Small Business Restructuring Process
What is a Small Business Restructuring?
As the name suggests, it is a formal restructuring process focused on small businesses.
From a business owner’s perspective there are up to 6 steps involved in the SBR. These steps are set out below in more detail.
Costs are important. There is little point engaging in a SBR if you can’t fund the restructure. Firstly, it is important to note that under the law, registered Small Business Restructuring Practitioners are required to quote a fee upfront for the fixed cost of the restructure. You should have this at least.
The SBRer would usually cost between $15,000 to $30,000. There are two components to the fee. The first is a fixed fee for the restructuring phase. This is good news for you as costs are known and fixed. The second component is a percentage fee for the planning phase.
Costs will also depend on your individual circumstances. You should compare these costs with what creditors are giving up in the restructure.
The first step in the process is for you to conclude that your company is insolvent. In some circumstances working out whether you are insolvent is not as straight forward as you may think. There are a number of factors to consider.
The test as to whether you are insolvent is when you’re not able to pay all of your debts as and when they become payable. Usually there are quite a few warning signs. Many small business owners would have a pretty good feel about this. For example, small businesses struggle with cashflow. When you couple this with an outstanding and growing unpaid tax debt you are starting to come into the window of insolvency. Other signs can include trading losses, some pressure from creditors or perhaps you haven’t paid yourself for a while.
Once you have formed a view that you may be insolvent, it is important you act. Nothing destroys credibility and limits your ability to restructure more than delay and lack of communication. It is important therefore that you maintain good relationships with the Australian Taxation Office (ATO) and creditors.
Of course, you can see your trusted advisor and they will certainly help, however, in an SBR it will require you to find and work with a small business restructuring practitioner. A small business restructuring practitioner will be a registered liquidator with the Australian Securities and Investments Commission. ASIC website keeps a list of registered liquidators.
If you haven’t already, take time to read my blog post about finding and working with an insolvency practitioner. This is important as you will be working closely with the small business restructuring practitioner. The small business restructuring practitioner must be independent.
In order to be eligible to access the SBR process, you must meet certain criteria. You, your trusted adviser and the small business restructuring practitioner must demonstrate:
- Your company is incorporated under the Corporations Act. A Pty Limited will qualify.
- Have total liabilities which do not exceed $1 million on the day the company enters the SBR process. This excludes employee entitlements.
- You have not used or accessed the SBR process in the last 7 years. This extends to former directors of the company.
- The company is up-to-date with its tax lodgements and all employee entitlements (exclusive of leave and other entitlements that are not currently due to be paid) – if the company is behind on lodgements it needs to get them up-to-date before the process begins.
Once you have met the criteria and are eligible, you can move to the next step.
As I will show, because time is tight in the SBR process, it is a good idea to have in mind what your business looks like in a restructured state. It is usual for you, your trusted adviser and the small business restructuring practitioner (SBRP) to discuss what your small business restructure looks like.
Now that you have the confidence that the SBR process is for you, and you have structured your team, it is time to formally appoint the SBRP to your company. This is done formally through board resolutions. The resolutions are:
- You resolve you are insolvent or likely to become insolvent at some future point in time and that a SBRP should be appointed; and
- Appoint the SBRP to oversee the restructuring process, which includes working with you to develop and put the plan to creditors.
- Fix the remuneration of the SBRP.
The process being.
You have 20 business days. Note that in some cases, this period can be extended to 30 business days or longer. It is critical that the restructure works as you have only one chance to get this right. The SBRP will help you with this. This will involve ‘testing’ your proposal. The SBRP will have some tools to help this ‘testing’ phase.
It is important to know there is no set plan or formula for a restructuring. This is where the experience of a SBRP is helpful.
The SBRP will send the plan to creditors. Creditors will then have 15 days to either agree or disagree with the restructuring plan. During this period, the SBRP will verify creditor claims and deal with any objection. Again, dealing with objections is important and an experienced SBRP, particularly mediation skills is highly valuable.
