A Guide to Small Business Restructuring in Australia
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. In practice, a high proportion of plans put to creditors are accepted (ASIC has reported overall approval rates around the high 80% range in its review of the regime).
Disclaimer: this guide is general information only and is not legal, tax, or financial advice. The SBR regime is governed by the Corporations Act 2001 and Corporations Regulations 2001, and regulator/ATO guidance can change. Get advice for your specific circumstances.
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 to a Plan with its creditors. It allows small businesses to restructure while the directors remain in control.
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 in 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.
Latest Update
SBRs continue to skyrocket in popularity since its introduction in 2021, surpassing Voluntary Administration as Australia’s most popular restructuring tool. As of 2024, the ATO continue to be big supporters of the process, reporting a steady increase in SBR appointments, averaging over 100 per month, and it is expected to outpace voluntary liquidations by the end of financial year. SBR’s hybrid deals trend, involving both partial lump sum and future profit payments, have become more common compared to the early days of the SBR process when lump sum payments were the most common option. This trend of businesses opting flexible payment terms that better suit their recovery plans.
Contents
- What is Small Business Restructuring (SBR)?
- An overview of Small Business Restructuring and Debt Reductions
- Details of the Restructuring Plan
- What are the expected outcomes of a Small Business Restructuring?
- If a company has a large ATO debt, is SBR a good solution?
- Eligibility for a Small Business Restructuring
- What is a Small Business Restructuring Practitioner?
- Frequently Asked Questions
An overview of Small Business Restructuring and Debt Reductions
You’ll be surprised at the kinds of deals that creditors, including the ATO, are willing to accept through Small Business Restructuring. Recent SBR Plans achieved debt “haircuts” of between 65% to 91% of total debt. In dollar terms the “haircuts” have reduced total debts by $114,000 to $853,000. And the cost of an SBR to achieve those savings was between $5,500 and $33,000.
When was it introduced?
Introduced in 2021, SBR is part of a broader initiative to support small businesses in financial distress, particularly during the COVID-19 pandemic. This reform was part of the Australian government’s response to the economic challenges, which left many struggling to maintain solvency. The new law aimed to provide small businesses with an alternative to traditional insolvency processes, offering a lifeline during a period of widespread economic disruption.
Why was it introduced?
Prior to its introduction, many small businesses were forced to close their doors because of the complexity and cost of existing insolvency processes. By creating a more accessible restructuring option, the government aimed to keep businesses afloat, preserve jobs, and protect economic activity. The reform sought to prevent the unnecessary closure of small businesses and provide the opportunity to restructure their debts, avoid liquidation, and give them a better chance to survive and thrive.
The legislative timeline
The government aimed to provide immediate relief to small businesses, with the development of a long-term solution. The key milestones include:
- September 2020: The government first announced the reform as part of its broader COVID-19 response package aimed at assisting small businesses’ economic recovery.
- November 2020: The legislation was passed by Parliament, officially setting out the legal framework for the SBR process.
- January 2021: The SBR process came into effect, providing small businesses a formal, structured path to deal with insolvency. The timeline reflects the urgency of addressing small business struggles and providing a clear path for recovery.
What are the benefits of SBRs?
The introduction of SBR brought numerous key benefits that helped small businesses tackle financial difficulties while minimising the impact on their operations:
- Cost-Effective: The SBR process is designed to be more cost-effective than other restructuring options, such as Voluntary Administration, making it accessible to businesses that might otherwise struggle to afford the cost of formal insolvency proceedings. This makes it an ideal solution for small businesses that may have limited financial resources.
- Preservation of Business Operations: unlike liquidation, one of the key advantages of SBR is that it allows businesses to remain operational throughout the restructuring process. This means they can continue generating revenue and preserve jobs.
- Ownership Retention: One of the most significant benefits of SBR is that SBR allows business owners to retain control over the day-to-day operations during the restructuring process, unlike in other insolvency proceedings where ownership may be transferred.
