Commencing in 2021, the Federal Government announced a new, simplified small business restructuring process for small businesses as part of the economic relief reforms.

Advisors to small businesses should be aware that while on its face the Small Business Restructuring Process (SBRP) may appear an attractive proposition, failure to properly consider key stakeholder concerns (funding continued supply, lender support and recapitalisation sources) prior to formally entering into a SBRP could result in business failure rather than rescue.

The SBRP is designed to assist businesses to restore operational liquidity by severing the financial burden of legacy debts through a formal debt compromise with creditors.

Unlike other formal restructuring procedures, the SBRP allows for Company Directors to remain in control of and continue to trade their business during the restructuring period.

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Qualifying for the SBRP

Companies wishing to utilise this process must be able to demonstrate the following:

  • less than $1 million in liabilities (excluding liabilities to employees of the company);
  • all outstanding employee entitlements, including superannuation, must have been paid (nb. this does not include entitlements not yet due for payment, such as annual or long service leave); and
  • all tax lodgements for the company must be up to date.

Developing a plan: How does the new process work?

On commencement of the engagement of a small business restructuring practitioner (SBR practitioner), all unsecured and some secured creditors (e.g. Retention of Title and Lessors) are prohibited from taking action against the company to recover money and/or collect property (including terminating contracts and formal debt recovery proceedings).

Over the next 20 business days, the company’s Directors (working with the SBR practitioner) develop a plan to restructure the company’s unsecured creditor debts and collate relevant documents to support the plan, which will ultimately be for creditor consideration. Typically, a plan creates a pool of monies, which is applied in full and final settlement of all unsecured creditor debts, excluding related party debt that existed at the time of entering the SBRP. The pool of monies could be funded from various sources, including:

  • third party contributions
  • proceeds from the sale of assets
  • future trading profits
  • refinance.

As a tool to compromise creditor claims, the funding pool does not need to provide for the payment of creditor claims in full. The circumstances of each case will determine the necessary structure and quantum of the funding pool. In almost all cases, the outcome to creditors should be greater than the expected return if the company were to be placed in liquidation.

At or before the end of the 20 business days, the SBR practitioner certifies the plan based on their assessment of the company’s financial affairs and issues the plan to creditors for their consideration.

After receiving the plan, creditors have 15 business days to vote on the plan. If more than 50% in value of unrelated creditors that participate in the vote support the plan, it is approved and binds all unsecured creditors.

If the plan is approved, the business continues to trade under the control of the Directors and the practitioner administers the plan and distributes funds to creditors.

What if the plan is rejected?

Whilst a rejection of the plan does not necessarily lead to a Liquidation of the Company, the Directors may need to consider the ability to continue trading the Company if it is unable to demonstrate viability.

What if the Directors have provided personal guarantees to creditors?

During the restructuring period, a personal guarantee cannot be enforced against a Director or one of their relatives. 

What does it cost to undertake a SBRP?

During the restructuring process, the Company’s Directors retain control of the company, which in turn helps to minimise costs and business disruption. We expect that, in most cases, the professional fees for conducting a SBRP will be less than the cost of conducting a more traditional external administration (such as a Voluntary Administration or Liquidation).

The professional fee of the restructuring professional for developing the restructuring plan and liaising with creditors about the SBRP is agreed and fixed up-front.

Where will it work best?

Our experience is that most SMEs find it difficult, costly and commercially embarrassing to pursue a path of agreeing an informal compromise with creditors.   

The ATO is more often than not a significant creditor in corporate insolvencies, however the ATO’s policy on compromising debts (other than penalties and interest) outside of an external administration is quite onerous and difficult to satisfy.

The SBRP provides a simple and cost-effective procedure for companies with unmanageable legacy debts to settle those and other debts, while at all times retaining control of the Company and its business.

What does the SBRP mean for suppliers?

While the reforms may be welcome relief for companies with unmanageable legacy debts, the debtor in possession model itself and the introduction of a suite of moratoriums on enforcement activity present an increased risk to those supplying on credit to small businesses.

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How we help

Our full service restructuring team can offer advice and guidance for businesses who may need to enter or are currently in the process.

For more information on insolvency reforms to support small business please see:

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Cameron Crichton
Cameron Crichton
Learn more about Cameron Crichton
Cameron Crichton
Cameron Crichton

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Cameron Crichton

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