A plan to deal with the financial stress from lockdowns.
On 1 January 2021, the government introduced small businesses insolvency law reform, intended to provide those businesses struggling with debt, cheaper and simpler options to either save their business or end a non-viable business and move on with other opportunities.
Statistics show there’s been approximately 20 small business insolvency restructuring (SBR) appointments where:
- creditors accepted 13 plans
- creditors rejected 1 plan
- a restructuring practitioner deemed 1 company ineligible to proceed with a SBR plan
- creditors were still to consider 5 plans (15 business days provided for this process).
Lockdowns caused significant financial distress nationally for small businesses largely through closed premises for months at a time, and/or their customers being unable to purchase their goods or services. While restrictions are easing and state governments are moving away from daily case number announcements to focus on vaccinating the nation, many viable small businesses are currently suffering from cash-flow problems and other legacy debts due to COVID-19.
Is SBR an option for your clients to consider? Let’s look at an example
Anna is a director of XYZ Steakhouse Pty Ltd, with a loyal local client base.
Before March 2020, the company consistently generated a net profit year-on-year, paid its staff on time, other creditors as and when they fell due, lodged its taxations returns on time, and Anna slept well at night knowing she operated a successful business.
Following March 2020, the company was forced into lockdowns several times and while takeaway was an option, Anna knew her client base dined at the restaurant for the experience and that takeaway just wasn’t a commercial option.
As a result, for the first time in years, the company suffered from significant cash-flow issues and Anna no longer slept well. The only upside for Anna is that current economic climate has seen her home double in value.
So, could Anna consider SBR for XYZ Steakhouse Pty Ltd?
While not explicit in the legislation, a business’s ongoing viability should be the first step before considering any formal restructuring option (we always walk clients through this aspect first). If XYZ Steakhouse Pty Ltd suffered from long-standing cash-flow problems before the lockdowns, which only exacerbated the issue, Anna may be better advised to consider winding up the company and moving on to other opportunities.
Given XYZ Steakhouse Pty Ltd was a viable business prior to the forced lockdowns, let’s assess whether it meets the SBR’s key eligibility criteria, briefly summarised as:
- Are the company’s employee entitlements paid up to date?
- Are the company’s debts less than one million dollars (excluding any outstanding employee entitlements)?
- Are the company’s taxation lodgments up to date?
- Anna (as company director) hasn’t been involved in an SBR or simplified liquidation in the previous seven years? (N.B. only since 1 January 2021.)
If the answer is yes to all of the above, then XYZ Steakhouse Pty Ltd may be eligible to propose an SBR plan to its creditors.
How could Anna fund the plan under an SBR?
While retaining control of the company, Anna can work with a restructuring practitioner to form a plan to put forward to the company’s creditors, affirming that the plan’s purpose is to provide creditors with a better return than if the company was to cease operating and be wound up. A liquidation scenario would likely generate limited funds from an auction sale of the company’s kitchen equipment and tables and chairs thus resulting in a minimal return to creditors.
Due to the significant appreciation in the value of Anna’s home, and with due consideration to personal financial circumstances, she could consider borrowing against her home to fund the plan. Alternatively, with ordinary trading resumed, Anna may consider setting aside a monthly amount of the company’s net income for the next two years to payout under the plan.
Assuming creditors accept Anna’s plan, then XYZ Steakhouse Pty Ltd will be able to address the cash-flow issues caused by the lockdowns, improving Anna’s overall wellbeing and allowing her to move forward with a viable business and a reassuring sense of certainty.
COVID-19 has had a devastating economic effect on many small businesses. As restrictions ease across the country and we all learn to live in this new COVID-normal world, now is the time for your clients to take advantage of any creditors’ willingness to negotiate, and to save a viable business through formal restructuring processes, such as SBR’s.
At Worrells, with 25 partners across our 32 locations, we help people and businesses dealing with financial stress. Your local Worrells partner is here to help (click here). Contact us for a complimentary and confidential discussion.
 From the Australian Securities and Investments Commission (ASIC) as at 30 September 2021.