What is the
SMALL BUSINESS RESTRUCTURING PROCESS?

SBR was introduced in 2021 to assist small businesses in financial difficulty. SBR allows a small business to propose a Plan to its creditors to restructure its debts while the directors remain in control of the business. SBR has become the “go-to” solution for many small companies in financial difficulty.

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    WHAT IS SMALL BUSINESS RESTRUCTURING?

    Small Business Restructuring is a simple process under the corporations law for a company to restructure its debts by proposing and agreeing a Plan with its creditors. It allows small businesses to restructure while the directors remain in control.

    Contents

    What does the Small Business Restructuring process look like?

    Under the guidance of a Small Business Restructuring Practitioner (SBRP), an insolvent small business has 20 business days to come up with a restructuring Plan, and creditors vote on whether to accept it within 15 business days after that. If creditors accept the Plan, then the company pays what is agreed under the Plan, then is free of the balance of the debt. It has “cleared the debt” and can proceed to trade successfully into the future. It is a very popular alternative to a Payment Arrangement with the ATO. In recent times, Plans agreed have ranged from 9c to 35c in the dollar for creditors. So SBRs have achieved up to a 91% debt reduction for a company.

    Is Small Business Restructuring popular?

    Yes, it is now very popular. In the second half of 2022, the number of SBRs increased significantly. This coincided with the ATO resuming its debt collection activities, having paused debt collection because of COVID-19. Most commonly it has been used to come to an agreed Plan with creditors including the ATO.

    What are the expected outcomes of a Small Business Restructuring?

    Initially the company and its directors work with a restructuring practitioner to create a restructuring Plan. That Plan is then put to creditors by the restructuring practitioner and creditors get to vote on whether to accept the Plan. Meanwhile, the business continues to trade under the control of the directors. The restructuring practitioner is responsible for administering the Plan and distributes funds to creditors. The plan is complete when its terms are satisfied. The company is then released from the past debts covered by the Plan.

    How do I know if my company is insolvent and needs a SBR?

    A company is regarded as insolvent when it is not able to pay all of its debts when they become payable. There are a lot of warning signs that a company is insolvent. Very commonly the most prominent warning sign is a large unpaid tax debt. Other signs can include ongoing losses, cashflow problems, overdue tax lodgements and difficulty gaining access to new credit.

    What does a Small Business Restructuring process cost?

    As a guide, fees can range from $15,000 to $30,000 inclusive of a fixed fee for the restructuring phase and a percentage fee for the planning phase. Fees will depend on your company’s individual circumstances. The fees need to be compared to the possible savings that can be achieved through a successful Plan. For example, a company may have creditors of $500,000 and agree on a Plan with those creditors at say 30 cents in the dollar. So, the company might get a “saving” being a debt reduction of $350,000 (70% of $500,000) and pay fees of $30,000 to achieve that outcome. By law, registered Small Business Restructuring Practitioners are required to quote a fee upfront for the fixed cost of the Restructuring Phase. The restructuring practitioner will also be paid a percentage of the amount returned to creditors in the Plan Phase.

    Does my small business qualify for Small Business Restructuring?

    The Small Business Restructuring process is available to incorporated businesses, which commonly means Pty Limited companies, with creditors of less than $1 million. To be eligible for Small Business Restructuring, a company must be able to declare that:

    • The company is insolvent or about to become insolvent
    • The company’s total liabilities, i.e. creditors, do not exceed $1 million on the day it enters the process (exclusive of employee entitlements)
    • None of its directors has been a director of another company that has gone through another Small Business Restructuring or a Simplified Liquidation process within the last 7 years
    • The company is up to date with its tax lodgements and all employee entitlements (exclusive of leave and other entitlements that are not currently due to be paid) – if the company is behind on lodgements it needs to get them up to date before proposing a Plan.

    How does a Small Business Restructuring process work?

    There are three phases to the Small Business Restructuring process.

    – Pre-Appointment

    • The process starts with a company appointing a Small Business Restructuring Practitioner to guide its directors through the process.
    • The Restructuring Practitioner will assess the company to confirm that it is eligible to proceed with Small Business Restructuring and that it is a suitable solution for the company.