- Simplified Procedure: The SBR process is designed to be less complicated than other formal insolvency options. With fewer formalities and simpler paperwork, business owners can focus on recovery rather than being bogged down by complex procedures. This makes it more accessible for small business owners who may be unfamiliar with complex legal processes.
- Improved Creditor Engagement: The SBR process promotes cooperative relationships between business owners and creditors, as it provides a structured framework for negotiating and agreeing on debt repayment terms. This approach can result in better outcomes for both parties.
These benefits make SBR a vital tool for small businesses seeking a structured, manageable way to address financial distress while protecting jobs and preserving business assets
The Small Business Restructuring (SBR) Process in Detail
The SBR process can be broken down into three key phases, each offering a structured approach to support businesses through their recovery. These phases ensure that businesses have the opportunity to reorganise while minimising any disruption to operations.
1. Pre-Appointment Phase
This phase begins when a small business recognises that it is experiencing financial distress, but before the official restructuring process begins. It allows the business owner to assess the situation and gather the necessary resources for formal restructuring.
- The business owner evaluates the financial situation and considers restructuring as a viable option.
- A restructuring practitioner can provide an initial assessment of the company’s chances of a successful restructuring.
- There is no specific timeframe for this phase, but it generally takes place over a few days to a week, and the process should begin as soon as financial distress is identified.
2. Commencement
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.
3. The Restructuring Phase
This phase focuses on providing breathing space for businesses to stabilise their operations, working with the practitioner to form a deal to be put to creditors, and, if necessary, form a repayment plan.
- This phase lasts for up to 20 business days, during this time the Directors work with the appointed Restructuring Practitioner (RP) to develop a formal Restructuring Plan. The business is protected by a moratorium, preventing creditors from taking legal or recovery actions. In some cases, the practitioner may apply for an extension of up to 10 additional business days.
- The RP is formally appointed to work closely with the business owner to analyse the business’s financial position and ensure all relevant financial records are gathered, up-to-date, and accurate.
- The business remains operational under the control of directors while the plan is prepared. This ensures minimal disruption to employees, customers, and other stakeholders.
- The plan is flexible and must be practical, achievable, and fair to creditors while ensuring the business has a path to recovery. It is a “debt restructuring” plan at heart and does not usually propose significant changes to the business structure, such as renegotiating debts, extending payment terms, or altering operational strategies.
- Once the plan is finished, creditors have 15 business days to vote on the plan. The majority of creditors (by value of those who vote) must vote “yes” for the plan to commence. Upon approval, the business proceeds with implementing the agreed terms.
If rejected, the company can choose to explore alternative options, such as voluntary liquidation or voluntary administration.
4. The Plan Phase
The final phase involves presenting the restructuring plan to creditors for approval, followed by its implementation if it is accepted. This phase is focused on solidifying the business’s path to recovery.
- The business submits a formal restructuring plan that outlines how it intends to repay creditors over time, often including discounts, extended payment terms, or debt forgiveness.
- Creditors vote on the plan, and if accepted by the required majority (at least 50% by number and 75% by value of creditors), the plan proceeds.
- The plan may involve a one-off contribution by the director into a fund, which the RP will distribute to creditors. This ensures a clear, structured repayment method.
The plan’s duration cannot exceed 3 years, to ensure that the repayment process remains manageable and provides a clear timeline for the business’s recovery. This also ensures creditors are not left waiting indefinitely for repayment, maintaining fairness and promoting confidence in the restructuring process.
- Once more, during the plan phase, the business remains under the control of its creditors, allowing it to continue operating while implementing the plan. This approach helps the business stay on course while actively working towards recovery and financial stability
These three phases offer a clear framework for small businesses to restructure their debts and manage financial difficulties while avoiding liquidation and keeping operations intact. Each phase ensures that the restructuring process is carried out in a clear and structured way, providing the best chance for business recovery.
Ending
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.
