The Corporations Act’s Part 5.3B, which established the Small Business Restructuring Process (SBRP), drastically changed the landscape of corporate insolvency in Australia in 2021. In contrast to the current Voluntary Administration (VA) system under Part 5.3A, this new procedure aims to give bankrupt small firms a more affordable and straightforward debt restructuring option. What advantages does the SBRP have over the VA, though? The directors’ continued daily influence over the company during the process, reduced professional expenses, increased success rates, a reduction in process detail, and more straightforward restructuring plans are some of the primary advantages.
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First Advantage: Directors Retain Power
The fact that only the directors have the authority to start the procedure is one of the SBRP’s most notable benefits versus VA. In contrast, under VA, actions may also be initiated by secured creditors.
In addition, Australia’s first debtor-in-possession restructuring procedure is the SBRP. It indicates that the directors are anticipated to continue managing the company day-to-day and to retain control of it during the SBRP process (s453K). This implies that the Restructuring Practitioner (RP) they designate serves as a process monitor as opposed to a business administrator. The directors’ authority is restricted in that they are not permitted to engage in transactions outside of the regular course of the company’s operations without the restructuring practitioner’s consent (section 453L).
Conversely, under VA, the company’s whole management is taken over by the voluntary administrator, who frequently keeps up business operations but does not ensure them (s437). Without the administrator’s approval, the directors forfeit their authority and are forbidden from handling the assets and business matters of the firm. For many directors, this loss of control might be unsettling, which makes the SBRP a more desirable choice. Because they are compensated on an hourly basis, voluntary administrators have no motivation to trade stocks or incur other risks. The SBRP is a recognition of the business reality that the directors will still need to assist the volunteer administrator and participate to day-to-day administration even during a VA procedure.
Advantage 2: Reduced expenses
Insolvency procedures include a lot of financial issues. For instance, the high expense of the Chapter 11 process in the US is one of the primary complaints leveled against it. Two benefits come with SBRP: first, unlike VA, the restructuring costs are set and cannot be increased; second, recent ASIC study indicates that SBRP costs are significantly lower than VA expenses.
Compared to time billing under VA, SBRP offers set rates, which makes it a more dependable alternative. expenses in VA are normally determined using a time cost method, and as a result of administrators taking over the firm and putting in more professional hours of work, expenses are frequently higher. On the other hand, SBRP works on a set price that was decided upon before the board appointed the RP. In a VA process, the first cost estimate provided to directors is typically updated to reflect higher costs.
According to ASIC report 756, the median overall cost of SBRPs was $22,055, which included finishing the restructuring process. In contrast, Mark Wellard’s 2014 research revealed that the average cost of a virtual assistant (VA), including restructuring via a deed of company structure, was around $60,000. The author does, however, believe that the VA procedure has been much more expensive over the past ten years, pushing the typical VA into six figures.
Benefit 3: A more efficient procedure
A simplified procedure with little creditor reporting is offered by the SBRP. Because the creditors will receive minimal information instead of an inquisitorial report, this provides a considerable benefit to the directors of an insolvent corporation. As a result, the procedure won’t be as heated because they won’t be interrogated or accused of perhaps engaging in insolvent trade.
The RP looks into and confirms the business, assets, affairs, and financial situation of the company. Unlike VA, though, there is no obligation to provide creditors with a thorough report outlining these conclusions. RP of an SBRP is merely needed to formally declare whether the firm would likely be able to fulfill obligations under the proposed plan, as opposed to offering a recommendation to creditors, as VA does. The RP’s job is to reassure creditors about the process; if they feel uneasy or discover anything amiss, they are required to call off the restructuring.
Meetings of creditors are not necessary under the SBRP; instead, creditors cast their votes by sending in written statements endorsing or rejecting the restructuring plan. In contrast, the VA procedure necessitates two meetings or more, which adds to the process’s length and complexity. The insolvency process may lose momentum as a result, as creditor meetings frequently devolve into accusations and arguments.
