How to help small business clients understand insolvency options

This article was current at the time of publication.

To help support small-to-medium enterprises (SMEs) understand their options with insolvency, CPA Australia members need to be aware of the changes introduced to the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth), which came into effect on 1 January 2021 following the expiry of temporary debt relief measures on 31 December 2020.  

Available insolvency fact sheets

Kristen Beadle CPA, manager public practice and SME at CPA Australia, has been involved in developing a series of fact sheets to assist members with their knowledge of insolvency. 

Beadle notes that while insolvency reform has been underway for some time, COVID-19 accelerated proposed changes, resulting in a new insolvency regime intended to streamline processes and provide more control for directors of financially distressed SMEs. 

She says there are three main amendments to the law that practitioners should become familiar with so they can offer SME clients ongoing advice and help them with potential insolvency issues.

“Under these new amendments, if a client comes to their adviser as a result of difficulty paying debts as and when they fall due, the first thing to do is help the client with compliance and the accuracy of the company’s accounts,” Beadle advises.

Check that creditor balances are in order, tax lodgements completed, and employee entitlements paid.

Breakdown of changes

Under the new Temporary Restructuring Relief process, businesses experiencing financial difficulty can elect for a three-month temporary relief period (anytime up to 31 March 2021) while they look to appoint a small business restructuring practitioner (SBRP). 

During the temporary relief period, the statutory demand amount increases to A$20,000. The entity has six months to respond. 

The directors of the entity will also be afforded the benefit of safe harbour from insolvent trading in this period.  

The small business restructure allows eligible companies to compromise their debts with creditors should the creditors agree and maximise the chances of trading profitably in the future. 

“This is designed to reduce the costs of going into external administration and keep the director/s in control of the company’s business,” Beadle explains. 

“The director will formulate a debt restructuring plan for the company to help the business survive.  

An SBRP assists with and administers the plan, while director/s retain control of the company.” 

To be eligible to undertake this type of insolvency administration, the company must have less than A$1million in debts, not utilised this type of arrangement previously, or undertaken a simplified liquidation in the previous seven years. 

Additionally, all taxation lodgements must be up-to-date and all due employee entitlements paid.   

Simplified liquidation

While still being a terminal wind-up of the company, the simplification stems from a reduction in reporting requirements by the liquidator, which reduces the cost barrier to appointing a registered liquidator to wind up a company. 

As mentioned, debts owed to creditors must be less than A$1 million but cannot be repaid within 12 months after the appointment of the liquidator.

The company and its associated director/s must not have adopted a small business restructure or had another entity subject to a simplified liquidation in the last seven years. Taxation lodgements need to have been completed and up-to-date.

Insolvency specialist Kathleen Vouris CPA, partner at Hall Chadwick, says the amendments are designed to streamline the process and help businesses struggling in the current economic climate.

“The main benefit of the small business restructure from the director's perspective is that they can retain control, and the hope is that with engaging a small business restructuring practitioner that the costs will be significantly reduced from a voluntary administration,” Vouris notes.

“Another benefit is that employee entitlements must have been paid before a director can undertake a small business restructure of their company.”

Specialist insolvency advice is key

Vouris recommends practitioners should advise clients under financial stress to seek the advice of a registered insolvency practitioner as soon as possible.

“Throughout my career, I’ve seen people leave it to the last minute because they believe insolvency practitioners and liquidators are the end point, and that is just not the case,” she emphasises.

“There are many more tools in the kit and CPA Australia practitioners who are not insolvency professionals can certainly help their clients access the expertise they need to undertake some form of restructuring before it is too late.

“As some of these amendments are designed to give companies the best chance to ensure long-term viability, there is an ongoing opportunity for a CPA Australia member to continue their relationship with the client after this introduction.  

“The role of advisers during and post a small business restructure is to facilitate and assist the client to meet the terms of the restructuring plan to return the client to a position of solvency and ongoing viability.”  

Thinking of becoming a small business restructuring practitioner?

With the introduction of the debtor-in-possession style insolvency regime, public practice certification holders can apply to the Australian Securities and Investments Commission (ASIC) for registration as an SBRP. 

Your application for registration will be considered by a committee formed through the application process. 

The committee will interview you on your ability to demonstrate that you can satisfactorily discharge the functions and duties of an SBRP.