Australia’s largest corporate insolvency reform in 30 years came into effect in January 2021. These reforms aim to replace a rigid insolvency model with a more flexible regime for small businesses that will reduce complexity, time and costs.

In our previous article, we examined the first part of these reforms: the Simplified Liquidation Process (SLP). If you missed out or would like to revisit this, simply click here.

In the final part of this two-part series, we take a look at the second part of these reforms: Debtor in Possession Model Restructuring (DIPM Restructuring) with Bradd Morelli, Partner at specialist insolvency and business recovery practice Jirsch Sutherland, and examine their potential impact on the business community.

The reforms introduced as at 1 January 2021 include:

1. Simplified Liquidation Process (SLP) introduced as a streamlined alternative to the standard Creditor’ Voluntary Liquidation (CVL) process.

2. Debtor in Possession Model Restructuring (DIPM Restructuring) as a simple and low-cost alternative to traditional insolvency appointments.

Q1. The new debt restructuring process (outlined below) for smaller businesses is designed to be a simpler low cost alternative to traditional insolvency appointments. Do you think that an alternative option was needed for small business and have they got it right?

A company must meet the following eligibility requirements to implement DIPM Restructuring:

  • Liabilities not exceeding $1 million (not including contingent liabilities)
  • Tax lodgements up to date (but not necessarily payment of tax)
  • Employee entitlements must be paid to date
  • Directors cannot be a director or former director of another company under DIPM Restructuring or that has been subject to the SLP within the previous seven years (exceptions apply).

A. Whilst no process is going to be perfect and suit every situation, I believe that the current creditors voluntary liquidation process is a good base process that allows a company to be efficiently wound up, assets dealt with, creditors have an adequate level of involvement and have its affairs properly investigated.

Q2. What are your thoughts on the DIPM Restructuring eligibility requirements and do you believe that it casts a wide enough net?

A. Not necessarily. As previously stated, this process will be suitable to some SME restructures but there are a number of challenges for an SME from an eligibility criteria perspective.

Some of these challenges include:

  • Up to date tax lodgements. It is common for businesses experiencing solvency and cashflow issues to have substantial periods of tax lodgements not lodged;
  • Payment of employee entitlements, primarily superannuation. SME’s with solvency and cashflow challenges could see payment of this liability drain cash from the business when it needs it most, therefore potentially hindering any restructuring plan. Or they might require a cash injection from an external party, which may not be available, or be unwilling to do this in circumstances where they do not know whether these funds will be recovered or the restructuring plan will be successful.

The legislation implementing the DIPM Restructuring prescribes the process to be undertaken. It is up to the directors to take steps to appoint a Restructuring Practitioner and to work with them to develop a restructuring plan within 20 business days. The company is taken to be insolvent when it proposes a Plan to creditors.

Q3. Is the prescribed process likely to encourage companies in distress to seek restructuring assistance at an earlier stage?

A. I believe that it will appeal to some SMEs. The key with all restructuring processes is education, making directors aware of the options that are available to them and then taking action sooner rather than later. The earlier a company considers its restructuring options the more options will be available to it and they also have an increased likelihood of success. 

Q4. A key feature of the DIPM Restructuring is that the director/s retain control of the company with restrictions on only certain transactions that require approval by the appointed Restructuring Practitioners. What are the benefits of allowing the director/s to remain in control of the company?

A. Directors have intimate knowledge of their business and (should) have a heightened motivation to do what is necessary to save it. The less that external parties are involved the cheaper the process is, thus making more funds available for the benefit of creditors. Particularly, communication channels are not disrupted by a third party, e.g. with normal ordering processes/authorisation continuing.

Q5. The role of the Restructuring Practitioner is to assess whether the company is eligible and certify whether the Plan is realistic, and likely to be able to allow the company to meet its obligations. How do you see your role as a Restructuring Practitioner in practice?

A. The role of the SBRP is to help determine if the company is eligible for the process; help support the company to develop a plan and review its financial affairs; certify the plan to creditors; and manage the disbursements once the plan is in place.

