What is Small Business Restructuring?
Small Business Restructuring is the process of significantly altering the way your business operates to repay outstanding debts to creditors. This may involve restructuring debt, reducing waste and costs, selling assets and changing the organisation’s structure.
Working with a Small Business Restructuring Practitioner (SBRP) is the ideal way for companies to negotiate a plan with creditors, potentially avoiding outcomes such as Liquidation.
Small Business Restructuring is provided for under the Corporations Act 2001. It is intended to be a simplified and cost-effective process for restructuring small businesses in the wake of COVID-19, but it can be applied to any eligible company, even if it was not affected by COVID-19.
When is a company eligible for the Small Business Restructuring process?
To be eligible for small business restructuring, a company must:
- Be insolvent or likely to become insolvent
- Have total liabilities of less than $1 million – including contingent liabilities, but excluding fully secured debts
- Be up to date on tax lodgements
- Be up to date on employee entitlements
- The company, or a director of the company, must not have previously used either the small business restructuring process nor the simplified liquidation process within the past 7 years
The eligibility test for Small Business Restructuring is strictly administered. We encourage you to reach out to the SV Partners team to see if this process is right for your business and to assess your eligibility.
What does Small Business Restructuring cost?
Small Business Restructuring is intended to be an affordable alternative to processes such as Voluntary Administration.
Additionally, it provides the chance to negotiate with creditors and reduce the total amount of company debt, further improving its cost-effectiveness.
The cost of Small Business Restructuring varies depending on the complexity of the matter. The Small Business Restructuring Practitioner is required to quote a flat fee to help company directors to develop the Restructuring Plan.
The directors and the Practitioner must agree on the fee before restructuring can commence.
The streamlined cost of Small Business Restructuring improves the chances that the company will be able to satisfy the terms of the Plan and continue trading.
How the Small Business Restructuring Process commences
The directors of a company can appoint a Restructuring Practitioner and commence Small Business Restructuring if they resolve:
- That the company is insolvent, or likely to become insolvent at some time in the future
- That a restructuring practitioner should be appointed
- A fixed amount of remuneration of the restructuring practitioner for the proposal period
Company directors must also ensure, to the best of their ability, that the company is eligible for Small Business Restructuring.
How does the process work?
The Small Business Restructuring process begins when the directors of the company resolve to appoint a Restructuring Practitioner.
The Restructuring Practitioner determines the company’s eligibility and assists the directors to develop a Restructuring Plan. The Plan allows the company to repay creditors (in part or in full), providing better outcomes for all stakeholders than Liquidation. The Restructuring Plan also provides for the remuneration of the Restructuring Practitioner. The Restructuring Practitioner receives a flat fee, as well as a percentage of the payments to be made to creditors.
After commencement of restructuring, the company has 20 business days to develop and propose the Plan to its creditors. During that time, there is a moratorium on most types of security enforcement against the company.
Following that, creditors have 15 business days to vote on the Plan. The Plan is only approved if it gains the support of more than 50% in value of unrelated creditors.
Approving the Plan allows the company to continue to trade in the ordinary course of business while the Plan is administered by the Restructuring Practitioner. The Plan must operate for no more than 3 years.
Who controls the company during Small Business Restructuring?
The directors retain day-to-day control over the company during Small Business Restructuring. This is one of the major advantages of the process.
Unlike other insolvency appointments, Restructuring Practitioners do not take control of the company. The directors still have control over any operations that fall within the “ordinary course of business.”
For matters that fall outside the ordinary course of business, the directors must consult the Restructuring Practitioner. These activities may include:
Repaying a debt that arises before the restructuring begins (e.g. a debt that would be satisfied under the Plan)
The sale or transfer of the business (in part or in full)
Paying dividends to shareholders
The role of the Small Business Restructuring Practitioner
The role of the Small Business Restructuring Practitioner is to assess the company’s financial position and work with the directors to develop a Restructuring Plan.
The Small Business Restructuring Practitioner will:
- Assist the directors to develop a Restructuring Plan and proposal statement
- Communicate the Restructuring Plan to creditors
- Certify to creditors that the company is eligible for Small Business Restructuring
- Certify to creditors that the company is likely to be able to meet its obligations under the proposed Plan
- Disburse payments to creditors according to the terms of the Plan
Restructuring Practitioners are experts in the field of insolvency, liquidation and restructuring. They provide assistance to the directors to create a Plan and will oversee the Plan’s implementation once it has been approved by the creditors.
Are ATO debts included in Small Business Restructuring?
Yes. Australian Taxation Office (ATO) debts are admissible under the Small Business Restructuring Process. In fact, the ATO is the major creditor in the vast majority of SBRs undertaken to date.
Small Business Restructuring is an effective tool for negotiating with the ATO and reducing tax debts. The ATO encourages the use of Small Business Restructuring for eligible businesses. In our experience, the ATO has requested copies of the following documents/information when considering the company’s proposal:
- Financial statements for the last 3 years;
- Details of assets at the date of appointment;
- Copies of general ledger print outs for related party loans;
- Cash flow forecasts for the company (if still trading).
