The Small Business Restructuring (SBR) regime was introduced in January 2021, aiming to provide a simplified and cost-effective process for small businesses to restructure and continue their operations after the impact of COVID.
Eligibility and Process
The key aspects of Small Business Restructuring:
1. Eligibility Criteria
Before commencing a SBR the director must ensure that:
- The company has total liabilities, including contingent liabilities, of less than $1 million (excluding employee entitlements and fully secured debts); and
- The company cannot have been subject to a small business restructuring or simplified liquidation process within the previous 7 years.
2. Appointment of a Small Business Restructuring Practitioner (SBRP):
- The company must appoint a SBRP, who is a Registered Liquidator, to oversee the restructuring process;
- The SBRP’s role is to assist the business in preparing a restructuring plan and liaise with creditors;
- The SBRP does not take over the operations of the company’s business.
3. Restructuring Plan:
- The company, with the assistance of the SBRP, develops a restructuring plan that outlines how it intends to address its financial issues, return to profitability and deal with the amounts owed to creditors;
- The company will have 20 business days (can be extended by an additional 10 business days) to develop the plan;
- The SBRP will liaise with creditors and provide a report detailing the makeup of the plan;
- Creditors must vote to approve or reject the plan, with a majority in value required for approval.
4. Moratorium on Enforcement Actions:
- While the restructuring plan is being developed and voted on, a moratorium is in place, preventing creditors from taking legal actions against the company. This includes creditors holding personal guarantees against a director;
- This provides breathing space for the business to develop and implement the plan;
- Additionally, directors of a company undergoing SBR are provided with temporary safe harbour protection from insolvent trading while the restructuring process is underway;
- Note that if winding up proceedings have been commenced prior to the SBR process commencing, the cooperation of the petitioning creditor in adjourning the winding up proceedings will be necessary. Alternatively, the company will need to instruct solicitors to ensure that the court either adjourns or dismisses the winding up proceedings.
5. Effect of Approval:
- If the plan is approved, it becomes legally binding on all creditors, including those who voted against it or did not vote.
- The business continues to operate, making payments as per the plan.
- Once the plan is implemented, any creditor holding a personal guarantee against the director is able to pursue the director in respect of that guarantee.
- The costs for the proposal phase of a SBR is a fixed amount that is paid upfront by the company.
- Should creditors accept the plan, the SBRP will be entitled to a percentage of the funds contributed to creditors. The percentage would be determined during the plan development.
Whilst the SBR process was first introduced in 2021, it wasn’t frequently used until mid-2022 when the ATO took a more proactive approach to debt collection.
More recently, we have noticed a more aggressive approach to companies that haven’t been in contact with the ATO regarding their unpaid debts. This approach includes issuing DPNs to directors for unpaid superannuation, PAYG and GST.
Given that DPNs expire 21 days after the date of the notice (not service of the notice), directors are often given little time to consider their options.
In addition, we have been involved in a number of SBRs where the ATO had commenced winding up proceedings prior to the SBR commencing. In these cases, the ATO has consented to short adjournments whilst lodgements were brought up to date and the company’s plan formulated. The adjournment of the winding up proceedings is not automatic as the court must be satisfied that it is in the bests interests of creditors that the SBR process continue.
Some practical issues to consider when thinking about a SBR are:
The proposal phase of the SBR process is a relatively short period, providing 4 to 6 weeks for the director(s) to:
- ensure all lodgements and returns are made; and
- determine the proposal to creditors.
Practically, the ATO is the major creditor in the vast majority of SBRs undertaken to date and therefore their cooperation is vital to the success of a SBR.
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).
Furthermore, whilst the legislation provides that the Restructuring Practitioner only needs to provide creditors with a copy of the plan and a declaration as to whether the company will be able to comply with the plan, 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.
The legislation also provides the company is required to “substantially” comply with the requirement to lodge returns. In our view, this means that only returns that are due at the date of the commencement of the SBR need to be lodged before the plan is sent to creditors. By way of example, if a company commences the SBR process on 31 July 2023, the company’s income tax return for FY23 doesn’t need to be lodged as that isn’t actually due until the following year. The ATO has advised that in its view the:
- substantial compliance test applies to each tax return and lodgement; and
- company would need to demonstrate steps had been taken to meet lodgement requirements but factor outside of their control prevented them from doing so.
2. Employee entitlements
To be eligible for an SBR, the company must pay its employee entitlements. There is a very strict definition of employee entitlements in the legislation.
In respect of unpaid superannuation that is due and payable, in our view, the legislation does not provide that the company subject to the SBR process needs to pay anything other than the actual superannuation owed and interest thereon. This amount needs to be paid before the plan is sent to creditors.
Whilst the other components of the SGC are not required to be paid before the plan is sent to creditors, they are included in the amount owed to the ATO and as such must be factored into the assessment of the company’s liabilities being less than $1 million.
Admin Fee (part of SGC)
SG Interest (part of SGC)
SG Shortfall (part of SGC
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 of same within the required period is vital.
3. Personal guarantees
Personal guarantees will usually not be addressed by the SBR process. This will need 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, including years after the successful completion of the SBR process. Positively, the ATO has advised that for unlocked DPNs, the director penalty remitted on appointment of an SBRP cannot be reinstated (by the ATO) if restructuring plan is not accepted of terminated.
4. Related party creditors
The SBR process doesn’t allow for related party creditors to vote on a company’s plan, however any amounts owed to related parties are caught up in the SBR process and will receive a dividend at the same rate as other creditors in full and final satisfaction of their claims.
If related party debts are significant and are not intended to be compromised, the SBR process may not be appropriate.
5. Return to creditors
The ATO has expressed an intention to work cooperatively with practitioners when considering proposals and has offered to provide feedback on proposals before the proposal period expires.
The Australian Securities and Investments Commission (ASIC) 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 in the dollar.
In our experience, we have found a return between 20 (non-trading) to 30 (ongoing trading) cents in the dollar to be the “sweet spot”. This of course is not a guarantee and an assessment of the company’s circumstances is required when formulating the plan.