    – The Restructuring Phase

    • Directors have 20 business days to come up with a restructuring Plan. They will do so whilst working with the appointed Restructuring Practitioner.
    • There is no set formula for what will be included in the Plan. The Plan may involve proposing significant changes to the structure of the business.
    • The Restructuring Practitioner will send the Plan to creditors.
    • Creditors are asked to vote on the Plan within 15 business days: either agreeing or disagreeing with the proposed restructuring Plan. If the majority (over 50% by value that vote) of the creditors vote “yes”, the restructuring Plan can commence.
    • If creditors don’t accept the Plan, the company is free to choose to proceed with a new simplified company liquidation process, voluntary administration or other actions.
    • The company can continue to trade during this period under the control of the directors.

    – The Plan Phase

    • If the majority in value of the creditors accept the Plan, then the Plan proceeds. Often that will be a one-off contribution by the director into a Fund and the Restructuring Practitioner will distribute those funds to creditors.
    • The period of the Plan cannot exceed 3 years.
    • Again, the company continues to trade during the Plan phase under the control of the directors.

    How does a Small Business Restructuring process commence?

    The directors of a company can appoint a Restructuring Practitioner and commence a Small Business Restructuring process by making “Resolutions”. That is, there is no Court or creditor involvement in the decision. The company signs a document that resolves:

    • that the company is insolvent or likely to become insolvent at some time in the future.
    • that the company should appoint a Small Business Restructuring Practitioner.
    • a fixed amount of remuneration of the Restructuring Practitioner for the proposal period.

    Who controls and trades the company during the Small Business Restructuring process?

    The big advantage of Small Business Restructuring is that the company’s directors retain control of the company throughout. A dedicated Restructuring Practitioner’s role is to assist the directors in devising and overseeing the plan as it takes effect. If the directors want to do something that is outside “the ordinary course of business”, they can do so but need the Restructuring Practitioner to agree to the transaction.

    What does it mean to trade “in the ordinary course of business”?

    During Small Business Restructuring a company can continue to trade in line with its normal operations. However, some transactions might be deemed to be outside the ordinary course of business. If a transaction is outside the ordinary course of business, it can still be done but the Restructuring Practitioner must approve the transaction. Some transactions regarded as outside the ordinary course of business include:

    • paying a creditor that arose before the restructuring began
    • the transfer or sale of the whole or a part of the business
    • the payment of a dividend to shareholders

    What notice of the SBR must be provided in public documents?

    Every public document must set out the phrase “Restructuring Practitioner Appointed” after the company’s name where it first appears in the document. So public documents will include things such as company letterhead, the website and purchase orders.

    Can the appointment of a SBRP be revoked, removed, or replaced?

    No, it can’t be revoked – once started the process must continue to one of the possible conclusions. Yes, the Restructuring Practitioner can be replaced, but only under very limited circumstances. The directors can resolve to appoint a new practitioner where the original practitioner has passed away, becomes prohibited from continuing or has resigned. Unlike a voluntary administrator or a liquidator, the Restructuring Practitioner cannot be removed and replaced by resolution of the creditors.

    What happens if the restructuring Plan is not accepted by creditors?

    For a Plan to be approved, it must be supported by more than 50% of the creditors by value that vote. If the restructuring Plan is not accepted, the restructuring process ends. The directors stay in control of the company but creditors are no longer prevented from enforcing their rights, for example, by taking legal action. Also, when the company comes out of Small Business Restructuring, a director is no longer protected from personal liability for insolvent trading. Directors in this situation will often consider placing the company into liquidation or voluntary administration.

    When does a Small Business Restructuring process end?

    When the Plan is completed, the company becomes free from all its debts and it can carry on with its business. Therefore, the Small Business Restructuring process ends when:

    • the terms of the Plan are completed; or
    • the Plan has been terminated because the company did not comply with the Plan terms.
    If the Plan is terminated, then all of the company debts that had been frozen become due and payable again. Directors will often consider appointing a liquidator or voluntary administrator.

