Debt and asset restructuring for financially distressed companies has taken on a new significance in Australia with the introduction of a new process last year — small business debt restructuring.
Businesses can struggle or fail in different ways. Consider an unprofitable transport business that hasn’t been able to put up rates in 20 years due to stiff competition. Or, consider the same type of business, where its unprofitability is caused by the inability to pay debts entered into by prior directors.
Pre-insolvency advice is an area that is relatively under-regulated in Australia. While there is a range of Codes of Ethics and professional standards that may apply, they will only apply where an individual is a member of that specific profession or association (e.g. ARITA, CPA Australia or ABRTC).
Small-to-medium sized business owners can’t effectively outsource the responsibility for driving a turnaround process when their business is in financial trouble. They can hire sensible staff and competent professional advisors but they are the only people with the incentive (skin in the game) and experience (because they started the business) to drive forward a turnaround process.
The safe harbour is a carve-out to the duty of company directors to cease trading when a company is insolvent. It is a pro-business mechanism that helps companies stay afloat by giving directors protection from prosecution for insolvent trading while they work on a restructure. Read our guide to the safe harbour to find out more about this potential lifeline for insolvent companies.
In article: The COVID-19 economic meltdown has already led to some quick changes to Australian bankruptcy and insolvency law. However, as the basic tools for dealing with insolvency remain the same, it is worth looking at the general regulatory landscape…