eligibility, including the consideration of insolvency and the extent of a company’s liabilities at a point in time.

 

If creditors approve the small business restructuring plan, the directors retain control of the business and it can continue trading with protections from participating creditors.
If the creditors reject the small business restructuring plan, the company and its directors may consider other options, including voluntary liquidation, e.g., the new streamlined liquidation process.

Don’t leave it to the last minute! Seek immediate advice from a small business restructuring practitioner. 

Appropriate advice is vital before seeking to access the small business restructuring process.
The right mix of pragmatic and solutions-oriented advisers, together with an experienced and flexible restructuring practitioner, will be required to ensure a successful outcome for the business in distress and its stakeholders such as creditors.

Whatever the position, it is important for directors to remember that the requirement to act with due diligence and care has never changed throughout the government’s response to the pandemic.

If you are in the property industry and your business is struggling financially, get advice from a small business restructuring practitioner (SBRP) early.

At RSM, we have small business restructuring practitioner (SBRP) experts in the property and construction industry on standby to assist you in making confident and informed decisions about the future of your business.
To get in touch with a small business restructuring practitioner, contact your local RSM office.