    What is a restructuring Plan?

    A restructuring Plan is simply the agreement between a company and its creditors. There are no set requirements for a Plan so they can be very flexible. They typically involve a one-off contribution from someone, such as the director, which is paid to creditors by the Restructuring Practitioner. But the Plan could also include contributions from future profits over a period of time or the sale of some assets.

    – What do I need to do before putting a restructuring Plan to my creditors?

    There are specific requirements that must be met before a Plan can be put to creditors:

    • Employee entitlements that are due must be paid. That will typically be wages, superannuation, and payment for leave already taken. It will not include untaken annual leave.
    • Tax lodgements must be up to date. That will include income tax returns and business activity statements. The tax debts do not have to be paid up to date, but the returns must be lodged.

    – Where can the funds come from to pay in the Plan?

    Often a Plan creates a pool of monies which is applied in full and final settlement of all unsecured creditors. There is no set requirement for where the funds come from. The source could be from the director or a related party, future profits, or a bank refinancing.

    – Do creditors have to get paid in full from the Plan?

    No. A Plan will usually involve creditors receiving a payment from the fund but usually, creditors will not be paid in full. The amount paid under the Plan will vary but the outcome for creditors will usually be set at a level higher than the expected return if the company were to be placed in Liquidation.

    – What debts are included in the Plan?

    The concept is that a line is drawn on the day that the company enters the Small Business Restructuring process. Debts prior to the SBR are “caught” by the Plan. Debts incurred after the day the SBR commences cannot be included in the Plan and must be paid in full as they fall due. The exception is employee entitlements. Employee entitlements that are due must be paid up to date before a Plan can be proposed.

    – What happens once a Plan is accepted?

    Once a Plan is approved, payments are made to an account controlled by the Restructuring Practitioner. The Restructuring Practitioner then calls for details of creditor claims from the creditors. When the amount of creditors is agreed upon, payments are made by the Restructuring Practitioner to the company’s creditors in accordance with the terms set out in the Plan. All creditors are paid the same “cents in the dollar” and all are paid at the same time. When a company pays off its obligations under the Plan, it is released from all claims that were caught by the Plan.

    – What sort of debt reduction is achievable under a Small Business Restructuring?

    In recent times, numerous SBR Plans have been approved and they are commonly in the range of paying creditors 9% to 35% of their debts. That is a debt reduction (haircut) of up to 91%.

    – Are there some examples of recent SBR Plans that have been approved?

    The aim of an SBR is for a company to agree on a Plan with its creditors. Here are some recent examples of Plans that have been approved using SBR.

    Type of company Total Company Debts Creditors agreed to reduce debts to Cents in the dollar for creditors Debt forgiven (haircut)
    Home Builder $750,000 $67,500 9 cents $682,500
    Café $205,000 $48,000 23 cents $157,000
    IT Consultant $189,000 $30,200 16 cents $158,800

    If a company has a large ATO debt, is SBR a good solution?

    Yes, absolutely. If a director attempts to negotiate a deal with the ATO, it will usually result in a Payment Arrangement, which will require payment in full, plus interest, payable within 2 years. A Plan under an SBR can be for up to 3 years but it is often a one-off payment, due to the reduced debt level.

    – Why is a SBR better than a Payment Arrangement with the ATO?

     

      Likely negotiated Outcomes Common SBR Outcomes
    Payment Terms An ATO Payment Arrangement will require payment in full, plus interest, within 2 years Payment terms can be up to 3 years, but are often much shorter due to the reduced debt amount – a one-off payment is common

    Debt reduction

    (write-off/haircut)

    The ATO will rarely agree to a negotiated debt reduction The ATO has approved SBRs with between 65% and 90% debt reduction

     

    – Does a SBR avoid a 21-Day Director Penalty Notice from the ATO?

