Small Business Restructuring

Since January 2021, there has been a new option for directors concerned about their company’s viability and solvency called a Small Business Restructure (SBR). However, from what we have seen, the SBR process appears to have been underutilised in favour of traditional forms of insolvency, possibly due to a lack of awareness in the market about its availability, application and benefits.  

What is a Small Business Restructure?

A SBR is a process where a company can appoint a Restructuring Practitioner (who must be a Registered Liquidator) (RP) to assist with putting forward a restructuring plan to creditors where creditors are offered a compromise of their debts at less than 100 cents in the dollar. If successful, creditor claims are compromised, and your business can continue to trade.

The SBR process allows directors to retain control of the business, property and affairs of their company while the restructuring plan is formulated, which is a major advantage over traditional forms of insolvency where control is handed over to a liquidator or administrator.

There are no creditors meetings or lengthy creditor reports in an SBR, which means it can be a more cost-effective option for small businesses than a voluntary administration process. During the SBR period, your creditors generally will not be able to take any action against you, which could be the breathing space you need to get back on track. 

Who is Eligible?

To be eligible for the SBR process:

• The company’s total liabilities must be under $1 million. This includes secured debts and related party debts but excludes employee entitlements.

• The company must not have been under a SBR or simplified liquidation process within the preceding 7 years.

• The company’s director (or a former director in the last 12 months) must not have been a director of another company that has been under a SBR or simplified liquidation process within the preceding 7 years.

In addition, before a restructuring plan can be proposed, all taxation lodgements must be up to date and all employee entitlements that are payable must be up to date.

The SBR Process

1. Appointment of Restructuring Practitioner

• If the eligibility criteria are met, the company’s directors pass a resolution that the company is insolvent or is likely to become insolvent at some future time and that a RP (must be a Registered Liquidator) should be appointed.

• During the SBR, directors must trade in the ordinary course of business. If directors choose to enter into transactions or deal with company assets outside of the ordinary course of business, the RP needs to authorise the transactions.

• The company has a period of 20 business days from the RP’s appointment to put forward its restructuring plan and send it to creditors (Proposal Period). The RP can extend this period by no more than 10 business days at the request of the company or by application to the Court.

• Creditors have 15 business days from the end of the Proposal Period to accept the plan (Acceptance Period)

2. Entering into a restructuring plan (if approved by creditors)

• A restructuring plan is accepted if at the end of the Acceptance Period, the majority in value of affected creditors who return the statements to the RP accept the plan.

• Restructuring plan must last less than 3 years, treat all creditors equally and allow for only one dividend.

• Restructuring plan ends:

• When the company’s obligations under the plan have been fulfilled and all admissible debts have been dealt with according to the plan.
• If the Court terminates the plan.
• If the plan is subject to a specified event occurring within a specific period which does not occur.
• If there has been a contravention of the plan by person bound by the plan and that contravention has not been rectified within 30 business days of the contravention occurring.
• On the day a Voluntary Administrator, Liquidator or Provisional Liquidator is appointed.

SBR Statistics

ASIC has recently released a report outlining the findings from its review of the 82 Small Business Restructuring appointments commencing from 1 January 2021 to 30 June 2022. A summary of key findings from ASIC’s report is presented below.

Outcome of SBR appointments: A vast majority of restructuring plans proposed were accepted by creditors (92%)

Appointments by state/territory: The main states where SBR appointments were made were New South Wales (44%), Victoria (34%) and Queensland (12%).

Appointments by industry: The main industry groups for SBR appointments were accommodation and food services (21%), construction (20%) and retail trade (16%).

ATO creditor claims: The ATO was an affected creditor in 89% of the 72 restructuring plans that commenced during the review period. In 79% of plans, the ATO represented 50–100% of total creditors.

Plan contributions: The sources of plan contributions were:

Dividend rates: The average proposed dividend rate was 18.7 cents in the dollar whereas the actual dividend was 15.2 cents in the dollar.

Key Takeaways

The SBR process has proven to be a highly successful method of restructuring a company’s affairs, with 92% of restructuring plans proposed being accepted by creditors.

SBR’s offer several major advantages over traditional forms of insolvency by allowing directors to retain control of their business whilst a restructuring plan is formulated and removing the need for creditors meetings and lengthy reports to creditors. This means a SBR can in many instances be a more cost-effective option for small businesses than a voluntary administration process.

If you think you or one of your clients may meet the eligibility criteria, then a SBR might be the right option for getting your business back on track.

Please reach out to the Smith Hancock team for a free initial consultation where we can discuss whether a SBR is the right solution for you. However, if a SBR isn’t right for you, then we can explore a solution that is tailored to your circumstances.

Sources – ASIC: https://download.asic.gov.au/media/31okxjmd/rep756-published-17-january-2023.pdf