The Restructuring Practitioner is only required to provide creditors with a copy of the Plan and a declaration that the company will be able to comply with the Plan. However, the ATO has also requested information as to the likely return to creditors if the company was to be placed into liquidation.
If the company hasn’t prepared financial statements for a few years, the costs associated with preparing the returns and financial statements will need to be considered. When negotiating with the ATO and other creditors under the SBR process, payment terms can be up to 3 years. However, one-off lump sum payments are usually more favourable than instalments over an extended period of time due to the shorter timeframe and certainty of return.
While it is possible to negotiate with the ATO without a formal insolvency appointment, the ATO is generally unable to compromise a company’s principal debt.
Informal negotiations with the ATO ordinarily only involve a potential remission of interest and penalties. The Small Business Restructuring process enables the ATO to approve a reduction in the total debt owing by a company.
Meeting employee entitlements under Small Business Restructuring
To be eligible for an SBR, the company must pay its employee entitlements, including superannuation and any interest owed on outstanding superannuation amounts.
Whilst the other components of the Super Guarantee Charge (SGC) are not required to be paid before the Plan is sent to creditors, they are included in the amount owed to the ATO. As such, they must be factored into the assessment of the company’s liabilities being less than $1 million.
For example:
Superannuation Type | Liquidation | SBR |
Admin Fee (part of SGC) | 2,020 | - |
SG Interest (part of SGC) | 12,361 | 12,361 |
SG Shortfall (part of SGC) | 54,043 | 54,043 |
GIC | 16,574 | - |
SG Penalty | 75,528 | - |
Total | 160,527 | 66,404 |
In addition, any amounts owed in respect of directors or their relatives are capped at $2,000 per person.
Careful consideration of the unpaid employee entitlements and the company’s ability to make payment within the required period is vital.
What happens to personal guarantees during SBR?
Personal guarantees typically are not addressed by the SBR process. This needs to be considered, as there is little utility in a company undertaking the process only to have its director(s) made bankrupt as a result of guarantees provided to creditors.
Lockdown DPNs will also need to be factored in, as the ATO may elect to pursue these types of DPNs at any time. The ATO may even pursue lockdown DPNs years after the successful completion of the SBR process.
Positively, the ATO has advised that for non-lockdown DPNs, the director penalty remitted on appointment of an SBRP cannot be reinstated (by the ATO) if restructuring plan is not accepted or terminated.
What are the expected outcomes of a Small Business Restructuring Process?
Small Business Restructuring allows company directors to work with a restructuring practitioner and develop a plan for moving forward. The Restructuring Plan is then presented to creditors. This leads to one of the following outcomes:
- The Plan is approved by the majority of creditors. The directors and Restructuring Practitioner then work together to execute the Plan. This may involve reorganising the company’s structure, selling assets, restructuring debt, reducing waste and altering the way the business operates.
- The Plan is rejected by the creditors. Small Business Restructuring ceases immediately if the Plan is not approved by the creditors. Creditors can once again commence or continue legal action against the company in order to recover outstanding debts.
If the Plan is rejected by the creditors, the company does not automatically enter other forms of formal insolvency. Rather, the directors remain in control of the company and creditors may continue enforcement action.
In this case, the directors may consider placing the company into Voluntary Administration, or Creditors Voluntary Liquidation, but are not obligated to do so. Creditors may consider winding the company up by way of an application to court.
How much will creditors be paid under a Small Business Restructuring?
Every situation is different and the outcome is dependent on a number of factors. It's important to speak with qualified Restructuring Practitioner who can assess the situation and provide insight into the best way forward.
The Australian Securities and Investments Commission prepared a report in January 2023 (REP 756) relating to 82 SBR appointments for the period 1 January 2021 to 30 June 2022.
Of these appointments, 57 had the ATO as being owed greater than 50% of the total debt. Where the plans were accepted and dividends paid (as reported to ASIC), 63% of the dividends were for between 10 and 30 cents on the dollar.
When does the Small Business Restructuring process end?
Small Business Restructuring ends when one of the following conditions is met:
- The terms of the Plan are satisfied
- The Plan is rejected by the creditors
- The Plan is terminated early under certain circumstances
If the terms of the Plan are satisfied within the specified timeframe, the company is released from its admissible debts and continues to trade as normal. If the Plan is rejected, the SBR ceases and the company continues to trade.
A Small Business Restructuring Plan may be terminated early:
- By Court order
- If a condition of the Plan is not met within 10 business days
- If the Plan is not followed, and the contravention is not rectified within 30 business days
- If an Administrator, Liquidator or Provisional Liquidator is appointed
If a Restructuring Plan is terminated early, the company is not released from its admissible debts. For more information, read our Small Business Restructuring flyer here.
How can SV Partners help?
SV Partners work with accountants, legal advisors, financial institutions, other related professionals and their clients to achieve the best possible solution for all stakeholders involved in the insolvency process.
Our qualified team has broad experience across a variety of industries, and we bring an extensive understanding of business and the impacts a company facing financial difficulties can have. Our goal is to work towards the good of all stakeholders in the restructuring process, delivering better outcomes and alleviating financial distress.
For more information about the Small Business Restructuring Process, contact us today to speak to an expert who can assess your situation by calling our confidential assist line on 1800 246 801.
