The Australian Federal Government announced COVID-19 reforms in October 2020 aimed at assisting small businesses to restructure when in financial distress. The reforms were aimed at reducing the complexity and costs of the small business insolvency processes.  Called a VA Light Process, the small business restructuring plan commenced on 1st January 2021 and there is a period of grace for small businesses in distress to apply for help until March 31 when Jobkeeper ends.

So why reform now?

  • During COVID-19 the number of corporate insolvencies has dropped by approximately 50% when compared to the same period in 2019.  This is largely due to the temporary measures that were put in place to keep businesses afloat, which expired 31 December 2020. Consequently, it is forecast when these measures end that financial difficulty is likely to increase in 2021 and therefore it is important that small business owners have other options available to them.
  • The reform is part of the Australian Federal Government’s Jobmaker plan and it is hoped that it will enable more Australian small businesses to quickly restructure and better survive the economic impact of COVID-19.
  • Small businesses are historically at the highest risk of For example:
    • approximately 80% of corporate insolvencies involve less than 20 employees; and
    • 75% of corporate insolvencies have < $1million in liabilities

 

What are the eligibility criteria?

  • The small business MUST be an incorporated business
  • It CANNOT have liabilities that exceed $1million – this includes related parties
  • MUST have all tax lodgements up-to-date – even if they have not been able to pay associated costs
  • MUST have paid any employee entitlements which are due and payable before the plan can be put to creditors

 

What should small businesses (or their advisers) who may be in financial distress do?

With this impending reform, there are now more options for small business directors to consider when looking at how they can move forward.

 

Key factors to consider:

  • When practitioners/accountants or clients identify early warning signs of financial distress, it is important to encourage directors to seek advice early from a trusted advisor.
  • Accountants and practitioners can assist clients with ensuring that financial information is in order.  It is vital that clients know where money is coming from or going to, understand where the debts may be and how much the business owes (including tax debts). This information will be important for a qualified insolvency expert to use in determining if the business is viable.

We have extensive experience in corporate restructuring, taxation and litigation support. We have worked extensively with insolvency practitioners and are well-positioned to assist clients navigate this difficult pathway.