Although the newly passed insolvency reforms may help some businesses stay afloat, the risks that creditors are exposed to have increased. This is a deliberate feature of these new reforms, which are clearly aimed at trying to allow insolvent businesses to continue trading.
This article explores some of the issues that arise for creditors in the Small Business Restructuring Process (“SBRP”).
#1: Proofs of Debt – The Sooner You Organise This, The Better
The first thing that creditors need to understand is that they have very limited time to respond to any dispute about the amount they’re owed by a company going through the SBRP.
Creditors will be notified of the appointment of a restructuring practitioner (“Practitioner”). However, when the creditors receive the restructuring plan they only have five business days to advise the Practitioner if they object to the amount the company claims the creditor is owed.
If the creditor takes more than five business days, they can still object but must provide reasons and the Practitioner still has the ability to reject the objection if the reasons are insufficient. The Practitioner’s decision can still be challenged in court but obviously, that is a very expensive process (which must be done urgently) when a creditor is looking at what may be only a small return from the SBRP.
If a creditor fails to object then the plan could be accepted and thereafter become binding. The creditor might find that they receive a very poor return under a restructuring plan that has been approved by other creditors.
While related party creditors can’t vote we would expect that companies that are going through the SBRP will make sure any friendly creditors are approved and vote to improve the likelihood that the restructuring plan is accepted.
To avoid this, the creditors will need to make sure that they are keeping on top of any of these notices and that they get in touch with the Practitioner as soon as they are aware that the SBRP has started rather than waiting until they receive the plan to find out if their debt is accepted. If they can’t resolve the issue with the Practitioner they should get advice sooner rather than later on how to contest any such ruling by the Practitioner.
#2: Voluntary Administration Protections for Creditors Don’t Apply
Although the SBRP has several features that are similar to the voluntary administration process (“VA”), there is one key difference. Unlike a VA, the Practitioner is not personally liable to pay creditors for any trading debts incurred once they’re appointed. This means that the creditor will only have a claim against the company (which has already said it’s insolvent) if it continues to provide credit to the company. This is a significant issue that all creditors should be aware of and is another reason to keep a close eye on any notifications that a customer company is starting the SBRP.
#3: Other Risks of Continuing to Trade With Parties Undergoing SBRP
As the SBRP is geared towards enabling businesses to continue trading, creditors obviously expose themselves to risk by continuing to trade with companies undergoing debt restructuring.
Generally, if a company has the hallmarks of financial distress and it starts the SBRP that would be sufficient reason for a creditor to rely on to terminate any further supply (called ipso facto clauses). However, under the SBRP creditors are prohibited from relying on ipso facto clauses for the duration of the planning period.
However, this may not pose a significant problem as the non-payment of an outstanding account by a company undergoing an SBRP will likely be a sufficient ground for terminating the contract with the company.
Creditors should have their credit terms and conditions reviewed to see if they are drafted properly to keep their options open if a customer is going through the SBRP.
Creditors should remember that there is no assurance that a company that starts the SBRP will be able to survive that process. Creditors who don’t pay attention to this process might suffer further significant losses. These losses will firstly be from the SBRP Plan (assuming this requires a partial write-off of the debt owed) and then further trading losses after this if the company still ends up going into liquidation or administration and a creditor continues to trade with the company.
#4: Other Risks of Continuing to Trade With Parties Undergoing Debt Restructuring
Creditors need to keep in mind the risks of unfair preferences.
It is important to understand that it is only the payments a creditor receives as part of the SBRP plan that are protected. Other payments received by the company for trading after the Practitioner is appointed are not protected.
In a worst-case scenario, this means that if a company fails to carry out its SBRP plan then any creditor who continues to trade with a company while it’s carrying out the SBRP plan could be liable to repay amounts it has received from that company for future trading debts as an unfair preference.
We would expect that these payments will be more difficult to defend as it’s unlikely a court would accept that a creditor did not have reasonable grounds to suspect the company was insolvent when it is trying to carry out the SBRP plan (the usual good faith defence to an unfair preference).
#5: Issues Concerning Statutory Demands and Other Methods of Debt Collection
There is currently a three-month moratorium on the enforcement of statutory demands against companies that simply register to say they’re thinking about undergoing the SBRP. There are also additional checks that creditors should perform before issuing a statutory demand against a company to ensure that the company is not about to enter into the SBRP.
After this three-month moratorium expires (on 31 March) creditors will still have to deal with the fact that they can’t take any legal enforcement action against the company or the directors (if they have given guarantees) while the company is undergoing the SBRP. There are certain exceptions to this rule, such as creditors who have security, but legal advice should be obtained to determine if any of these exceptions would apply.
Creditors will have a very limited time to deal with a company undergoing the SBRP. If they have any concerns about this process or how it might affect them they should seek urgent independent legal advice about how to best navigate the situation rather than waiting until it is too late. If you have any queries about the SBRP or would like to discuss a current SBRP problem you may have, please contact Andrew Lambos or Shereen Parvez
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