The short announcement yesterday by Treasurer Josh Frydenberg, is to be expanded on today.
But have we seen enough to say – “Nah, won’t work?”
The proposed new small business restructure regime, with a target start date of 1 January 2021, appears to have borrowed from Chapter 11 of the US Bankruptcy Code.
The purpose appears to be to:
(i) save small businesses from closure due to the impact of COVID-19; and,
(ii) reduce the cost of formal restructuring / winding up (which can be crippling).
But will the new regime achieve those objectives and is the issue of costs of our Government’s own making?
Here are some things to think about:
1.1 The small business restructuring regime (“SBRR”) is only open to businesses (companies and individuals) with creditors of less than $1M. In our near half century experience, generally, we have found that the quantum of liabilities is usually double that advised by the directors and the assets are worth half.
1.2 Who is the arbiter on the quantum of liabilities?
1.3 What input does an independent qualified insolvency expert have?
1.4 Do you reduce the quantum of a chattels lease liability by the value of the chattel?
1.5 Do you reduce the value of a property lease, for the term of the lease, by an estimate of the mitigation of loss?
1.6 Is the claim of the secured creditor included in the quantum of creditors?
2.1 The press release refers to the business owner gaining protection from some secured creditors. We will understand this more with the detailed announcement.
2.2 But, does this mean that the rights of secured lenders, such as banks, as they were yesterday, will not be affected? If a lender can go into possession or appoint a Receiver or call in a guarantee, not a lot has changed. Other than if you are supplier. Now your guarantee is worthless compared to a lender.
3.1 At what point are creditors advised that steps are being taken under SBRR?
3.2 Will those creditors continue to supply the company with no certainty that they will get paid, contrary to the position when a Voluntary Administrator places an order? We think not.
3.3 Employee entitlements that are due and payable must be paid out in full before the plan is put to creditors. That includes superannuation. This could be a lot of money that has to be russled up.
4.1 How will supply partners respond to this new SBRR?
4.2 With personal guarantees being worthless, will landlords insist on only a bank guarantee to support a company’s lease commitments. A bank guarantee is a lot harder to raise than a personal guarantee.
4.3 Pricing risk will be factored in. A supplier/ chattel lessor will see a higher risk to their revenue. It is foreseeable that, to mitigate such risk, pricing will increase. This results in a costs increase and thus a reduction in profit and cash flow for the small business operator if they can’t pass it on to the customer.
4.4. Will it force suppliers to only deal on COD terms or 7 day trading terms for which the small business does not have or depletes the remaining working capital? In a normal world, lack of working capital is a major driver of business failure.
5. In our experience, where creditors generally are comfortable with the business owners’ integrity and wish to continue the business relationship, they are prepared to do informal deals to compromise debts owing to suppliers. But not so the Government through its revenue agent, the A.T.O.
6. Is there any mechanism for the creditors to change the SBRR advisor. The answer may be that if creditors don’t like the advisor, they can vote down the proposal and the subsequent mechanism may be used to install the creditors’ preferred administrator.
7.1 The cost of external administration has been increasing over the decades due to regulation, compliance and the increasing complexity of doing business in Australia.
7.2 In the 1970’s, often General Security Agreements (fixed and floating charges/debenture charge) had written into them that Receiver’s remuneration would be limited to 5 or 6% of realisations. No chance today of costs being kept near that level.
7.3 Businesses, big or small, are impacted by such things as:
• Environmental issues
• Employment law
• Cyber security
An External Administrator cannot ignore the obligations that arise under these points. And it costs money to deal with them.
7.4 Maybe the Government can waive the 2017 impost on Insolvency Practitioners, which is passed on to failed companies.
7.5 Maybe the Government can rid us of a lot of compliance inefficiencies, such as the duplication of information contained in a Liquidator’s dividend report, which has previously been disclosed in an Administrator’s report.
Who has Mr Frydenberg been speaking with to cook up this proposal? It doesn’t sound like the experts – ARITA. Doesn’t sound like the experienced.
The SBRR is a commendable concept; but it might be more effective to just get rid of the massive regulation and compliance cost.
Business Turnaround & Restructuring
Corporate & Personal Insolvency
Level 2, 6-10 O’Connell Street, Sydney, NSW, 2000
GPO Box 882, Sydney, NSW, 2001
Telephone: (02) 9233 6088 Facsimile: (02) 9233 1616
Melbourne – Brisbane – Adelaide – Perth