With Australian small business gripped by the effects of COVID-19, many find themselves in a position where they can’t pay their debts. The Australian government has stepped in to help by introducing insolvency reforms.
Insolvency is when you find yourself in a position that you do not have the funds to pay the money you owe to others. As the owner of a small business your business and most likely you personally are responsible for paying your debts.
WHY should I pay my debts
If you don’t pay money that you owe to others, they have the right to recover those funds. If you don’t have the funds, you become insolvent or essentially bankrupt.
Before January 2021 it was illegal for a business to trade if insolvent. The Australian government has introduced reforms that will allow a small business more time to restructure and survive the financial effects of COVID-19.
WHAT do insolvency reforms mean to me?
If you find your self insolvent and your debts are less than $1million, you will be eligible. Note that you must also have paid your employees their entitlements including superannuation and have your taxation lodgements up to date.
The small business reforms package consists of:
• A debt restructuring process providing a quicker and less complicated procedure for financially distressed but viable firms to restructure their debt.
• A liquidation process to allow faster and lower-cost liquidation, maximising returns for employees and creditors.
These reforms have been announced as temporary so at some point they will be removed!
Most importantly, this means that you can keep trading under your control while developing a debt restructuring plan.
HOW do I get help?
Traditionally you would need an administrator who would take control of your business which would be placed in voluntary administration.
Now a small business restructuring practitioner is recruited, which will reduce the complexity involved.
If you are facing financial stress, you should approach a practitioner immediately to discuss your options. There is a flat fee to do this but remember it is the difference between closing your business immediately and trading out of your insolvency.
The practitioner will work with you over up to 20 days to create a plan that your creditors must vote on. If the plan is approved, the practitioner will administer the plan, including making payments on your behalf to creditors as set out in the plan.
HINTS – Small Business Reforms Package
A government fact sheet can be found here
You can find a registered restructuring practitioner here. Only a person registered with the Australian Securities & Investment Commission (ASIC) as a “registered liquidator” can act as a business restructuring practitioner.
SUMMARY – Can’t pay my debts
Key to your business success is good record keeping. Knowing your financial position and understanding if your business has become insolvent means you may be able to trade out of your issues. Alternatively, shut your business down without also destroying any personal assets. The recent government reforms show sympathy and understanding of small business. They are making it easier to get back on your feet.