Author
David HurstDirector & ASIC Registered Liquidator
Many small businesses in Australia are struggling to meet their financial obligations and are wondering what they can do to keep their businesses operational. It should come as some comfort to know that business distress doesn’t necessarily mean the end of the line.
Eligible small business owners in Australia might consider using the Small Business Restructuring Process (SBRP). It is important to note that seeking professional advice and careful consideration of the options available is crucial before commencing a small business restructure.
Business distress doesn’t mean the end of the line, a Small Business restructure can provide a solution to get Australian businesses back on the front foot.
What is a small business restructure?
A small business restructure is a process that allows eligible Australian businesses to reorganise their operations and debts with the assistance of a restructuring practitioner. The goal is to achieve a sustainable outcome and avoid insolvency.
Key elements of the SBRP are that the process allows directors of eligible companies to:
- Retain control of the business, property, and affairs of the company whilst a restructuring plan is developed.
- Work with a restructuring practitioner to develop a restructuring plan.
- Enter into a restructuring plan with creditors that is binding if accepted by them.
Eligibility criteria
Eligibility depends on meeting certain criteria. To qualify for a small business restructure, eligible companies must:
- Have liabilities totalling no more than $1 million
- Unable to repay debts within 12 months and facing insolvency
- Not already be subject to an insolvency administration
- Be up-to-date with tax lodgements
- Be up-to-date with employee entitlements (superannuation and unpaid wages)
- Not have used the restructuring or simplified liquidation process in the last seven years.
It’s important to seek professional advice to determine eligibility.
What are the warning signs that I might need to restructure my small business?
There are several warning signs to look out for, which may indicate that small businesses need to consider a business restructure:
- Cash flow problems: If your business is struggling to pay bills on time or experiencing a decline in sales, it may be a sign of cash flow issues that could indicate that the business needs to restructure its operations.
- Increasing debt: If your business is taking on more debt to cover expenses, it may signal that a restructure is necessary to address underlying issues.
- Loss of key customers: If your business is losing its key customers or experiencing a decline in customer base, it could indicate that the business needs to restructure its operations.
- Lack of profitability: If your business is consistently operating at a loss, restructuring might be necessary to improve its financial position and ongoing viability.
- Legal action or creditor pressure: If your business is facing legal action or pressure from creditors to pay debts, it’s time to speak to a restructuring advisor.
Step-by-step small business restructuring process
The restructuring process involves the development of a restructuring plan, which entails providing a restructuring plan to creditors to reach an agreement about how to pay your debts.
1. Appoint a Restructuring Practitioner
- Small businesses choose to restructure to reduce debt, renegotiate payment terms, and improve cash flow.
- The restructuring practitioner oversees the process and manages communication with creditors.
2. Develop the Restructuring Plan
- Together with the restructuring practitioner, your business has 20 business days to prepare a restructuring plan and supporting documentation.
- The plan outlines proposed changes to business operations and payment terms for creditors.
3. Creditors vote
- The restructuring plan is provided to creditors for consideration.
- Creditors have 15 business days to review the plan and vote on it.
- The plan requires approval from more than 50% of creditors by value to proceed.
4. If the Plan is Approved
- Your business can continue trading.
- The restructuring practitioner administers the agreed plan.
- During the repayment period:
- Most creditors cannot pursue legal recovery actions.
- The company's directors are protected from certain enforcement actions, including ipso facto clauses (where a contract can be altered or terminated due to insolvency-related events).
Ipso facto clauses are where one party may terminate or modify the operation of a contract upon the occurrence of a specified insolvency-related event (such as the appointment of an administrator, receiver or liquidator) against another party.
5. If the Plan is Rejected
You remain in control of the company but should be aware that:
- Creditors are no longer prevented from taking action
- You are no longer protected from liability for insolvent trading
If creditors reject the restructuring plan, you can consider other formal appointment options such as voluntary administration or liquidation.
Those who are able to access the small business restructuring process are generally also eligible for a simplified liquidation. This is a quicker and more cost-effective liquidation method suitable for small businesses.
What are the outcomes of a small business restructure?
The outcomes of a successful small business restructure include:
- Debt reduction
- Renegotiated payment terms
- Improved cash flow
The best part is that your business can continue trading and avoid insolvency.
Can a small business restructure be used to resolve ATO debt?
Yes, the ATO small business restructure rollover provides tax relief for eligible businesses that undertake a debt restructuring process. This can help to resolve ATO tax debts.
FAQS
How did the small business restructuring process come about?
The government made significant changes designed to support the survival of small businesses. The reforms that were introduced on 1 January 2021 have been designed to provide better outcomes for businesses, their employees, creditors, and the economy. They include a new debt restructuring process, simplified liquidation, and complementary measures.
SBR offers small businesses a structured and practical approach to managing financial difficulties, helping to safeguard jobs and preserve valuable business assets.
Do directors remain in control of the company during the restructure process?
YES. This is one of the major benefits for small businesses. Not only do the company's directors retain control, but they may also undertake transactions that are in the ordinary course of the company's business while a plan is developed and proposed.
In addition, any debts incurred following the company entering a restructure are not included in the plan.
What is the role of the restructuring practitioner?
The small business restructuring practitioner is responsible for overseeing the restructuring process. They assist in developing a restructuring plan and restructuring proposal statement to be presented to creditors for their consideration to enable the Company to continue in existence.
They advise the company and its directors and then they assist in communication with creditors. They then administer the agreed plan and distribute funds to creditors. The restructuring plan is complete when its terms are satisfied.
What is the difference between a small business restructure and administration?
A small business restructure is the process of debt restructuring and reorganising operations with the existing management team still able to run the business throughout the restructuring process. Administration involves appointing an external administrator to take control of the business and assets.
The goal of administration is to maximise returns for creditors, while a restructure is to avoid insolvency and achieve a sustainable outcome.
How much does a small business restructure cost?
Despite no two scenarios being the same, the streamlined process attracts a very reasonable flat fee. More importantly, the expert advice provided by the restructuring practitioner could be vital in the survival of the business. In the event that a restructure is not possible, you will likely be eligible for a low-cost simplified liquidation.
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