What SME directors need to know about new insolvency rules

These rules, which absolved directors from personal liability if their businesses traded while insolvent, have been replaced by legislation that includes a new, streamlined SME restructuring process that came into force on 1 January.

As of that date, a company with debts due and payable, that they cannot pay, is technically insolvent and its directors are at risk for debts incurred by the company.

There are a number of upsides and potential pitfalls within the new insolvency model that small business owners must be aware of, so that if they undertake restructuring in 2021, they are fully aware of the consequences.

Did you know?

• There is the potential for a spike in Australian businesses experiencing difficulties and requiring turnaround funding in the first half of 2021, especially as government stimulus measures such as JobKeeper end and the protective measures around statutory demands and winding-up petitions are withdrawn.
• With the new legislation now in effect, businesses operating in the same manner as 2020 could risk trading insolvent once the stimulus measures are removed.
• Under the new rules, SMEs with liabilities under $1 million and who are up to date with their tax lodgements and up to date with employee entitlements that are due and payable, such as wages and superannuation, can work with an expert to restructure the business.
• Now, owners will be able to stay in charge of running the business while experts (the new Small Business Restructuring Practitioners) work on a turnaround plan to put to creditors.
• SME directors can lodge with ASIC an intent to enter into the new arrangement within three months. Effectively, this protects them from the implications of trading insolvently while their arrangement is put in place.
• The new insolvency laws aim to make restructuring a less complex and less expensive process for many businesses — but it’s important for small business owners to be aware that restructuring under the new rules will very likely have a negative impact on cash flow.

Four actions small business owners should take — now

1. Talk to a professional about the consequences of restructuring
2. Be aware of the potential cash-flow impact
3. Find funding that will assist in this situation
4. Put the funding in place now — before you need it

Talk to a professional about the consequences of restructuring

One impact of the COVID crisis is that there are so many businesses who, in early 2020, could not have imagined that they’d be looking down the barrel of insolvency.

The million-dollar question for small business directors is: once support and protection measures are withdrawn, will they have sufficient cash flow?

Directors need to review their position and seek considered advice — sooner rather than later.

Hall Chadwick’s Blair Pleash suggests SME directors to have the tough conversations with their advisers as soon as possible. He says the key is to talk about restructuring options and the funding it will require, because dealing with this issue early means directors may have more options.

Be aware of the potential cash-flow impact

One of the aims of the new legislation is, given small business owners will retain control while the business is restructured, then directors might seek help earlier and end up with a better outcome.

Small businesses considering the debtor-in-possession restructuring system should act quickly to put in place arrangements that secure the working capital they’ll need to deal with tighter supplier credit terms.

Find funding that will assist in this situation

As of 1 January, the ATO, banks, landlords and suppliers are in the position to take more direct enforcement action now that the support structure in place during COVID-19 has been replaced.

Put the funding in place now — before you need it

Having systems in place as soon as possible will give small businesses the best chance of turnaround success. It’s important to be aware of the range of SME lending options available, and to seek advice about which are suitable for restructuring situations.

Restructuring requires funding that is fast and able to be put in place without red tape. This is where products such as invoice finance will be in demand, helping to ensure that businesses undergoing restructuring have the working capital to see them through.

We’re all willing 2021 to be a kinder year to the small business sector than 2020. However things pan out, it’s important for SME directors to be prepared.

Even if a small business is not at the crisis point now, taking action now to get in place a suitable style of funding means it is ready to draw down from, if and when the need for restructuring arises.

Craig Michie is a senior executive at ScotPac