Post Restructuring
Businesses often engage advisors to strengthen their financial strategies and ensure sustainable growth. It marks a new chapter after completing the SBR process. Here are some suggestions post-restructuring:
1. Debt Relief
Once the plan is completed, the business is released from the debts included in the plan, allowing it to operate without the burden of past financial obligations. Creditors cannot pursue further action against the company for those debts, providing the business with a clean slate.
2. Strengthening Financial Management
Businesses often adopt better financial management practices post-restructuring to avoid slipping again. Restructuring provides a vital opportunity to reassess financial strategies and implement measures that prevent future financial distress. This includes tighter cash flow monitoring, revenue diversification, and improved operational efficiency.
3. Rebuilding Relationships with Stakeholders
Maintaining and restoring trust with stakeholders, including creditors, suppliers, and employees, is crucial to establishing payment terms or credit facilities in the future.
4. Improving Operational Efficiency
Identifying and resolving inefficiencies in the business model to maintain profitability and sustain growth. This includes streamlining workflows and processes, investing in technology to enhance productivity, and training employees to adapt to new operational models.
5. Rebuilding Credit
Reestablishing good credit standing is a priority, as it affects the business’s ability to secure loans, partnerships, or other financial support, making it essential to restore credibility over time.
6. Planning for Growth
With financial stability in place, businesses can focus on strategic planning for growth of market expansion, product or service development, and collaboration that complements business goals.
7. Periodic Evaluation
At last, businesses should be periodically evaluating their performance against recovery goals to ensure sustained progress. This involves reviewing financial metrics, operational outcomes, and stakeholder feedback.
Details of the Restructuring Plan
The restructuring plan is a cornerstone of the SBR process. It outlines the proposal to creditors on how the company intends to repay its debts. Below are the main details included in the plan:
1. Debt repayment offer
The plan specifies the percentage of debts creditors will receive (e.g., cents on the dollar). For example, creditors may agree to a settlement of 25% of debt
2. Payment structure
Contribution can be made via:
- One-off payments: A lump sum funded by directors, external investors, or asset sales.
- Instalments: Regular payments over an agreed period, typically two but can be up to three years.
- Future profits: Commitments from future revenue streams
3. Timeline
Defines the timeframe for repayments, ensuring creditors know when they can expect payments, which can extend up to three years
4. Creditor approval
For the plan to proceed, the consent of a majority in both the number and value of the creditors voting in the plan is required.
5. Cost structure
Fees for the RP are usually included in the plan, calculated as a fixed cost plus a percentage of the amount distributed to creditors.
The plan must be clear, realistic, and demonstrate that it provides a better outcome for creditors than other insolvency options. Once the plan is approved, it binds all creditors, preventing further legal actions related to pre-SBR debts.
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 |
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 distributing 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.
For the Business
SBR allows businesses to continue operations while addressing their debts. By restructuring, a business can avoid liquidation, maintain employment, and focus on long-term stability. With a tailored plan in place, the business can alleviate creditor pressure and gain the breathing space needed to recover.
For the ATO
The ATO benefits from receiving structured payments that may not otherwise be recoverable if the business fails. Although not in full, this is generally more favourable than what might be achieved through liquidation. SBR also enables the ATO to work collaboratively with businesses to sustain tax compliance and support economic stability.
For Creditors
Creditors gain a clearer path for recovering a portion of their owed funds. The process ensures that creditors are treated equitably, and it can secure better outcomes compared to liquidation, where they may receive minimal returns. SBR expedites debt resolution, enabling creditors to recover funds faster.
For Employees
SBR helps preserve jobs by allowing businesses to remain operational. Employees benefit from the company’s ability to meet wage obligations and maintain stability during the restructuring phase. A successful restructuring boosts employee confidence in the company’s future, improving workplace morale and productivity. A company cannot propose a plan in SBR unless all employee entitlements are paid, so it ensures employees get priority payment.
For Directors
Directors retain control of their business during SBR and get some protection from personal liability whilst adhering to the SBR plan. The process reduces stress associated with creditor actions and allows directors to focus on rebuilding the business. Successfully completing the restructuring plan helps directors maintain professional credibility and demonstrate responsible financial management. Moreover, directors gain the opportunity to rectify past financial missteps and steer the business toward a more secure and profitable future.
