Insolvency Reform: What Australian Businesses Need to Know

Insolvency Reform

Changes to Australia’s insolvency framework could have a significant impact on the future of your business — here’s what Australian business directors need to know.

On September 24, 2020, the Federal Government announced significant changes to Australia’s insolvency framework. These insolvency reforms — the most significant in 30 years — have a significant impact on Australian small businesses, creditors, and employees.

Directors of Australian businesses should carefully assess the information presented by the Australian Government in the insolvency reform fact sheet, as there are several key issues that should be considered by directors remaining in control of businesses undergoing Chapter 11 styled restructures.

The reform process presented by the Australian Government specifically details changes to the management of business affairs during Chapter 11 restructuring — directors of Australian businesses now remain in control over business affairs for up to seven weeks subsequent to the notification of business creditors that the business has accessed the regime.

The first four weeks of this seven-week period now provide business directors to create a plan with the assistance of a Small Business Restructuring Practitioner. The subsequent three weeks of the seven-week period allow business directors to present the plan to creditors, along with the opportunity to vote.

The insolvency reform planning process presents business directors with the opportunity to assess a number of key factors, such as practical and commercial hurdles that could potentially affect the ability of the business to continue trading. These factors include:

1. Credit Access

Entering the seven-week insolvency decision period is likely to eliminate access to any overdraft facilities or credit cards for businesses that rely on them. In the case that a business is no longer able to access credit or overdraft facilities, it’s likely that the business will be forced to rely on cash reserves in order to meet employee entitlements and pay suppliers.

Ensuring that employee entitlements are up to date is a key feature of the new insolvency reform legislation amendment and must be treated as a priority.

2. Transaction Facilities

Transaction facilities such as disputed credit card transactions are likely to be affected by the insolvency reform seven-week decision period. In the case of disputed card transactions, credit card providers are entitled to charge back vendors. If a business has advised a card provider that it has entered into a restructuring process, it’s unlikely that a card provider will continue to accept this risk.

3. Trading Account Impact

Many businesses operate on credit with suppliers. A business that has entered into a restructuring process under the insolvency reforms and notified suppliers is likely to find credit access limited or cancelled, forcing the business to engage on a cash-on-delivery basis. It’s also likely that suppliers will demand that any previous debts be paid in full before further goods are supplied.

4. Retention of Title

Creditors that have retention of title claims are likely to collect stock on hand in the event of a business entering the restructuring process.

5. Staff Engagement & Retention

Ensuring that staff is retained throughout the restructuring process can be difficult. Strong staff or team members may be approached by competitors during a trade-on, which can potentially cause talented team members to leave a business.

Increased use of sick leave during restructuring is common due to elevated stress levels. Some staff may seek alternative employment on the assumption that a restructure is unsuccessful. It’s important to consider any signs of distress that could potentially impact a restructuring plan in order to minimize the negative impact of restructuring.

When is it Time to Assess Business Solvency?

There are several key indicators that can be used to determine when it’s time to assess business solvency. Increased working capital pressure, declining cash reserves, or a deteriorating financial position are key indicators that it may be time to assess the solvency of your business.

    If your business is losing key customers or contracts, collecting aged creditors, or experiencing a long-term decline in sales or revenue, it may be time to assess the continued ability of your business to trade and meet debts. Other factors that can indicate that it’s time to assess business solvency include:

  • Tightening supplier credit terms
  • Demand or pressure for payment from creditors
  • Difficulty obtaining finance
  • Deteriorating relationships with creditors or stakeholders
  • Incomplete or missing business plans, forecasts, or strategies
  • Overdue statutory obligations.

When assessing business solvency, the most important factor to consider is whether or not the core business can be salvaged. If the core business remains viable in its current state, it’s possible that insolvency reform safe harbor or turnaround planning can help to improve future performance.

A viable core business that is not operating efficiently in its current state may be a strong candidate for voluntary administration. A business that is not viable or salvageable, however, should be considered for liquidation.

If you’re not sure whether your business will be affected by insolvency reforms, or are seeking information on how best to assess the solvency of your business reach out to Fullstack for comprehensive guidance today.

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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech & online companies.

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