Don’t delay moves in developing a small business restructuring plan

" The options are extensive and it is important to think and act strategically to ensure the plan is viable and reasonably likely to succeed, as is required under the legislation. If you have insolvency concerns, it is imperative that you act promptly."

Particularly for businesses in industries such as hospitality and tourism, the damage caused by the pandemic has left many business owners in a difficult financial situation. We have been working with our clients who meet eligibility requirements to determine which scenarios would warrant the development of a small business restructuring plan.

The plan relates to the small business restructuring reforms for financially distressed small businesses that are either insolvent or likely to become insolvent. Under the reforms, owners retain control of day-to-day trading operations while implementing a documented restructuring plan with creditors.

An appointed practitioner in this area must work with company creditors to develop and implement plans - otherwise known as a corporate debt agreement.

It is essentially a debtor in possession (directors retain control) restructuring model and insolvency process, as opposed to the voluntary administration regime where an administrator makes all of the decisions in the day to day running of the business in administration.

The reforms aim to encourage distressed businesses to seek assistance early (meaning at the first sign of potential insolvency). There are many signs that a company is insolvent, such as not enough cash to pay debts, no way to raise extra funds, cannot pay tax debt, or unable to pay wages and entitlements.

The faster you take action, the more opportunity you have to minimise your personal risk and exposure. This improves the chances of implementing a successful restructuring – meaning better outcomes for stakeholders and creditors.

Considerable benefits

A small business restructuring plan could cut the length of the insolvency process which distressed companies are facing. An effective implementation of a restructuring plan might also reduce the cost involved and partly take the edge of the financial pressure. In addition, this is a great solution which could save small businesses out of crisis.

A small business restructuring plan can take many forms. There are some examples of what it could include and when it may be appropriate to implement.

First of all, the plan could include a compromise of debts with repayments to be made from future profits or revenue, or in combination with other asset realisations or cash advances. Businesses should have plans to restructure due to a dispute between partners, members, and shareholders; or directors or wider family groups.

The restructuring plan should well prepare crisis management in response to the sudden illness, death, or incapacity of key management personnel within a business to enable stabilisation and a viability assessment, as well as exit strategies to finalise the sale of a business and compromise debts if there is likely to be a shortfall (for example, mitigating the risk of serious financial loss while safely exiting and/or retiring).

We also suggest a simple repayment plan where a freeze on repayment is implemented for a particular period. This would allow for the realisation of difficult to sell assets, or the implementation of complex secured debt refinancing to pay creditors either in full or at an agreed percentage.

Your small business restructuring plan might embrace the downsizing and/or redeploying existing resources with a view to ensuring ongoing viability by pivoting the business or expanding the scope of products and services. Moreover, companies might consider taking on a freeze on debts followed by an influx of new capital or equity via separate investment, or otherwise including debt for equity arrangements.

Furthermore, you would want your plan to contain partnerships or joint ventures with key trading partners, suppliers, or other stakeholders such as lessors as well as vendor financing arrangements and sale and leaseback scenarios.

The options are extensive and it is important to think and act strategically to ensure the plan is viable and reasonably likely to succeed, as is required under the legislation. If you have insolvency concerns, it is imperative that you act promptly to mitigate personal liability exposure as a director and improve the chances of a successful restructuring.

Eligible businesses

There are various technical elements to determining eligibility, including the consideration of insolvency and the extent of a company’s liabilities at a point in time.

If creditors approve the small business restructuring plan, the directors retain control of the business and it can continue trading with protections from participating creditors.

If the creditors reject the restructuring plan, the company and its directors may consider other options – including voluntary liquidation, such as the new streamlined liquidation process.

Do not leave it to the last minute – seek trusted advice from a small business restructuring practitioner. Appropriate advice is vital before seeking to access the small business restructuring process.

The right mix of pragmatic and solutions-oriented advisers, together with an experienced and flexible small business restructuring practitioner (registered liquidator by law), will be required to ensure a successful outcome for the business in distress and its stakeholders such as creditors.

Whatever the position, it is important for directors to remember that the requirement to act with due diligence and care has never changed throughout the government’s response to the pandemic.