Small Business Restructuring Pitfalls for Builders: How Restructuring Can Jeopardise Your DBI Eligibility in Victoria

21 June 2024
  • Small Business Restructuring (SBR) helps financially distressed small businesses with debts under AUD $1 million restructure their debts while retaining control.
  • Builders entering into a SBR risk losing Domestic Building Insurance (DBI) eligibility, essential for maintaining VBA registration for works over $16,000 in Victoria.
  • Builders receiving a notice of decision to deny DBI eligibility should seek professional legal advice immediately before responding to the DBI provider.

DBI Eligibility Concerns for Builders

While entering an SBR Restructuring Plan offers numerous benefits and can alleviate creditor pressure, builders must exercise extreme caution navigating this process due to its impact on their DBI eligibility. Entering a Restructuring Plan can jeopardise DBI eligibility, which is mandatory for maintaining VBA registration as a domestic builder for works over $16,000 in Victoria.  Similar requirements apply in other jurisdictions.

The Victorian Managed Insurance Authority (VMIA) views the appointment of a Restructuring Practitioner and acceptance of a Restructuring Plan as raising concerns about the builder’s corporate governance and business administration capabilities.

The VMIA generally does not accept DBI applications from builders who were directors of companies that entered into an SBR Restructuring Plan. This stance affects not only the company undergoing restructuring, but also any other companies with which it shares directors.

Understanding Small Business Restructuring (SBR)

Small businesses facing financial distress have a lifeline through the Small Business Restructuring (SBR) framework, introduced in Australia in January 2021. This framework aims to provide struggling businesses with a fresh start in the wake of the COVID-19 pandemic. By allowing eligible businesses to restructure their debts while retaining control, SBR offers a practical solution for financial recovery.

SBR is designed to assist businesses with debts under AUD $1 million. If eligible, a registered liquidator becomes the Restructuring Practitioner, working with the business to propose a debt repayment plan to creditors (Restructuring Plan). This plan typically involves regular payments, with creditors accepting a reduced debt value. For the Restructuring Plan to be approved, more than 50% of creditors (by value) must agree to it. Importantly, businesses can continue trading while implementing the Restructuring Plan, with directors maintaining control throughout the process.

Initially, the adoption of SBR was slow due to perceived complexity and stringent eligibility requirements. However, recent trends show an increase in SBR adoption, driven by overall insolvency trends and the Australian Taxation Office’s (ATO) pursuit of outstanding tax debt. In May 2024 alone, 158 companies appointed a Restructuring Practitioner under the SBR scheme, consistent with the general rise in insolvency appointments. The construction sector, in particular, saw the highest number of appointments, highlighting the sector’s significant financial challenges.

VMIA approach to SBR and Restructure Plans

If a builder or a director is associated with a builder who has undergone an SBR, the VMIA will typically issue a notice of proposed decision to deny DBI eligibility. Builders will have the opportunity to submit additional information before a final determination is made. A final determination to deny eligibility leads to the VBA suspending the builder’s registration, severely impacting their business operations.

(Note that while VMIA is a primary provider of DBI in Victoria, other providers adopt a similar approach and therefore the same risks apply.)

It is ironic that the VMIA questions corporate governance and business administration capabilities due to SBR participation. Arguably, in one sense, opting for SBR demonstrates a builder’s good governance. It shows foresight and a practical approach to addressing cash flow or solvency concerns.

Successful restructuring plans, voted on and accepted by creditors, indicate that a sensible plan is in place, enabling the company to meet its obligations while continuing to trade.

At a policy level, the Federal Government introduced the SBR regime specifically to help businesses impacted by the COVID-19 pandemic, including the disproportionately affected construction industry, but the VMIA appears to have chosen to take a carte blanche approach to SBR appointments.

Moreover, implementing a Restructuring Plan, rather than allowing a company to cease trading or enter voluntary administration, ensures that the builder can honour its obligations under domestic building contracts. This reduces the likelihood of DBI indemnity policy claims, alleviating pressure on the VMIA to pay out claims to homeowners.

Responding to denied DBI eligibility

Builders facing a notice of proposed decision to deny DBI eligibility should immediately seek professional legal advice to prepare a response.  

It is important that the response clearly presents the full circumstances leading to the SBR and Restructuring Plan and demonstrates the company’s ongoing viability and capacity to meet construction contract obligations.

The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.

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