Businesses are now testing whether the new bankruptcy laws that came into effect on January 1 will deliver the easier way forward they promise. The restructure has been designed to help business owners stay afloat via a faster, streamlined debt-restructuring process governed by a set of laws that aim to reduce the complexity, time and costs of managing a financially struggling concern. Yet how many will actually qualify for this new scheme is the question. 

Early reports are that those who are testing the new waters are finding they are not quite what they thought. Lawyers who spoke to CPG expressed concern the legislation lacked clarity in parts and remained to be tested, while some said it was such a grey area that they had advised clients to become insolvent prior January 1 to avoid being on the wrong side of the law.

 “It’s a little hard to say whether it (the new legislation) will work,” said commercial litigation lawyer Michael Mounehis from Madison Marcus. “It’s a way of simplifying the process but it will require some tweaking.

“There’s some lingering issues about the previous legislation too – for instance if directors can still be liable for insolvent trading. We’ll surely see it play out in the next six to 12 months.”

One concern with the new rule is the stipulation a company must pay all employee entitlements and taxes due and payable before a plan is put to creditors. “A lot won’t be able to go down this new path because of that requirement,” Mr Mounehis said.

The new debt restructuring process is available to companies with debts of less than $1 million. It follows a ‘debtor-in-possession’ model similar to the US-style chapter 11 bankruptcy procedure which allows a company director to continue trading during a restructuring process.

Liquidator Paul Nogueira, a partner with Worrells Solvency & Forensic Accountants said the legislation has its upsides, especially when it comes to reducing costs and complexities. However he too has reservations as to how practical its measures will be for the broad majority of those staring down the barrel of insolvency. “It’ll be interesting to eventually see how many businesses are in fact going to be able to work with this new legislation,” he said. 

From the handful of clients to have inquired so far this year about whether the new laws can help them, certain issues and practical problems have become apparent. The first is their ability to pay all wages and employee entitlements and have all their tax affairs up to date, a qualification that must be met to take part in the new scheme. 

Then there is the question of ongoing profitability and ability to service any plan put forward. “You’re still dealing with an insolvent company that has significant cash flow problems,” Mr Nogueira said.

If a business was historically profitable pre-COVID, and operators can show trading will return to normal post-COVID, then the legislation could be employed and hence ease the way forward. Where this is not the case, and a business has been challenged pre-COVID then had its situation exacerbated by the pandemic, it will be far harder to satisfy the new bankruptcy rules. “A company needs to be able to demonstrate its ability to satisfy any proposed plan to get a sign-off from a practitioner,” Mr Nogueira said.

“A third problem is once the company goes into the small business restructuring process there’s a prohibition on paying any of the creditors that were outstanding at the start of the plan without a practitioner’s signoff, which means that at least during the process which is 20 days plus the voting period which is another 15 business days the company would need sufficient capital to trade on a COD basis during that time, as it would be unlikely creditors would extend any further credit during the restructure period,” Mr Nogueira said.

“This means there is going to be some significant working capital requirements for a business which may not be available given its insolvency position going into a restructure.” 

Furthermore, banks are not proposing any further extensions on mortgages and business loans, and come the end of March the government will finally remove economic stimulus packages the provided business owners with safety nets. The ATO will also be ramping up collection activities.

All businesses can do at this point is seek expert guidance on their individual circumstances, and wait to see how the biggest overhaul of bankruptcy law in decades plays out over the course of 2021.