Small businesses begin registering for new temporary restructuring relief amid overhaul to insolvency laws

Small businesses have begun registering for temporary restructuring relief, under Australia’s new insolvency regime that began on January 1. 

Records published by the Australian Securities and Investments Commission show four businesses have so far made declarations that they are eligible for temporary restructuring relief. 

Among the businesses to make declarations are a Queensland-based travel agency and a workwear business. 

The first declaration was made on January 11, 10 days after the new insolvency laws came into effect.

Announced by Treasurer Josh Frydenberg in September, and legislated for in December, the reforms to Australia’s insolvency regime include temporary restructuring relief — which extends the temporary measures introduced by the government in March 2020 in response to the COVID-19 pandemic — as well as a new restructuring process for eligible companies. 

The temporary restructuring relief is designed to give company directors time to consider if their business can undertake a restructure process. 

Registering for the restructuring relief prevents creditors who are owed less than $20,000 from issuing statutory demands to wind up the company; gives directors a period of six months to respond to statutory demands; and provides for a temporary safe harbour from personal liability associated with insolvency trading. 

The temporary restructuring relief is available until March 2021, meaning directors must apply before that date to access the provisions.

Credit reporting bureau CreditorWatch is now sending out real-time alerts to its database of 50,000 businesses to notify them if a debtor has declared eligibility for the temporary restructuring relief. 

CreditorWatch chief executive Patrick Coghlan tells SmartCompany it is critical that businesses are monitoring these new notices, and then seeking professional advice about how to mitigate risk to their own operations. 

“They should be very concerned,” he says of companies that see their debtors register for temporary restructuring relief.

“It certainly a high-risk indictor of coming delinquency.”

“This is so new, there’s no blueprint to follow, so getting professional advice and support is really important.”

The temporary relief measures form part of the broader suite of changes to Australia’s insolvency regime, which also include a new restructuring process for incorporated businesses with less than $1 million in liabilities. 

The process allows eligible businesses to retain control of their business and continue trading while restructuring debts with the help of a small business restructuring practitioner.

This ‘debtor in possession’ model differs from the traditional ‘creditor in possession’ model, in which creditors are able to appoint external administrators to insolvent small businesses, however, the new system does still allow creditors to vote on restructuring plans. 

In the event a restructuring plan is not pursued and a business is liquidated, a new liquidation process is available with streamlined meeting and reporting obligations, which Frydenberg has previously described as allowing for “faster and lower-cost liquidation”. 

While Coghlan says it is difficult to predict how many businesses will seek to use this new process over coming months, the majority of businesses that do go into external administration each year would be eligible for new arrangements.

With fewer SMEs going into administration during 2020 as a result of government support programs, Coghlan says it is “very possible” we may see between 2,000 and 3,000 companies use the new arrangements this year as those government programs are wound back.

“I don’t think it will be that high, as many businesses are now in a much better position,” he says.

“It is likely ASIC and the ATO won’t be as aggressive as they were pre-COVID in relation to debts and insolvent trading claims, but it is very possible and no one should be surprised.”