DOES THE REFORM ACHIEVE THE RIGHT BALANCE?
Australia has traditionally had what is known as a âcreditor-in-possessionâ insolvency model. This is because all of our insolvency regimes take control of the business from the owners and give that control to the creditors by appointing an outside independent director. The idea being that we shouldn’t leave control of the business in the hands of the very parties that got the business into financial trouble.
The proposed restructuring for small businesses moves away from this to adopt a âdebtor-in-managerâ style of arrangement. You will commonly hear references to Chapter 11 bankruptcy in the United States of America as a popular debtor-in-use model. The United States is not the only jurisdiction with a debtor-in-person style model. Around the world, insolvency laws are evolving to incorporate more lenient debt relief and restructuring agreements. In 2017, Singapore introduced new restructuring laws, passing parts of Chapter 11 bankruptcy laws, lowering barriers to entry for struggling businesses to seek help. In the United Kingdom (UK), Corporate Voluntary Arrangements (CVA) have traditionally been the âdebtor-in-possessionâ tool, but lacked the moratorium on creditors continuing their debts. However, COVID-19 prompted the UK government to introduce in June 2020 a new moratorium feature and a new standing ‘restructuring plan’ procedure, which keeps the current directors in office. However, this restructuring plan requires judicial review, which risks being too costly for small businesses.
Back in Australia, piecemeal changes were made to relax insolvency laws seen as ‘creditors friendly’ by introducing a safe harbor at the end of 2017 and suspending ipso facto clauses in mid -2018. However, what has been continuously left unanswered is the âone size fits allâ system which imposes the same duties, obligations and restrictions, regardless of the size and complexity of the administration. This has led to the perception that small businesses do not enter the insolvency system early enough, reducing the chances of the business surviving.
Due to the economic impact of the pandemic, the government was forced to act quickly to reform the insolvency law to better equip small businesses with affordable tools to restructure or seek debt relief through to a simplified liquidation. The restructuring process, known as Small Business Debt Restructuring, will allow directors to retain control of the business as they work with the Restructuring Practitioner to design a debt reorganization plan for the company. ‘business with the approval of creditors.
So, we can see that the government has solved a problem by introducing a new format suitable for small format, the next challenge is, is Australian culture ready to accept a recalibration of the balance between the control of debtors and creditors?
For this, we must understand that the roots of our insolvency legal framework lie in the scale at which the country relies on credit to fuel the growth of its economy and, therefore, the social tolerance of the country. countries to accept business failure to promote risk taking and entrepreneurship. Inheriting UK insolvency laws, Australia has always been seen as too tough on directors, with strict insolvent business laws and the many ways directors can be held personally liable for company debts.
Although precipitated, by this reform, the government prepared the ground to allow directors to retain control of their businesses while seeking external professional support. The intention of this reform is clear: the perception that the current insolvency framework is the end of the line and that administrators are losing control needs to change.
From the perspective of the business owner (debtor), the key is to recognize the value of this initiative and to seize the opportunity. A key factor in changing the mindset of business owners is getting the message out within the business community. Professional advisers, insolvency experts or others, should make the case that it is okay to seek outside advice when you need help and the earlier the advice is sought, the more likely the business is to survive and ideally to prosper. While the “She’ll be right” attitude is laudable, it is just as dangerous. Directors should not feel that they have to use up every dollar of working capital and external funding source before entering the insolvency system. They should feel comfortable enough to do it sooner, much sooner, without feeling ashamed or that they will be punished. A cultural change is needed and hopefully the reform of small business restructuring will be the trigger for this change. What should we see as a result? More cases of insolvency practitioners working on cases where the underlying ingredients of a viable business model, strong and competent management, modest working capital and accurate and reliable financial records are there to increase the odds of successful restructuring.
But, one last ingredient is needed to bring it completely. That is, the support of stakeholders (creditors).
Stakeholders include, but are not limited to, shareholders, financiers, employees, contractors, suppliers, owners, regulators, industry bodies and customers, to name a few some. The attitude of Australians towards providing credit and supporting businesses has been largely positive, especially among small businesses. We support each other, it’s in our culture. The challenge for businesses is to have ongoing support when they need it most, when times are tough. Small businesses generally depend on other small businesses, whether they are a supplier or a customer. And for them, every dollar counts. This is where the friction arises and a compromise has to be found. Again, this is where a cultural shift is needed. Creditors must be prepared to support, compromise, and understand that bad debt is a risk and a cost to doing business, especially in today’s environment. If the right ingredients are there, then creditors should step in and support a struggling business. This means that suppliers will not have the assurance that a voluntary administrator is personally responsible for bearing the cost of a struggling business. The insolvency practitioner then plays a minimalist role in reducing costs and facilitating negotiation between debtors and creditors. Let’s not forget that small businesses demand an affordable price. Of course, loosening the insolvency framework too much is also dangerous. Our economy is dependent on credit and therefore providers and lenders need to have confidence in a strong regulatory framework to keep credit in circulation and at an affordable price. Despite this, I think the reform is a step in the right direction.
The recalibration is about to happen and, in my opinion, our business community needs to rethink a bit of its perception of credit, compromise and control. After all, half a loaf is better than nothing.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.