Benefit 4: Plans for restructuring are simpler
Simpler restructuring proposals are permitted by the SBRP, but they must be limited to cash-only offers made to creditors. It also forbids directors from favoring one creditor over another and bans them from having voting rights or getting paid from the restructuring plan. These limitations give creditors and the corporation a clear-cut and simple-to-understand method. The creditors may choose to accept the compromise offered by the board in the form of cash payments as they are aware that the firm is bankrupt and that they will not be paid in full for their claims.
However, because a VA procedure involves a proposal from directors with little restrictions, it can become quite complicated. Directors frequently have the ability to discriminate amongst creditors, manipulate the voting process through related party votes, and offer complex agreements that are difficult for creditors to understand. In actuality, the volunteer administrator has a limited amount of time to have a firm grasp of the company’s operations, therefore their inquiries could not be comprehensive. since of this, there may be no reason to anticipate a voluntary administration to be exhaustive. In the end, creditors would still have to take a significant loss on their debt claims since the firm is insolvent.
Benefit 5: Process assistance from the ATO
Furthermore, schemes that benefit creditors more than a liquidation scenario have received backing from the Australian Taxation Office (ATO). Another important benefit of the SBRP is that it is typically supported by a major creditor in cases of insolvency involving small businesses. Although there is anecdotal information that suggests the ATO prefers to assist legitimate firms at a far higher rate than VAs, the ATO may also support VAs. The ATO is creating its own guidelines for which SBRPs it will accept, but its general approach is to assist legitimate companies with a history of tax compliance as well as current entitlement documents and payments.
Benefit 6: If the procedure fails, there is no automatic liquidation.
Unlike VA, SBRP creditors do not have the option to vote in favor of a liquidation if they reject the restructuring plan. In VA, creditors vote through a deed of business arrangement to determine the firm’s fate, even deciding to liquidate it if they vote against a restructuring. But under the SBRP, the restructure terminates and all creditor claims reappear if the simple majority (measured by dollar amount) in favor of a restructuring proposal is not reached. The corporation does not automatically enter liquidation, but shareholders have the option to do so if they so want.
Advantage 7: Increased rates of success
Since its launch, the SBRP has demonstrated encouraging signs of success, with a large percentage of organizations utilizing the process to good effect. This track record demonstrates the SBRP’s efficacy, and one of its main advantages over the VA method is its greater success rate.
In Australia, voluntary administration may have just 1% of bankrupt firms’ fully effective restructures to its credit. The following is the result of this “back of the envelope” statistical calculation:
According to pre-COVID ASIC figures, 13% of bankrupt enterprises choose Voluntary Administration over liquidation;
According to a study article by Mark Wellard, 29% of voluntary administrations chose to engage into a deed of business arrangement rather entering into liquidation.
According to the author’s estimation, 25% of all business arrangement agreements that are engaged into end up being successful;
The multiplier impact is equal to 0.01 (0.13) * 0.29 * 0.25.
Take that in: as little as 1% of bankrupt enterprises may be able to effectively restructure through voluntary administration. Given VA’s dismal success statistics, it should come as no surprise that attorneys and the general public view it as “glorified liquidation.”
The percentage of restructuring plans accepted by creditors in SBRPs is exceptionally high at 87%, despite the modest number of appointments during its initial 18 months of operation (2021-mid 2022) (source: ASIC research paper 756). The fact that the SBRP has a high approval rate suggests that it has been successful in assisting small firms in debt restructuring and creditor arrangements.
In conclusion, it is evident that the Small Business Restructuring Process (SBRP) has a number of significant benefits for small firms, even if both the SBRP and Voluntary Administration have a place in the Australian insolvency framework. Small firms have a higher chance of recovering and surviving thanks to this streamlined, less controversial, and more affordable procedure, which enhances the general strength and variety of the Australian economy.