    Yes. A Director Penalty Notice/definitions/director-penalty-notice/

    is a Notice that the ATO can send to a director which can make the director personally liable for some of the company’s tax debt. That can include PAYG, Superannuation and GST that has not been paid to the ATO. Many DPNs give a director 21 days to take certain actions and if the director does that, then they avoid personal liability under a DPN. One of those actions is to commence a Small Business Restructuring within 21 days.

    – Is the ATO supportive of Small Business Restructurings?

    Yes. The ATO has been very supportive of the Small Business Restructuring process. Many SBRs have the ATO as a major creditor. The ATO has not agreed to all Plans proposed, but they have voted in favour of the majority of Plans.

    – Does the ATO actively participate in Small Business Restructuring process?

    Yes. The ATO has appointed dedicated staff to review SBRs. They are active in reviewing Plans and often ask for specific information and provide feedback to Restructuring Practitioners on the Plans.

    What is a Small Business Restructuring Practitioner?

    A Small Business Restructuring Practitioner is often referred to as a SBRP. It is a new class of Insolvency Practitioner, charged with the role of administering the Small Business Restructuring process. This person must be registered with ASIC as a “registered liquidator”.

    – Who can be a Small Business Restructuring Practitioner?

    A Small Business Restructuring Practitioner must be a Registered Liquidator. Of course, RestructuringWorks has several Registered Liquidators who can act as SBRPs.

    – Does the Small Business Restructuring Practitioner need to be independent?

    Yes, a SBRP must be “independent”. This means that someone “connected” to the company cannot seek to be appointed as its SBRP. A “connected individual” includes someone who:

    • has a debt of more than $5,000 owing to the company
    • is a creditor of the company for more than $5,000
    • is a director, senior manager, secretary or employee of the company
    • is an auditor of the company.

    – What is the role of the Small Business Restructuring Practitioner?

    The Small Business Restructuring Practitioner assists in the debt restructuring whilst the company’s directors remain in control of the business. During the Small Business Restructuring process, the SBRP:

    • assists the company to prepare its restructuring Plan and restructuring proposal statement
    • circulates the restructuring Plan and restructuring proposal statement to creditors
    • certifies to creditors that they believe the company is eligible for restructuring and that the company is likely to be able to meet its obligations under the Plan
    • manages the disbursement of payments to the company’s creditors based on the terms set out in the Plan.

    – What qualifications do Small Business Restructuring Practitioners have?

    SBRPs must be Registered Liquidators. To get registered as a Registered Liquidator, they must possess suitable experience, knowledge and abilities, and have their registration granted by an independent committee convened by ASIC. A new classification of Registered Liquidator can take on the role of Restructuring Practitioner only. They are required to be recognised accountants who have demonstrated the capacity to perform the functions and duties of the role.

    – How will I know if a Small Business Restructuring Practitioner is registered?

    The ASIC website keeps a list of Registered Liquidators. That list can be found on the ASIC website under “Search Our Registers” then “Professional Registers”. Of course, RestructuringWorks has a number of Registered Liquidators who can act as SBRPs.

    – Can more than one person be appointed as an SBRP to a company?

    Yes, it is often just one, but two or more Restructuring Practitioners may be appointed to act. Two or more is often referred to as a “joint and several” appointment.

    What effect does the appointment of a SBRP have on creditors?

    The primary purpose of a Small Business Restructuring is so that a company can deal with its creditors and change their rights. That could be to reduce the amount owing or change the terms of payment or both. As a result, the Small Business Restructuring process has a significant effect on creditors. Creditors fall into various classes and the effect is different for each.

    – What is the effect of a Small Business Restructuring on ordinary creditors?

    While the company is in restructuring, ordinary unsecured creditors cannot begin or continue their claims against the company without the Restructuring Practitioner’s consent or the court’s permission. That is, any legal actions against the company are paused whilst the Small Business Restructuring process is ongoing.

    – What is the effect of a SBR on a creditors’ winding up process?

    Sometimes the situation will arise that a creditor has already commenced a legal action against a company. If that legal action has progressed to the stage of an application to the courts to have the company wound up, that is, to have a liquidator appointed, then the action must pause whilst the Small Business Restructuring proceeds. The court can consider what to do. Usually, if the court is satisfied that it is in the interests of the company for it to continue under the Small Business Restructuring process, then the restructuring will continue rather than winding up the company.

