Saving your business through corporate restructuring – by Chad Gear and Greg Grunert

Insolvency Series:

 In the last 12 months, the Australian economy has seen a surge of company liquidations.  Insolvencies in Australia are increasing and predicted to reach post-GFC levels.  The increase follows two years of low numbers of corporate insolvencies; a consequence of government measures designed to assist businesses negatively affected by the global pandemic.  However, government measures designed to help businesses have largely deferred the problem, and the ATO is now taking aggressive enforcement action against businesses and business owners, a key factor triggering the current high number of liquidations.

Fortunately, the Corporations Act 2001 provides a number of options for business owners to ‘restructure’ a company, rescuing the business and avoiding liquidation.

What is ‘corporate restructuring’?

One aspect of Australian insolvency laws, those that deal with corporate restructuring, are laws that embody a ‘rescue culture’.  These laws allow for financially distressed companies to ‘restructure’ or reorganise themselves.  They provide companies with a ‘second chance’, and an opportunity to save the business, returning the company to financial health, rather than forcing it into liquidation.  

Corporate restructuring can encompass a range of strategies designed to address a company’s financial problems.  The main processes, and those provided by the Corporations Act 2001, include:

• Voluntary administration;
• Small business restructuring; and
• Schemes of arrangement.

Understanding voluntary administration

Voluntary administration is a process whereby a ‘voluntary administrator’ is appointed to a company, providing the company with ‘breathing space’ (a moratorium on creditor enforcement action) while a voluntary administrator performs a range of functions, including exploring saving the company or its business.  

The process has a hierarchy of aims, but the primary purpose is to maximise ‘the chances of the company, or as much as possible of its business, continuing in existence’.  

Restructuring under voluntary administration can involve:

• Debt compromises;
• Asset sale;
• Debt for equity swap;
• Closing unprofitable parts of a business;
• Terminating unprofitable contracts; and
• Sale of the business.

Generally, the process involves a director or third party proposing a ‘Deed of Company Arrangement’ (DOCA), which is a binding arrangement between the company and its creditors, usually involving a compromise of the debts owed to creditors.  DOCAs are relatively quick, efficient to implement, and do not require court approval.  Compared with liquidation, the process provides a range of benefits to both creditors and directors (beyond just saving the business).

Small business restructuring

Small business restructuring (SBR) involves the appointment of a ‘restructuring practitioner’ to monitor a company’s management and to facilitate creditor voting on a restructuring plan designed to maximise a company’s opportunity for survival.  

It is similar to voluntary administration in a number of its features, but allows the company to retain control of its business, property and affairs while a restructuring plan is developed, proposed and implemented.

Unlike voluntary administration, SBR has a number of eligibility requirements:

• Total liabilities must not exceed $1m;
• The company has not been under restructuring or subject to a simplified winding up process within the last 7 years; and
• No director (or former director in the last 12 months) has been a director of a company that has used restructuring or the simplified liquidation procedure within 7 years prior.

In addition, in order to propose a restructuring plan:

• All of the company’s employee entitlements that are due and payable must be paid;  and
• The company’s tax lodgements must be up to date.

Schemes of arrangement

Finally, a scheme of arrangement is a procedure that allows a company to reconstruct its share capital, assets or liabilities with the approval of its shareholders and the Court.  The structure can also be used to effect a compromise between a company and its creditors, and which binds all relevant creditors, even if individual creditors oppose the plan. 

Contact a lawyer about saving your business through corporate restructuring

Corporate restructuring with an insolvency lawyer provides an opportunity to assist a distressed business to recover, restructure, and otherwise avoid being forced into liquidation. Lawyers at Gear & Co have extensive experience in restructuring and complex corporate insolvencies, and work cooperatively with creditors, financial institutions, liquidators, voluntary administrators, receivers and accounting advisors to provide restructuring solutions for their clients.

If you require assistance with an insolvency matter, contact Chad Gear or Greg Grunert on (07) 3209 2547, or at info@gearandco.com

Copyright © 2024 Chad Gear

While attempts have been made to ensure the currency of information contained in this publication, it is not guaranteed.  This publication is intended to provide only general information on matters of interest.  It is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice.  You should seek legal or other professional advice which is specific to your circumstances.