From Paul Gidley, Restructuring Practitioner
Regardless of your political persuasion, the Federal Lib’s introduction of the Small Business Restructuring (SBR) legislation has been a shining success for small corporate Australia with approximately 3,388 small businesses resuscitated using the SBR process since its introduction in January 2021.
The SBR has arguably been the catalyst to revolutionise and revitalise the insolvency and reconstruction sector. I believe all stakeholders in this sector, including the judicial system, regulators, corporate advisers, insolvency practitioners, and corporates are part of the evolution towards developing a dominant “restructure” mentality akin to that which already exists in the major mature economies around the globe. One question remains however - will those stakeholders who have considerable influence in the success of formal corporate restructuring processes in Australia such as the ATO, stay true to the cause and keep supporting the restructuring revolution?
Whilst liquidations still significantly outnumber successful corporate restructuring and turnaround appointments, the ratio of business turnarounds via formal restructuring processes, compared to outright failure and liquidation, is moving in the right direction. Some may argue that the evolution towards the developing of a dominant restructuring mentality in Australia dates to when the Athenians practiced debt slavery.
Personally, I believe Australia’s restructuring evolution began in earnest with the introduction of the Voluntary Administration (VA), Part 5.3A of the Corporations Act, on 23 June 1993, effectively replacing the official management legislation. The VA was a genuine attempt to introduce a statutory turnaround and restructuring platform for Corporate Australia. Unfortunately, it was a “one size hopefully fits all” type of legislation and proved to be unworkable for small business, despite being more functional than companies seeking to restructure using predecessor legislation such as arrangements and reconstructions, official management and/or schemes of arrangement.
When I started in the insolvency and reconstruction profession in 1991, the conversation about developing effective, efficient turnaround and restructuring legislation was buzzing off the back of the Harmer Report release in 1988, resulting in the introduction of the VA legislation. Following that, despite the conversation continuing, no other real traction occurred in this space until recent years.
I personally experienced various levels of success utilising the VA process to restructure and resuscitate corporates. I quickly came to realise it was not fit for purpose for small under resourced companies, which unfortunately make up most of the corporate insolvencies per annum. Under the right circumstances and for a company with the correct profile, the VA remains a very useful restructuring tool, and I have been involved in a number of successful VA restructures, historically and recently.
Despite the ongoing conversation however, there was no significant developments in the restructuring and turnaround legislation in Australia until September 2017 with the introduction of Safe Harbour (SH) provisions into the Corporations Act (s588GA).
SH, apart from providing a director with a level of statutory protection from insolvent trading, is predominantly an informal boardroom restructuring and turnaround exercise, using existing advisers, expert consultants and commercial negotiations. I believe however that SH was a signal to corporate Australia that the government had not forgotten about developing internationally competitive restructuring legislation and was getting on with developing efficient and
effective restructuring legalisation, that is, before the world left Australia behind in this space.
Unfortunately, there are no complete stats on the number of appointments and/or the success of the SH provisions as there is no formal notice of appointment lodged with ASIC. I have however found SH to be extremely useful for the right company profile, a conversation for another newsletter.
SH is a genuine consulting exercise not a formal insolvency appointment. Directors remain in total control; all the planning is done behind closed doors and only those stakeholders that are mission critical to the turnaround plan are brought to the table. The only caveat to disclosure would be for a public company in relation to the continuous disclosure rules.
When the world was turned upside down by COVID19 and governments across the globe closed borders and sent workers home, trade literally ground to a halt. Every business was impacted in some way, most negatively, with significant corporate doom and gloom forecast by governments and commentators alike! In January 2021, pre-empting an avalanche of corporate failure, mostly in the small business sector, the Australian federal government enacted Part 5.3B of the Corporations Act “Restructuring of a Company” otherwise known as the small business restructuring process or SBR. From that, the restructuring revolution began!!
Whilst the legislation still requires some fine tuning, the SBR is proving to be a highly successful statutory restructuring tool for small business. Fundamentally it has several desired ingredients for good restructuring legislation in that it provides a protected environment for the restructuring to take place. It is flexible, efficient, and cost effective and it keeps the directors in control. Most importantly it allows scarce resources to be invested towards the restructuring and not regulation, compliance or interference.
One should not underestimate the changing mindset of the stakeholders impacted by insolvency who now appear more than any other time in Australia’s corporate history. They now give proper consideration towards the benefit of successful restructuring and turnaround, rather than liquidation. This may be due to many small businesses experiencing some form of hardship during the Covid years, needing a helping hand here and there, even if it was a roll of toilet paper. This has resulted in a new level of commercial empathy and goodwill in the business community, which is a vital ingredient in any corporate turnaround.
What has been of great assistance in the success of SBR process, was a change in approach when compared to pre-COVID times by the ATO. They are often the major creditor of influence in the restructuring process. Over the last three years or so, the ATO have showed an unheralded level of willingness to compromise aged debts, for good businesses who had fallen on genuine tough times.
Hopefully, this is due to a newfound level of commercial acumen within the ATO insolvency team ranks and not just policy directives from the Government. If it is due to policy, I am unsure how long the ATO will maintain a willingness to comprise small business debts. Anecdotally, recent SBR outcomes (and personal insolvency agreement outcomes) suggests that the Commissioner may be winding back on the levels of commercial leniency shown in the restructuring space over the last few years.
Shaw Gidley has experienced some amazing results with SBR appointments, when compared to periods prior to COVID, rejuvenating balance sheets and resuscitating businesses using both the SBR and VA platforms. In the last eighteen months we have administered thirty-six successful corporate restructuring appointments, with the support of creditors of those companies, compromising in excess $10,000,000 in liabilities.
If you have any clients with good underlying businesses but struggling to service legacy debts, and in need of a solution before affairs become uncontrollable, please contact one of the Directors from Shaw Gidley.
Long live the restructuring revolution!
Paul Gidley is a registered liquidator and trustee in bankruptcy with 34 years’ experience providing restructuring, turnaround and insolvency solutions for companies and individuals in financial distress. Paul is Fellow of the Australian Restructuring, Insolvency & Turnaround Association (ARITA), a member of the Turnaround Management Association Australia (TMA), Fellow of Chartered Accountants Australia & New Zealand (CAANZ), a member of Certified Practicing Accountants Australia (CPA), and holds a Bachelor of Commerce and Master of Business Administration with Merit from The University of Newcastle, NSW.