    – What is the effect of a Small Business Restructuring on secured creditors?

    A secured creditor is usually a bank or financier who has lent money to the company and has taken security over some or all assets of the company. Secured creditors cannot exercise their rights, such as selling company property, without the Restructuring Practitioner’s written consent or with leave of the court.

    – How do creditors vote on a restructuring Plan?

    The Restructuring Practitioner oversees the voting process. The Restructuring Practitioner provides creditors with the restructuring Plan and proposal statement. When the Plan is put to creditors, they have 15 business days to vote to accept or reject the Plan. During this time, creditors also seek to correct errors in the amount they are owed. A Plan is accepted, if more than 50% of the creditors by value (so not in number) that vote, vote to accept the plan. Related party creditors are not entitled to vote on a restructuring Plan.

    – What will creditors consider in accepting a restructuring Plan?

    A variety of documents are provided to creditors to help them consider the proposed Plan. The Restructuring Practitioner will provide:

    • the company’s restructuring Plan
    • the restructuring Plan standard terms
    • the company’s restructuring proposal statement
    • a declaration from the Restructuring Practitioner about whether the eligibility criteria for restructuring are met and whether the company is likely to be able to meet it obligations under the Plan
    • a statement about the completeness of information set out in the company’s restructuring Plan

    The Restructuring Practitioner will also ask the creditor to:

    • vote yes or no to the Plan
    • advise if creditors agree with the amount of their claims as listed and, if not, provide information on the amount they say they are owed.

    What is the role of the directors during a Small Business Restructuring?

    Directors have a very active role during a Small Business Restructuring. During the restructuring process, the directors remain in control of the company and trade the business. The consent of the Restructuring Practitioner is required before the directors enter any transactions that are not in the ordinary course of the company’s business. The directors will also receive advice from the Restructuring Practitioner on the proposed Plan and will work with the Restructuring Practitioner to arrive at an appropriate Plan. It is possible that a director will need to explain to some creditors why it is in their interest to agree to the restructuring Plan.

    What if the directors have provided personal guarantees to creditors?

    It will often be the situation that a director has signed personal guarantees with suppliers or financiers. During the restructuring process, a personal guarantee cannot be enforced against a director or anyone else who signed a personal guarantee.

    How is SBR compared to voluntary administration?

    Small Business Restructuring was only introduced in 2021. The other main restructuring tool available to companies was, and is, voluntary administration. If a company qualifies for Small Business Restructuring, then it is very likely that it is better for a company to use Small Business Restructuring rather than voluntary administration. When comparing Small Business Restructuring to voluntary administration, the key difference is the person taking control of the business. Under SBR, the company directors remain in control of the business whereas in voluntary administration control of the company passes to the administrator. The Small Business Restructuring process is designed to be shorter and less regulated and as a result it also costs much less than voluntary administration. Here is a summary of other key differences:

        Small Business Restructuring Voluntary Administration
    Fixed Cost? ✔️
    Directors retain control? ✔️
    Designed for small businesses? ✔️
    Company returned to directors if deal fails? ✔️
    Rough cost before Plan contribution $15-35,000 $60-150,000
    Duration? 35 business days 35 business days
    Level of investigation and reporting? Low High

    Is Simplified Business Restructuring similar to “Chapter 11” in the United States?

    Well, sort of! Small Business Restructuring is similar to other countries that have “debtor-in-possession” restructuring frameworks. By debtor-in-possession we mean that the directors keep control of the business while a restructuring process is undertaken. Chapter 11 of the United States Bankruptcy Code is a federal law in the US that provides for a well-known restructuring alternative to traditional corporate bankruptcy. However, Small Business Restructuring is designed for small businesses and is much cheaper than the Chapter 11 process.

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    Restructuring Law can be a complex area and circumstances vary, so we recommend a telephone call for your initial consultation. We will then gladly meet you or just confirm our advice and quote in writing.

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