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” 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.
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.
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 an 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 an SBR avoid a 21-Day Director Penalty Notice from the ATO?
Yes. A 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.
Eligibility for a Small Business Restructuring
SBR offers a valuable process for businesses facing financial distress to recover while minimising the risk of liquidation. To qualify for an SBR, a company must meet specific criteria that determine its eligibility.
Who is eligible for an SBR?
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
To be eligible to propose a plan (up to 20 business days into the process), the company must also be:
- Up to date with all tax lodgements and
- Able to pay all due and payable employee entitlements
If the company is behind on either point it needs to get them up to date before proposing a Plan.
What is a “Small Business”?
The definition of Small Business can vary, but it is typically agreed a small business is one that has:
- Less than $10 million annual turnover
- Less than 20 full-time employees
Note these are guidelines for definition and not eligibility requirements for the SBR process.
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.
How often can a business use Small Business Restructuring?
A business or director of a business can only access the SBR process once every seven years. This restriction is in place to ensure that the process is used as a genuine means of recovery, not repeatedly for financial relief. Upon completing the SBR process, the business must wait for seven years to reapply for another SBR.
What is a Small Business Restructuring Practitioner?
A Small Business Restructuring Practitioner is often referred to as an SBRP. It is a new class of Insolvency Practitioners, 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, Restructuring Works has several Registered Liquidators who can act as SBRPs.
Does the Small Business Restructuring Practitioner need to be independent?
Yes, an 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 debt restructuring whilst the company’s directors remain in control of the business. During the Small Business Restructuring process, the SBRP:
• assists the company in preparing 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 an 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 an 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 its obligations under the Plan
• a statement about the completeness of the 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.
How are secured creditors impacted?
As their claims are backed by security interests held in the business’ assets, secured creditors may be still impacted by the terms of the restructuring process even if they generally have a higher priority in the SBR process. If the business is unable to meet its obligations, secured creditors may receive less than what they owed. Although the timing of repayments may be extended, which can affect cash flow and create uncertainty for the creditor. Secured creditors might have to weigh up whether accepting a reduced amount under the restructuring plan is preferable to a potential liquidation, where they could face the risk of less or no recovery.
How are related creditors impacted?
Related creditors, such as business partners, family members, or affiliates of the business are not permitted to vote on the restructuring plan like other creditors.
Frequently Asked Questions
Do I qualify for SBR in Australia?
In broad terms, a company may be eligible for SBR if it can confirm that:
- It is insolvent or likely to become insolvent
- Total liabilities are under $1 million at the time of appointment
- All tax lodgements are up to date
- Employee entitlements are paid (e.g. wages and super)
- The business is a company, not a sole trader
- Directors have not used SBR or simplified liquidation in the past 7 years
For the full criteria and how the tests apply in practice, see Eligibility for a Small Business Restructuring above.
How much does SBR cost?
The cost of SBR can be vary depending on the complexity of the business, the state of the books and records, creditor mix, and the practitioner fee structure. Costs must include an upfront fixed fee for the proposal period and, a percentage of amounts distributed to creditors under the plan. SBR is typically more cost-effective than Voluntary administration, which is one reason it can be suitable option for smaller businesses.
SBR vs Voluntary Administration: Which is better?
SBR and Voluntary Administration (VA) are both formal insolvency options, but they work differently.
- SBR: Directors stay in control, lower cost, for businesses with liabilities under $1 million
- VA: An administrator takes control, more complex, typically used for larger or more serious situations.
The right option depends on your business circumstances and financial position.
SBR vs Liquidation: What’s the difference?
SBR aims to save the business, while liquidation is used to close it down.
- SBR: Business continues operating while a plan is made to repay creditors
- Liquidation: Business stops, and assets are sold to repay creditors
SBR may suitable if the business is still viable, whereas liquidation is typically the final step when it is not.
Can I keep running my business during restructuring?
