The small business restructuring (SBR) regime works as an alternative to voluntary administration or a winding up of an insolvent company through a Liquidation process. The SBR regime allows for a simplified process for a small business to restructure their debts, preserving accrued employee entitlements while allowing creditors to recover a portion of money owed to them, while having the directors maintain control of the business’s operations throughout the restructure.
The regime works by way of implementing a Restructuring Plan (the ‘plan’) which outlines a way of compromising existing debt to creditors, usually by way of regular instalments. The SBR process cannot exceed a period of 3 years. Once the final payments of the plan are made, the plan will be complete, and the plan period ends.
Statistics and facts
Between January 2021 to July 2022 there were 82 restructuring appointments, with 78 proposals being sent to creditors and 72 transitioned to restructuring plans. The plans that failed were either rejected by creditors, the company was ineligible, or the directors ended the restructuring appointment. Within this period, 92% of proposed restructuring plans were accepted by creditors, with 66% of plans being effectuated allowing those companies to continue operations of their business throughout the process. Additionally, the ATO is clearly in support of this regime, with them being a creditor in 89% of claims, and a major creditor in 79%.[1]
A simple overview for a Small Business Restructure
Pre-appointment period
For a business to be eligible for the SBR process, they must satisfy a number of conditions including that; the company must be insolvent, the debts owed to creditors must be less than $1 million, the directors must not have undertaken a prior SBR or a Simplified Liquidation in the 7 years prior, all taxation lodgements are up to date and all employee entitlements owing (including superannuation) have been paid.
The directors must pass a resolution that the company is insolvent or is likely to become insolvent and that a Restructuring Practitioner (‘RP’) should be appointed. The RP must consent prior to any appointment, be appointed by the directors in writing and such resolution lodged with ASIC.
Proposal period
The proposal period follows the appointment and is a period of 20 business days. During this time the company can trade as it normally would, and the RP can authorise transactions outside of the normal course of business. In this period the plan is developed, and the RP makes a declaration that the plan is clear and accurate and achievable. In this period the company must pay employee entitlements, and the RP proposes the plan to creditors for them to vote on such proposal.
Acceptance period
The acceptance period lasts 15 business days and commences once creditors have been provided with the directors restructuring proposal. During this period the plan is sent to creditors where the creditors debts and claims are verified. Creditors should also notify the RP where they have objections to the quantum of their debt reported on by the RP. If there is an objection by a creditor, they must notify the RP within 5 business days in relation to the debt amount being disputed or being categorised as an excluded creditor. The RP is to assess these objections and makes recommendations to the company or creditor. If the creditor disagrees with the RP’s decision, they may apply to court.
Within this period, the creditors vote on the plan with a majority of votes in value necessary for deciding an outcome. If there is a majority of creditors in value against the restructuring proposal, the restructuring lapses and the SBR process ends. If the restructuring proposal succeeds, the plan period commences.
Plan period
The plan applies from the day it is made and is binding on parties. The RP collects any funds and pays it to creditors pursuant to the terms of the plan. The RP also has the responsibility to do anything else necessary in applying the plan.
End of plan
Once the terms of the plan are effectuated, the plan is concluded. Excess property/funds are returned to the company and the company is released from all admissible debts. After directors notify the RP that the plan has effectuated, and the RP gives notice to ASIC and the plan ends.
If the plan is terminated because of non-compliance with the terms of the plan, the restructuring process ends. Any of the unpaid claims which were subject to the SBR fall due upon the termination of the plan, and control of the company returns to the directors. Directors are then usually left with the options of voluntary administration, continuation of trade or the appointment of a liquidator. Directors must notify the RP if voluntary administration commences or a liquidator is appointed, and the RP is required to lodge notice with ASIC and creditors as appropriate.
Key takeaways
For eligible companies, Small Business Restructuring provides a lifeline for businesses to continue to trade under the control of their directors, allowing directors to comprise the Company’s debt, and regain solvency. With the statistics showing a great amount of success for businesses that implement this process, it should definitely be a consideration to struggling small businesses. Additionally, having such a streamlined and definite process, reduces the administrative burden and costs which would usually occur in other alternative methods.
[1] ‘REPORT 756: Review of small business restructuring process’ Australian Securities and Investments Commission, January 2023.
