Small businesses are a risky proposition. Large numbers of small businesses fail each year, but help is available if your business is struggling.
Formal insolvency proceedings like Small Business Restructuring allow directors to access help in turning their company around. While the process can be long and challenging, it presents an opportunity for the company to repay its debts and continue trading.
In this article, we’ll learn more about Australia’s Small Business Restructuring legislation, and how it helps businesses manage insolvency.
Defining Small Business Restructuring
Small Business Restructuring is a new process developed by the Australian Government. It was designed to support small businesses that struggled throughout the COVID-19 pandemic. It has now been widely adopted as a way to help businesses manage their debts.
Under the Small Business Restructuring (SBR) legislation, eligible small businesses can restructure their operations to repay outstanding debts. This is preferable when compared to outcomes like liquidation, which inevitably result in the company being wound up.
When used correctly, the SBR process will allow a business to repay outstanding debts and continue to trade, improving outcomes for creditors, employees and directors.
Eligibility Criteria for Small Business Restructuring
Australia’s Small Business Restructuring scheme is only available to eligible businesses. These eligibility criteria are applied strictly. You should consult an accredited restructuring professional before applying for SBR.
Your business must meet the following criteria to be eligible for Small Business Restructuring:
● The company must be insolvent, e.g. it must be unable to pay its debts on time
● You must have debts that total less than $AUD 1 million (excluding secured debts)
● Your tax lodgements must be paid and up to date
● Your employee entitlements (wages, superannuation, leave, etc) must be paid and up to date.
In addition, the company, and the directors of the company, cannot have used SBR within the past 7 years. This rule is designed to prevent irresponsible directors from bouncing between companies and taking advantage of the SBR system.
Developing a Restructuring Plan
The Small Business Restructuring process is based around the development of a restructuring plan.
When a business is eligible for SBR, they can appoint a restructuring practitioner to help turn the business around. Restructuring practitioners are insolvency and financial experts. Their role is to assess the business and figure out the best course of action for repaying outstanding debts.
The plan for saving the business is a formal document that must be developed and submitted to creditors within a set timeframe. In most cases, companies have 20 days to propose a plan to creditors. If you fail to produce a plan in that time, the restructuring ends, and creditors may continue other legal action.
Each restructuring plan is unique. The restructuring practitioner will:
● Assess the total assets and liabilities of the company
● Negotiate with creditors to potentially lower the total amount of debt
● Identify areas where waste is occurring (such as inefficient business practices)
● Decide whether assets can be sold
● Decide whether debts can be refinanced
● Figure out whether the company will be able to repay its debts within a period of no more than 3 years.
Once it’s created, the restructuring plan is submitted to creditors. Creditors are given 15 business days to vote on the plan. The plan will proceed if it’s approved by at least 50% of creditors (in value).
Control of the Company During Small Business Restructuring
Most formal insolvency processes require a registered professional to take control of the failing business. One of the major benefits of SBR is that it allows the directors to remain in control of the company.
During the restructuring period, the restructuring practitioner will assess the business, develop a plan and provide support to directors, but they will not have direct control over day-to-day activities.
Note that there is an exception to this rule. Directors are given licence to perform all operations that fall within the ordinary course of business. Anything that is not considered the “ordinary” course of business must be approved by the restructuring practitioner.
For example, if a business normally buys and sells real estate as part of its day-to-day business, the directors would be allowed to continue these activities during restructuring. In contrast, a business that normally offers accounting services would not be allowed to suddenly begin purchasing real estate during restructuring.
The restructuring practitioner must also give their approval for matters such as:
● Repaying any debt that is captured as part of the restructuring plan
● A partial or full sale of the business
● Transferring part (or all) of the business to a new owner
● Paying shareholder dividends
How Small Business Restructuring Ends
The Small Business Restructuring process can result in one of two outcomes:
- The creditors reject the restructuring plan – Where this occurs, the SBR process ends immediately and the business continues to trade as normal. This allows creditors to initiate or continue legal debt recovery action (up to and including liquidating the company).
- The creditors approve the restructuring plan – If 50%+ of the creditors (in value) approve the plan, the plan immediately takes effect. The insolvent company is bound by the terms of the plan, and must meet all conditions contained therein.
Where the restructuring plan is approved, the restructuring practitioner is responsible for overseeing the execution of the plan. They will ensure that the company meets its obligations during the timeframe of the restructuring plan.
As part of the plan, the company may alter its day-to-day operations, reduce waste, fire staff, sell assets and change company leadership. This will allow the company to raise the cash it needs to repay any debts that are captured by the plan.
At the end of the plan period, the company is released from any remaining debts and can continue to trade as normal. If the company fails to meet its obligations at any point, the plan is terminated, and the company will remain liable for its outstanding debts.
