In 2021, the Australian Government made changes to the country’s insolvency framework to better serve small businesses, making it easier for them to bounce back from financial challenges
As part of these changes, the Government introduced a new, simplified debt restructuring process for eligible small businesses. Known as Small Business Restructuring (SBR), this process helps financially troubled companies reorganise their debts while they retain control of their operations.
Definition and purpose of SBR
SBR works as a debt restructuring tool that lets companies create and agree on a restructuring plan with their creditors under the Corporations Act 2001. The main goal is to give small businesses a fresh start when they face financial difficulties, with directors maintaining management of operations throughout the process.
Eligibility criteria for SBR
Your company needs to meet the following criteria to qualify for SBR:
- Total liabilities should not exceed $1 million
- The company and its directors cannot have used SBR or simplified liquidation in the last seven years
- The business must be insolvent or likely to become insolvent in the future
- The company must be incorporated under the Corporations Act to be eligible
Key differences from other insolvency processes
SBR’s biggest differentiator lies in its “debtor-in-possession” model. Directors keep control of daily operations throughout the restructuring period. This is significant as it completely avoids external administrators taking control of the company, as per traditional insolvency processes.
SBR also costs less than traditional external administration processes. The restructuring practitioner’s fee is fixed and agreed upon upfront, which ensures expenses are transparent. The process has a moratorium on creditor claims that stops them from taking action to recover money or property during restructuring.
Similarly, creditors with personal guarantees cannot commence action during the restructuring phase of the SBR.
The Small Business Restructuring Process
Before the SBR process can officially begin, your company’s board must first confirm the business’s insolvency status or likely insolvency. Once that has been confirmed, you can make an appointment with a qualified restructuring practitioner. This first appointment marks the start of the formal restructuring process.
The appointment requires written documentation, and the practitioner must be an ASIC-licensed registered liquidator. Before restructuring begins, both parties should agree on the practitioner’s fees. The fee structure combines a fixed amount to prepare the plan and a percentage of payments made to creditors.
Developing the restructuring plan
Your company gets 20 business days to create the restructuring plan after the appointment. You might receive an extra 10 business days if needed. The plan must have:
- Details of company property under management
- Clear steps to handle the property
- The practitioner’s payment terms
- The date to execute the plan
The practitioner helps prepare the plan and a restructuring proposal statement that has a detailed list of debts and claims. The practitioner must then confirm they reasonably believe the company qualifies and can meet its plan obligations.
During the SBR process (before the proposal is sent to creditors), the following must occur:
- All tax lodgements must be brought up to date
- Employee entitlements that are due must be paid in full, including superannuation
Creditor voting and plan approval
Creditors have 15 business days to vote on the proposal after the plan’s development. The plan passes when most responding creditors by value vote ‘yes’. The voting process has these important rules:
- Related parties can’t vote
- Secured creditors vote only on their unsecured debt portion
- Bought claims get voted at purchase price, not full value
A successful plan binds all unsecured creditors with valid debts and claims. The practitioner manages payments based on the agreed terms.
Implementing the Restructuring Plan
If the plan is accepted by creditors, funds payable under the proposed plan are paid to the Restructuring Practitioner for distribution to creditors.
Director’s role during restructuring
Directors retain control of daily business operations during the restructuring period. In spite of that, they still need the restructuring practitioner’s approval for activities outside normal operations. These include:
- Satisfying pre-restructuring debts
- Transferring or selling business parts
During the restructuring period, directors should maintain proper financial records and pay all new trading obligations promptly.
Debt reduction and payment arrangements
Restructuring plans usually create a fund pool to help settle unsecured creditor claims. Recent data shows successful restructuring plans have cut debt levels by 65% to 90%. All creditors get equal treatment and receive payments at the same time and rate.
Payment arrangements can last up to three years. Many cases have one-off settlements because of lower debt levels. These arrangements can be funded through:
- Director contributions
- Related party support
- Future business profits
- Bank refinancing
The ATO has demonstrated its strong support for viable restructuring plans, especially when businesses face temporary setbacks. The ATO often becomes the most important creditor in these cases.
Companies must keep their tax lodgements current throughout restructuring. Tax returns need lodging, but outstanding tax debts can be part of the restructuring plan.
The ATO actively reviews restructuring plans and may give specific feedback to practitioners before the plan is finalised and issued to creditors. This involvement has led to soaring wins, with recent cases showing ATO approval for plans that offer creditors between 9 to 35 cents per dollar.
Creditor Involvement and Decision Making
Creditor participation is a vital element of the SBR process that determines if a restructuring plan will succeed. The process needs stakeholders to think over their interests through meticulous decision-making procedures.
Voting process for creditors
Creditors have 15 business days to cast their votes after receiving the restructuring proposal. If they wish to dispute their claim’s assessment, they must do so within five business days of receiving the plan.
For the proposal to be approved, it must receive support from a simple majority based on the value of voting creditors. The outcome is determined by those who participate during the acceptance period, meaning the plan can succeed even if not all creditors vote.
Treatment of secured and unsecured creditors
The restructuring framework sets different rules for creditors of all types:
- Secured creditors maintain rights over their security unless they vote in favour of the plan
- Unsecured creditors participate fully in the voting process
- Related party creditors cannot vote on the restructuring plan
- Purchased debt claims only carry voting power equal to their purchase price
Secured creditors are bound by the plan only for the portion of their claim that exceeds their security value.
Implications of plan acceptance or rejection
The restructuring plan becomes binding on the company and its creditors once it gets majority approval. Data shows this is a big deal as it means that 92% of Small Business Restructuring plans across the country got acceptance between January 2021 and June 2022.
The company keeps control if creditors reject the plan, but creditors get back their enforcement rights. Directors also lose protection from personal liability for insolvent trading after the restructuring process ends without acceptance.
The practitioner’s job ended up including these responsibilities:
- Receiving and holding money in trust
- Making distributions to creditors
- Realising available property when requested by directors
Non-lockdown Director Penalty Notice (DPN)
A non-lockdown DPN allows the ATO to recover unpaid PAYG withholding, GST, and superannuation directly from directors unless the company takes specific actions, such as appointing an administrator or restructuring under the SBR framework.
By entering an SBR, directors can work towards repaying debts while maintaining control of the business, potentially avoiding personal liability under a non-lockdown DPN.
For Small Business Restructuring Advice, Reach Out to Business Savers!
Restructuring is a serious undertaking for businesses of any size. Seeking guidance from experienced professionals is crucial before making any decisions.
Business Savers can help you navigate the restructuring process with expert advice and tailored solutions, ensuring the best possible outcome for your business.
Contact us today to arrange a confidential discussion.
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