SME debt restructuring process

This aims to assist distressed but viable SMEs to restructure their debt so they can continue trading.

• It uses a ‘debtor in possession’ approach, allowing directors continue to control the company during the restructure rather than putting an insolvency professional in charge.
• The board appoints a Small Business Restructuring Professional (SBRP) to assist with the development of a restructuring plan setting out how creditors will be repaid, and a proposal statement containing a schedule of the creditors’ debts and claims.  These must be completed within 20 business days and are then distributed to creditors by the SBRP, together with a written opinion on the company’s ability to repay its debt.
• From receipt of these documents, creditors have 15 business days to consider the restructure before voting. Related party creditors are excluded from voting. If creditors want to dispute the schedule of debts and their eligibility to vote, they must do so within five business days. The SBRP will then serve notice adjudicating any disagreements, and recommend whether the schedule of debts requires amendment within a further five business days.
• The restructuring plan is approved if it receives the support of a simple majority by value of voting creditors. The company and SBRP then implement the plan. If the plan is rejected, directors must consider standard insolvency processes.
• During the process, the company may only conduct ordinary business and there is a moratorium on unsecured creditors from enforcing claims. There is also a stay on enforcement of ipso facto clauses. This means creditors may not terminate a contract simply because of the company’s insolvency, even where there is an express insolvency event of default allowing termination.
• Secured creditors are only bound by the plan if they agree and if their debt or claim exceeds the value of their security interest. A secured creditor is only prevented from dealing with their security interest if they agree to be bound by the restructuring plan and the plan prevents them dealing with the security interest.
• A restructuring plan terminates on whichever happens first of:
  • All restructured obligations, debts and claims are satisfied;
  • The Court terminates a restructuring plan;
  • Failure to satisfy any specific conditions precedent to the effectiveness of the restructuring plan within 10 business days;
  • A breach of the plan is not remedied in 30 business days; or
  • A voluntary administrator or liquidator is appointed to the company.

To qualify for the SME restructuring process a company must:

• Not have debts exceeding $1 million;
• Have reasonable grounds for suspecting current or likely future insolvency and requirement of an SBRP;
• Not have outstanding taxes and employee entitlements;
• Not have previously used an SME restructuring process;
• Not have directors who have used SME restructuring processes for another company in the past seven years; and
• Not currently be subject to other formal insolvency processes.

Use of the process is beginning to build after a slow start which the Law Council of Australia (Insolvency Law Committee) has attributed to the anticipated post COVID-19 insolvency increase not eventuating; the cost of SBRPs (averaging $15,000 - $25,000); and SME difficulties in meeting the thresholds, in particular paying tax and employee entitlements and falling under the $1 million debt cap.

SME liquidation process

The simplified liquidation process is designed to be low cost and quick.

• Liquidators are not required to prepare the standard Australian Securities and Investments Commission (ASIC) report on potential misconduct (by officers or employees).
• Liquidators do not have to call in-person creditor meetings and are only required to give creditors electronic information.
• Creditor dividend and proof of debt requirements have been simplified.
• There are fewer circumstances in which unfair preference payments made by a company are voidable.

A SME liquidation process may be brought to an end where:

• The liquidator has reasonable grounds to believe the company or its directors have engaged in fraudulent or dishonest conduct that has or is likely to have, a material adverse effect on creditors interests; or
• The liquidator becomes aware that the company no longer meets the SME liquidation process eligibility criteria.

The eligibility requirements for the new liquidation process are:

• The company must have less than $1 million in debt;
• The company must be in a creditor’s voluntary liquidation;
• The company’s directors must have reported to the liquidator on the company’s affairs and provided a declaration that the company is eligible for the process;
• The company’s taxes are up to date;
• The liquidator believes on reasonable grounds that the company meets the eligibility criteria;
• Fewer than 20 business days have passed since the liquidation event; and
• Fewer than 25% of creditors (in value) are opposed to the simplified liquidation process.

The SME liquidation process has also barely been used, which the Insolvency Law Committee has also attributed to high costs and complexity.