Yes. One of the features of SBR is that the company generally continues to trade under the control of its directors during the proposal period and, if accepted, while the plan is carried out. The Restructuring Practitioner monitors the process and must consent to transactions outside the ordinary course of business. The aim is to keep the business operating while the company works towards a deal with creditors.
Can creditors enforce debt collection during SBR?
There is a moratorium during the restructuring proposal period that restricts creditors from starting or continuing enforcement action against the company without the practitioner’s consent or the court’s permission. This protection is most commonly discussed in the context of unsecured creditors, but secured creditors’ enforcement rights can also be restricted and may require consent. Existing proceedings may be dealt with by the court. Getting advice early is important, particularly if a creditor has already began legal action.
What if the restructuring plan is rejected?
If creditors reject the restructuring plan, the SBR process ends. The directors remain in control of the company, but the moratorium falls away and creditors my resume enforcement action. Directors will often consider other formal options such as VA or liquidation. Insolvent trading protection that applied during the SBR proposal period will also no longer apply once the company exits the process.
Can creditors negotiate the terms of the plan?
Creditors can raise questions and provide feedback before voting, and in some cases the directors, with the Restructuring Practitioner’s assistance, may adjust the proposal before it is issued for a formal vote. However, creditors do not “negotiate” the plan in a formal meeting like some other insolvency processes, the vote is ultimately yes or no on the plan put forward.
Are creditors bound by the decisions of the majority in voting?
Yes. If the plan is accepted by the required majority, it will bind affected creditors.
Can creditors challenge the SBR process?
Yes, creditors can apply to court in relation to aspects of the process. In practice, court action is usually uncommon because of time and cost, but it can happen, particularly if a creditor believes the process is being misused or key requirements have not been met.
Who controls and trades the company during the Small Business Restructuring process?
During Small Business Restructuring, the company continues to trade under the control of its directors. The Restructuring Practitioner is only involved if transactions fall outside “the ordinary course of business”.
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.
Why would directors choose to use restructuring?
Directors may choose to use the restructuring process as a way to avoid liquidation and to provide the business with an opportunity to reorganise its debts and possibly recover. By choosing to use SBR, the business can negotiate with creditors while continuing operations whilst expecting the ongoing generation of revenue. Directors may believe that with a restructuring plan, they can turn the company around and eventually repay creditors in full or at least recover more than would be possible in liquidation. Directors may also use the SBR process to protect the jobs of employees, preserve the
value of the business and to give breathing space to reorganise operations, which can be crucial for the business to recover from financial distress.
How much will creditors be paid under a Small Business Restructuring?
The amount creditors will be paid under an SBR depends on several factors, including the status of the creditors debt, the value of its assets, and the terms of the agreed restructuring plan.
- Unsecured creditors typically receive a fraction of the amount owed to them.
- Secured creditors are generally given higher priority as they have collateral backing for their debts.
- Related parties or other affected creditors.
What is an Affected Creditor, and who usually falls into this category?
An affected creditor is person whose claim is dealt with under the restructuring plan and who would generally be bound by the plan if it is made. In practice, that usually means a creditor with a pre-restructuring debt that is to be compromised, repaid, or otherwise addressed through the plan documents.
- Trade suppliers and service providers are commonly affected creditors if they are owed money for goods or services supplied before the restructuring began.
- The ATO is very often an affected creditor because tax debts are commonly a major unsecured debt in SBR matters.
- Landlords may be affected creditors to the extent they have unsecured claims such as rent arrears or other amounts owing that arose before the restructuring started.
- Secured creditors are affected only in relation to any unsecured shortfall. For example, if a lender is owed more than value of its securities, the shortfall may be dealt with under the plan.
- Related creditors may still fall within the group of creditors affected by the plan, but they are excluded from voting under the SBR rules.
- Post-commencement creditors are usually not affected creditors for plan purposes, because debts incurred after the restructuring starts generally must be paid as they fall due rather than being rolled into the plan.
