Calling it DIP does not make it DIP

Australia’s small business restructuring reforms (Part 5.1B of the Corporations Act) took effect early this year. The aim of that part of the legislation is stated on s 452A as:

                   The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for a restructuring process for eligible companies that allows the companies:

                     (a)  to retain control of the business, property and affairs while developing a plan to restructure with the assistance of a small business restructuring practitioner; and

                     (b)  to enter into a restructuring plan with creditors.

So obviously the “debtor in possession” model is supposed to be the star feature in this process.

Yet, the restructuring only begins when the restructuring practitioner is appointed! (s 453B)

So what is the restructuring practitioner supposed to do while the debtor company’s management remains in control of the business? Provide restructuring advice and help prepare the restructuring plan, amongst other things. The restructuring practitioner even acts as an agent of the company; and can terminate the proceedings by giving notice to the company and creditors.

For their part, the directors have “to give the restructuring practitioner information about the company’s business, property, affairs and financial circumstances”. This is starting to look a lot like a practitioner is in control right? The only real “DIP” flavour seems to be that a company under restructuring still “has control of the company’s business, property and affairs”; and the fact that directors are allowed to enter into transactions in the ordinary course of business. Other types of transactions should be approved by the restructuring practitioner. This approval can only be given if she or he “believes on reasonable grounds that it would be in the interests of the creditors for the company to enter into the transaction or dealing”.

So I don’t think this is a real DIP model.

I would think that a DIP model with the option for creditors to exit the process would have been much better. I know Professor Jason Harris has been writing/ speaking about the process being too costly for many small businesses and I agree. However, the main point of this post (rant) is to caution against mislabeling the model.

I will end with an extract from Professor Aurelio Gurrea Martinez’ article about MSME restructuring which I highly recommend:

Unfortunately, even if this system reduces the direct costs of the procedure for debtors, many insolvent MSMEs might not even have the resources to afford the appointment of an insolvency practitioner. In these situations, countries may adopt two possible strategies. On the one hand, they can recognize this situation as a “market failure” and respond with a governmental intervention consisting of the appointment of a public trustee. Alternatively, a country can adopt a “private solution” based on a (purely) debtor-in-possession model. Therefore, the procedure would be exclusively managed by the company’s directors, as happens in the US Chapter 11 reorganization procedure.