COVID-19 created a tough economic environment and the government made changes to allow small businesses to to restructure debt more easily and with less expense.
What are the benefits of small business restructuring?
Small business restructuring was introduced for small businesses, its creditors, and its employees to get the benefits of:
- reduced costs
- shortened turnaround times
- increased and easier access
- retained control by business owners/directors (through the debtor-in-possession model).
Why would directors choose to use restructuring?
Directors who want to try to save their business through restructuring company debt while retaining control of business operations and creditor relationships.
The team at Worrells will work with you to map out the best course of action for you. Speak to an expert to get tailored advice based on your circumstances.
All registered liquidators are automatically Small Business Restructuring Practitioners (SBRPs).
Providing appropriate advice regarding a distressed business requires a specialised skill set and knowledge that is acquired through years of education and experience.
Furthermore, registered liquidators operate in a highly regulated environment and are subject to strict professional standards, accountability and ethics, unlike many “advisors” in the unregulated pre-insolvency market.
While SMEs may appear to have simplified affairs, in order to achieve a successful outcome in any business turnaround process, it is important for those managing that process to have the correct expertise, a well-planned and articulated strategy, and the ability to support all key stakeholders.
Within five business days after the restructuring begins (or longer if approved by the restructuring practitioner), directors must provide the restructuring practitioner with a signed declaration stating that:
- The company is eligible.
- Whether the company has entered into a voidable transaction.
- The directors believe on reasonable grounds that the company meets the eligibility criteria, and why.
Transactions outside the ordinary course of business, such as material asset transfers and forgiving related party debts, are the sorts of transactions that might be voidable in a liquidation. If in doubt, directors may require appropriate advice before making the declaration.
Secured creditors are subject to similar moratorium provisions as applies in a voluntary administration and will only be bound by a restructuring plan to the extent they agree to be bound, under regulation 5.3B.29. However, any shortfall a secured creditor sustains will be covered by the restructuring plan and again they are bound by it.
Related creditors do not get to vote on the plan. However, they receive a distribution under the restructuring plan.
All restructuring plans must include several prescribed terms and conditions. For example, admissible debts and claims must rank equally and receive a pro-rata share of the funds available for distribution (including related creditors). Additionally, a creditor cannot receive a transfer of property other than money.
The restructuring plan can be conditional on a future event occurring e.g. a sale of property/asset within a maximum of 10 days after creditors accept the plan.
The restructuring plan is limited to a three-year term.
When an approved restructuring plan is fully effectuated in accordance with its terms, it terminates (is completed), and the company is freed from the debts covered by the plan.
Yes. A plan can be terminated if:
- A creditor obtains a court order.
- If the plan is conditional on a particular event occurring within 10 business days after the plan is made, and the event does not occur within that period (i.e. a condition precedent).
- If there is a breach that goes un-remedied for 30 business days.
- If an administrator, liquidator or provisional liquidator is appointed to the company.
Yes. However, varying an approved restructuring plan might not be commercially viable in many cases as a court order is required.
All registered liquidators are automatically entitled to act and be appointed as a restructuring practitioner. Only registered liquidators can act and be appointed to the new simplified liquidation process.
The restructuring practitioner’s role includes:
helping determine eligibility
supporting the directors to develop its plan and review the company’s financial affairs
certifying the plan for creditors to vote on
managing disbursements if plan is approved.
Directors stay in control of the company’s day-to-day activities, therefore the restructuring practitioner is not personally liable for the company debts/actions.
The basis for the restructuring practitioner’s remuneration is:
A fixed fee for the proposal phase, which directors resolve prior to the appointment.
A fixed percentage of the recoveries from the plan, which creditors approve.
The fixed fee covers the following duties:
helping determine eligibility
supporting the company to develop its plan and review its financial affairs
certifying the plan for creditors to vote on.
Referral fees are prohibited in all other types of formal insolvency; however, they are impliedly permitted by regulation 5.3B.16.
Call us
If you'd like a quote or a confidential chat about the small business restructuring process, give us a call.
A company subject to the restructuring process must advertise this status. For example, ABC Pty Ltd should be described on all public documents as “ABC Pty Ltd (restructuring practitioner appointed)”.
Should the company meet certain eligibility criteria, a small business restructuring practitioner may adopt this process rather than a voluntary administration. Because the small business restructuring (SBR) process is more streamlined and less onerous than other formal insolvency appointments, not all businesses are eligible to use it as a debt restructuring tool. To be eligible to commence the SBR process a business must:
Be operating through a company structure.
You must either be operating as a company, or via a trust with a corporate trustee. Sole traders are not eligible for the SBR process but may have other options available to them; our teams can help assess.
Have liabilities of less than $1 million.
Total liabilities must be less than $1 million, excluding employee entitlements. These typically include, the ATO, suppliers and related party debts.
Have not recently used the SBR process.
The company and its directors can only use the SBR process once in a seven-year period. This means if a director becomes a director of another company, the exclusion moves with the director. Former directors who resigned in the previous 12 months are also factored into this restriction. Some limited exceptions to the seven-year exclusion period apply for a group of companies.
Director declarations
Before proceeding, directors must make a declaration about whether they believe the company has entered into any voidable transactions; and that there are reasonable grounds for believing the company qualifies to propose an SBR. Directors must also resolve if the company is insolvent or is likely to become insolvent and that a restructuring practitioner should be appointed.
Appoint a small business restructuring practitioner
Directors must engage with and appoint a registered small business restructuring practitioner (like us at Worrells) to oversee the SBR process
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