From a practical point of view, this category matters because affected creditors are the creditors who vote on whether to accept the plan or not. They receive the restructuring plan and proposal statement, and their claims are assessed for the purposes of the process.
What is a Related Creditor, and who usually falls into this category?
A related creditor is a person or entity that is both a creditor of the company and a related entity of the company. In other words, a related creditor can still be an affected creditor if its claim is dealt with under the plan, but it is generally excluded from voting on the restructuring plan. This usually means that someone with a connection to the company, its directors, shareholders, or associated entities who is also owed money.
- Directors who have lent money to the company
- Shareholders or members who are also creditors
- Related companies within the same corporate group, if one company is owed by another
- Family members or relatives of directors/shareholders
- Trusts, trustees, or entities connected with directors/shareholders
- Other connected parties who fall within legal concept of a related entity
These related creditors still affected by the restructuring plan, but they are treated as excluded creditors for voting purposes. The idea is to protect the integrity of the vote by preventing connected parties from influencing the outcome in the same way as arm’s-length creditors.
What happens if the restructuring Plan is not accepted by creditors?
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. 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.
Are ATO debts included in Small Business Restructuring?
Yes, ATO debts are commonly included in the restructuring plan as unsecured debts. As with other creditors, the company must also keep up with post appointment obligations as they fall due. Because the ATO is often a major creditor, good records and up-to-date lodgements can be important to the ATO’s assessment of the proposal.
Meeting employee entitlements under Small Business Restructuring
A company cannot propose a restructuring plan unless all due and payable employee entitlements have been paid, including superannuation. This requirement is designed to protect employees by ensuring they are not asked to effectively “fund” the restructure. If entitlements are outstanding, the company will must pay them before the plan can be sent to creditors for voting.
What do directors need to declare?
Directors must provide declarations required by the process including eligibility-related statements and information that supports the proposed plan, so creditors can make an informed decision. False or misleading declarations can result in legal consequences, including personal liability.
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 into 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?
Personal guarantees are common. An SBR does not automatically extinguish a director’s personal guarantee liability. However, there may be temporary restrictions on enforcement during the restructuring proposal period, and some creditors may choose to wait while the company attempts to complete a plan. Directors should get advice on their specific guarantee terms and enforcement risk.
How does SBR compare to Voluntary Administration?
The key difference is, 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 | |
Are there restrictions on the plan directors can put forward?
Yes, restructuring plans must comply with several restrictions:
- The plan must treat all unsecured creditors equally.
- Employee entitlements must be fully paid before proposing the plan.
- Payments under the plan must not exceed three years and must provide fair terms to creditors.
Can an approved restructuring plan be terminated?
Yes, an approved restructuring plan can be terminated by the Restructuring Practitioner if:
- The business breaches the terms of the plan.
- Creditors or courts raise any issues that warrant termination.
- Continuation is deemed not in creditors’ best interests. Termination restores creditors’ rights to pursue the business for unpaid debts.
Can an approved restructuring plan be varied later?
A restructuring plan cannot be varied easily once it has been accepted. If circumstances change applying to court, or in some cases, termination are the alternative pathways.
How does an approved restructuring plan become complete?
An approved restructuring plan becomes complete if the business fulfills all obligations, such as making agreed payments into the fund to be paid to creditors. Upon completion, creditors have no further claims on the business for the debt included in the plan.
Can the appointment of an SBRP be revoked, removed, or replaced?
No, SBR 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 when 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 the resolution of the creditors.
How should a company under a restructuring plan be referred to?
Once a plan is accepted and, the business must disclose its status as “subject to a restructuring plan” on all public documents and official correspondence while a restructuring practitioner remains appointed. This ensures stakeholders are informed of its financial status.
Does my small business qualify for Small Business Restructuring?
The Small Business Restructuring process is available to incorporated businesses, which commonly means Pty Ltd companies, that meet the eligibility criteria including the liabilities threshold and director history rules and can get tax lodgement and due employee entitlements up to date before a plan is proposed. For the full checklist, see Eligibility for a Small Business Restructuring above.
Is Small 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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