Being pragmatic, I think that practitioners will be somewhat risk adverse, there will concerns about the extent of investigations that have been carried out and the extent of likely recoveries that would be available to creditors under alternative processes (i.e. liquidation).

The restructuring practitioner is not required to provide a report to creditors setting out a recommendation for creditors. Creditors will only see the assets and liabilities to be included in the SBR Plan and not necessarily the full financial position. There is no comparison against any other outcome presented to creditors, and the SBR Practitioner’s statement is only in respect of the company’s ability to meet the requirements of the SBR Plan. This is deliberate as it represents one of the main cost savings anticipated in the SBR Process. However, in practice, the SBR Practitioner will still have to undertake this work to meet the obligations to only continue the process if it is in the interests of creditors – meaning some of the anticipated costs savings are likely to be lost.

Q6. Do you think that the implementation of a Plan will be popular with unsecured creditors?

The rights of unsecured creditors are restricted to allow the company to develop and implement the Plan (such as restrictions from bringing or continuing legal actions against the company implementing). However, unrelated creditors are provided an opportunity to vote on the Plan before it is approved.

The legislation provides a process of voting in which unrelated creditors are allowed 15 days to review and vote on the Plan, and all creditors are bound by the Plan if a majority of creditors in value vote in favour of the Plan.

If the Plan is not approved the directors may consider a CVL or administration in the normal course.

A. Unlikely, SME’s entering into any form of external administration/restructuring process is never popular with creditors. Hopefully creditors will engage in the process to ensure that the best outcome is achieved for them and the SME moving forward. I would hope that creditors remain pragmatic about the process and do not react negatively to it too quickly.

Q7. Secured creditors may still enforce their security interests by for example, appointing a Receiver. Would the appointment of a Receiver by a secured creditor undermine attempts to develop and implement a Plan?

A. Absolutely, in instances where a secured creditor makes an appointment, I am of the view that any opportunity to restructure the SME using the SBRP would be lost or at best significantly reduced. In circumstances where the SME appoints a voluntary administrator and a receiver is subsequently appointed there is still an opportunity to restructure the business with the use of a Deed of Company Arrangements, this option is not available in the SBRP. 

Q8. Do you think that the DIPM Restructuring process will assist SMEs with a time and cost effective plan to recover and contribute positively to economic and jobs growth in Australia?

A. I am certain that there will be some SME’s that will benefit from the SBRP. However, in my view there are some significant challenges that SME’s will face if using this process. These include:

  • Cashflow, the company will need to have sufficient cashflow available to allow it to trade during the SBR period
  • All outstanding employee entitlements need to be up to date, this primarily will be around outstanding superannuation, which can often be significant
  • Uncertainty around creditors continuing to trade with the company. In the Voluntary Administration process the Administrator is personally liable for any debts they incur during the process, even with this guarantee to creditors it can still be difficult to get creditors to continue to support you during the trading process. I am of the view that creditors, who are already exposed will be less likely to provide continued support where they have no additional assurances that any further credit extended to the SME will be recoverable

This is a significant shift from the traditional creditor-orientated model to a more flexible ‘debtor in possession’ model. The overall intention of the legislation appears to be an attempt to encourage SMEs to seek assistance before liabilities grow to an unmanageable level.

It is important for businesses and creditors in the current economic environment not to delay seeking expert legal, and insolvency advice, at an early stage in order to take advantages of the reforms and to reduce the consequences of insolvency.

If you have any queries or would like further information please contact our team today. 

Antcliffe:Scott Lawyers

About Jirsch Sutherland

Jirsch Sutherland is a specialist insolvency and business recovery practice offering expert insolvency and turnaround management services across Australia. Since 1984, Jirsch Sutherland has built a business based on empathy and integrity – qualities that have led to them being recognised as one of Australia’s leading national insolvency players.

At Jirsch Sutherland, their focus is on making a difference to our clients, their clients, and the local communities in which we live and work.

Their head offices are located in Sydney, Melbourne, Brisbane, Newcastle and Perth, with a supporting network of regional offices. Their national reach combined with their local presence underpins the success of our specialist services.

To find out more simply visit their website: https://www.jirschsutherland.com.au/