Rescue or Risk: The Real Impact of Australia’s Latest Restructuring Laws

Following our recent Lunch Money interview with Blair Pleash, restructuring partner from Hall Chadwick and Professor Jason Harris from Sydney University’s law department, we explore the complexities of corporate restructuring amidst economic shifts, exploring measures like Small Business Restructuring and Safe Harbour.

Post Covid, new regulations were put in place by the government to support businesses during financial hardship. This included Small Business Restructuring (SBR). By offering an alternative to Voluntary Administration (VA), SBR has helped many Australian small businesses to keep their doors open.

What is Small Business Restructuring?

SBR is essentially the lite version of VA. It is intended for Small and Medium Enterprises (SMEs), to adopt should they be facing financial hardships within their business.
Like any form of restructuring, the key is seeking advice early and adopting the plans suggested by experts to help you trade out of the insolvency issues.
To be eligible, your business must meet the following criteria:
Liabilities less than $1 million
● Employee’s entitlements up to date
● Up to date with Tax lodgement

Why would you choose to undergo SBR?

SBR utilises the ‘Debtor is possession model’, which means directors remain in control rather than administrators who would take the reins in a VA scenario. It also provides a lower-cost alternative than a VA, where money can be tied up with lawyers’ fees. Businesses that engage in SBR also have an opportunity to liaise with the Australian Tax Office (ATO) in regard to negotiating and compromising on their outstanding tax debts.

What role does the ATO play in SBR?

The ATO plays a large role when it comes to the current set-up with SBR. They alone have jurisdiction to cut deals with the business in question regarding their tax debt. Essentially the ATO acts as a banker, as it is said that there is an estimated collectible tax debt of $36 billion when it comes to SMEs in Australia.

In an effort to combat the $36 billion in arrears, the ATO is being praised for being open and transparent when it comes to what they are looking for when it comes to approving SBRs. Essentially they want to see a decrease in director loans and an increase in tax compliance – focusing on the history of the business in question. Have they been on time with lodgements in the past, or are they a serial repeat offender?

Refinance Vs SBR

As a credible financier, it is important to delve into the reasons behind a company’s financial position. Sure refinancing may be able to get them out of trouble for a little while, however, is this a band-aid solution?

What is Safe Harbour, and would it be an option when restructuring?

Safe Harbour provides a greater level of comfort to directors’ personal assets if a company is under financial stress, and insolvency is suspected. It ensures that directors are not exposed to insolvent trading liability for that period.

It is expected during this time of Safe Harbour, that a business initiates steps to turn the business around.

To be eligible for Safe Harbour, like SMR, ATO and employee benefits must be up to date, however, there is no $1 million ceiling, therefore this is usually utilised for bigger businesses. It can also be a costly option. However, there is no register for Safe Harbour, so businesses can continue to trade without judgement or stigma associated with insolvency issues initially. Safe Harbour can be the first step when it comes to seeking insolvency advice.

The Importance of Openness and Transparency in Building Trust

In today’s unpredictable market, maintaining open and transparent communication is crucial for building trust with clients. Transparency allows for a deeper connection and fosters a strong relationship even in the face of mistakes or errors. Research shows that 75% of satisfied clients are willing to switch providers, highlighting the need for ongoing conversations and transparency.

In Summary

What we would like to see moving forward…

● More regulation in the insolvency space is needed. An ASIC regulatory guide for SBR would be useful along with a directory of businesses who are able to assist.
● An advisory voucher – to cover the costs of a business health check, which may prevent many businesses going through restructuring or insolvency issues

 Video Summary

05:25 What is small business restructuring

10:11 Debtor in Possession, why can it work

14:51 What role does the ATO play?

19:17 How could the repeat insolvencies process be improved?

23:42 Effective measures by the ATO

28:28 What is Safe Harbour?

32:57 What statistics can we show from businesses utilising Safe Harbour?

37:25 What role do the courts play?

41:41 What role do finance brokers play?

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