Small Business Restructure (SBR) have been all the rage in recent times, with the number of appointments skyrocketing over the past few years.
So, when should a company consider using the Voluntary Administration (VA) process?
SBR vs VA – What are the Differences?
Both SBR and VA seek to address insolvency and maximise returns to creditors, but they differ in important ways that influence which option is appropriate for a given business. The table below summarises some differences:
| FACTOR | SMALL BUSINESS RESTRUCTURING | VOLUNTARY ADMINISTRATION |
|---|---|---|
| Eligibility | Restricted to companies with less than $1 million in liabilities and other criteria (no SBR use in past 7 years, up-to-date tax lodgements, paid employee entitlements). | Available to any insolvent company, regardless of size or debts. No statutory cap on liabilities. Suitable for small, medium, or large companies if they are insolvent or likely to become insolvent. |
| Control of Company | Directors remain in control of day-to-day operations throughout the process. The appointed restructuring practitioner oversees the plan development and certifies information while also authorising transactions outside of the ordinary course of business but does not take over management. | Independent Administrator takes full control of the company during the administration. Directors’ powers are suspended while the Administrator manages the business and assets. In practice, Directors often assist during any ongoing trading of the company’s business. |
| Process Timeline | Fast-tracked timeline: Plan is required to be formulated within 20 business days (can be extended by 10 business days) and creditors vote within 15 business days thereafter. The process is typically concluded within roughly 7-9 weeks (if a plan is approved or not). | Defined but extendable timeline: First meeting within 8 business days; second meeting by 25 business days (about 5 weeks) unless extended or adjourned. A VA may last around 1 month or a few months (or longer if extended) depending on the complexity. |
| Outcome Options | Single outcome: A successful SBR results in a binding restructuring plan that all unsecured creditors share in equally. If the plan fails or is not approved, the company reverts to its position before the SBR, however likely faces liquidation or another type of insolvency (no automatic liquidation). | Multiple outcomes: Creditors decide to either return the company to directors, implement a DOCA, or liquidate. A DOCA can include flexible terms (e.g. asset sales, new payment terms, third-party contributions) beyond just a payment plan, and if executed, it binds all creditors. If no DOCA is approved, the company usually goes into liquidation. |
| Cost and Complexity | Lower cost, simplified process: SBR is designed to be relatively affordable and streamlined for small businesses. The practitioner’s fees are often fixed or capped, and there are fewer reporting obligations than in VA. The trade-off is that it’s only suitable for simpler cases with straightforward debts. | Usually higher cost and more complex: VA involves a full administration, creditor meetings, detailed investigations and reports. VA offers greater flexibility to restructure or sell the business. As a result, it is often more complex and costly. |
| Voting Rights | Creditors with unsecured debts owing at the time of the SBR appointment (including secured creditors with a debt that exceeds the value of its security) are entitled to vote. Related party creditors are excluded from voting. For a SBR to be accepted, a majority in value / debts (> 50%) of voting creditors is required. | All creditors can vote, including related parties and secured creditors, for the full amount of their debts. Related creditors with assigned debts will be limited in value to the consideration given for the assigned debts. A majority in number and a majority in value of creditors is required for the resolution to pass. The Administrator may decide the vote (casting vote) if there is not both a majority in value and number. |
| Payments to Creditors | Creditors are locked in at the start of the SBR and receive payments under the SBR, as per the Plan. Creditors (especially related parties) cannot subordinate or defer their claims, if they are included in the SBR. In some instances, related party creditors may forgive / write-off their debt prior to the SBR, usually to assist improve the amount paid to other creditors (such as the ATO). | Creditors with debts at the time of the VA are included. Secured creditors can claim for any shortfall. Related parties can subordinate or defer their claims to assist make the DOCA proposal more appealing to other creditors. Claims are finally assessed at the time of dividend payments. |
| Queensland Building Licence | A company does not automatically lose its building licence in Queensland (the QBCC can terminate the licence on other grounds though). | Automatic suspension or loss of licence in most instances. |
SBR vs VA – What is the Right Option?
The decision between SBR and VA will largely depend on the company’s size, situation, and goals.
SBR is typically preferred for eligible small businesses because it is faster and less disruptive – the directors remain in charge, the business can continue operating almost normally, and the costs are typically lower.
VA is often chosen in scenarios where SBR is not available or not adequate, making VA the main option to obtain debt relief via a turnaround / restructure.
Companies may also choose a VA in the following circumstances:
- When an independent administrator is needed to manage the business (for instance, if there are complex operational changes required or disputes among directors/creditors that call for an impartial party).
- If employee entitlements (including superannuation) can’t be paid
- before the SBR Plan is proposed to creditors.
- Where greater flexibility is needed to deal with debts, including voting and distribution rights of related party claims.
- When a more flexible restructuring approach is necessary, including:
- introducing new investors;
- selling the company’s business; or
- varying claims of certain creditors.
In summary, SBR and VA are both valuable tools. SBRs offer a lifeline to small companies under financial strain, letting them rehabilitate under their own management with a simplified plan and regulatory oversight. VAs remain the go-to process for larger or more complex insolvencies and where more flexibility is necessary, including dealing with related party voting and distribution rights.
You don’t need to know the correct option….we can help!
If you have a client facing debt difficulties, please contact your local SV Partners’ expert for advice and assistance.
Call us today on 1800 246 801 or submit an enquiry here.
Article by Jason Cronan (Director) – Sunshine Coast