Update on the New Small Business Insolvency Regime - 6 Months In

We are now 6 months into the Governments “New Insolvency Regime” designed to make a formal Insolvency appointment  simpler, and therefore cheaper for Small Business.

To refresh your memory, here’s the summary:

• A new Small Business Restructuring process that will allow small businesses to restructure their debts while directors remain in control of their business. Intended to be much cheaper than the current Voluntary Administration process.
• A new Simplified Liquidation for small businesses. Which was planned to be quicker, easier and cheaper.

Now, six months after these new laws have come into effect, they have barely been used. Out of the over 2,200 insolvency appointment from 1 January to 30 June 2021, there have been 16 Small Business Restructuring appointments, and 15 Simplified Liquidations. Of the 16 Small Business Restructurings, 2 failed without proposing a deal to creditors.

In the same period there have been just over 350 Voluntary Administrations,(that SBRs are designed to replace) and approximately 1,300 Creditors Voluntary Liquidations (the longer version of the Simplified Liquidation).

Why is it so? They’re not actually much simpler!

These laws were rushed through Parliament to be ready for the removal of the Insolvent Trading Moratorium on 1 January 2021. This meant there was very little time for consultation with the Insolvency Industry leaving some problems that may have otherwise been raised and solved.

The main problems in our view are the eligibility tests are too tough, and the risks for practitioners are higher.

Eligibility criteria is too tough

To get into Simplified Liquidation, company liabilities must be less than $1 million, and all tax lodgements must be up to date (not necessarily paid, just lodged).

To enter a small business restructuring, liabilities must be less than $1 million. To be able to propose a restructuring plan at the 20 day mark, all tax lodgements must be up to date, and all due and payable employee entitlements must be paid.

Most queries we receive about liquidation or restructuring would not meet these requirements at the time of their initial query. Some may see it as worthwhile to bring lodgements and entitlements up to date, but for many these, extra requirements (neither are necessary for a regular Creditors Voluntary Liquidation or Voluntary Administration) negate any cost savings.

Higher Practitioner Risk

The Small Business Restructuring regime is a debtor in possession model. This means the Small Business Restructuring Practitioner does not automatically receive full access to the company’s records like they would in a regular CVL or VA. For example, they have to rely on the company to grant access to their tax records to the Practitioner. This makes it difficult for a practitioner to review a restructuring plan with imperfect access to company records.

Another factor in the slow uptake is demand for formal insolvency is 50% down on pre COVID times. Even if the number of Simplified Liquidations and Small Business Restructurings doubled, they would only be 2% of total insolvency appointments.

Despite all that, there will be situations where the Simplified Liquidation or Small Business Restructuring will be appropriate.  We are ready to roll if presented with those situations.