It is important to note that while this process is continuing. you continue to trade the business and not the SBRP. Be aware however, if you want to do something that is outside “the ordinary course of business”, you will need permission of the SBRP to agree to the transaction. The following transactions could be regarded as being outside the ordinary course of business:
¨ Paying a creditor arising before the restructuring began
¨ Transfer or sale of the whole or a part of the business
¨ Payment of a dividend to shareholders
You should also know that every public document you produce will have the phrase “Restructuring Practitioner Appointed”. Public documentation includes – letterhead, website, purchase orders.
If over 50% of creditors (by value) vote yes, then the plan can get started. Some further details around this include:
- The plan cannot be longer than 3 years.
- The pan, after it has been agreed, binds your company and creditors.
- Creditors will be informed as will ASIC.
The SBRP will then manage the plan.
Note the SBR will come to an end when it has been completed or the plan itself is terminated.
If creditors say no, you will be free to appoint a voluntary administrator, or proceed with the liquidation of your company. Note this process is not automatic. You remain in control of your company.
However, some important consequences are that creditors can now commence in enforcing their rights against you, for example, by taking legal action. Importantly you will no longer be protected from personal liability for insolvent trading. As a consequence of this, it would be sensible to consider placing your company into liquidation or voluntary administration.
Small Business Restructuring Criteria
Small business restructuring refers to the process of changing the organizational structure of a company in order to improve its performance, increase efficiency, reduce costs, or respond to changes in the market or industry. Some common criteria for small business restructuring include:
Financial distress: Small businesses facing financial difficulties, such as declining revenue or cash flow problems, may need to restructure in order to remain viable. This could involve reducing expenses, renegotiating debts, or selling off assets.
Changes in market conditions: Small businesses may need to restructure in response to changes in the market, such as new competitors, changing customer preferences, or shifts in demand for certain products or services.
Growth opportunities: Small businesses that are experiencing rapid growth may need to restructure in order to accommodate the increased demand for their products or services. This could involve expanding their operations, hiring more employees, or adopting new technology.
Organisational inefficiencies: Small businesses that are struggling with inefficiencies, such as poor communication, lack of coordination, or duplication of effort, may need to restructure in order to streamline their operations and improve their overall performance.
Ownership changes: Small businesses may need to restructure as a result of changes in ownership, such as the departure or arrival of key stakeholders. This could involve transferring ownership or reorganising the management structure.
Overall, small business restructuring should be viewed as a proactive measure that can help businesses stay competitive, improve their financial performance, and adapt to changing market conditions.
Would your company be eligible for the SBR scheme?
To be able to access the SBR framework, there are six requirements which must be satisfied, which are as follows:
- Less than $1 million in total liabilities;
- The company is either insolvent or likely to become insolvent in the near future;
- Fulfilled all required tax lodgements;
- Made payment of all employee entitlements currently due and payable;
- The directors (current or in the previous 12 months) have not engaged with the small business restructuring process or simplified liquidation within the past seven years;
- The company must not be under other restructuring or administration including a deed of company arrangement or liquidation.
It is important to note that all tax obligations do not need to be paid, rather they only need to be lodged.
Frequently Asked Questions
What is a Small Business Restructuring Practitioner?
A SBRP must be registered with ASIC as a “registered liquidator” and must be “independent”. This means someone “connected” to your company cannot seek to be appointed.
Specifically this includes someone who:
- has a debt of more than $5,000 owing to the company
- is a creditor of the company for more than $5,000
- is a director, senior manager, secretary or employee of the company
- is an auditor of the company.
What is the role of the SBRP?
The SBRP assists in the debt restructuring whilst you remain in control of the business.
- assist you to prepare a restructuring plan and the restructuring proposal statement
- circulate the restructuring plan and restructuring proposal statement to creditors
- certify to creditors that they believe you are eligible for restructuring and that you are likely to be able to meet your obligations
- manages the disbursement of payments to your creditors based on the terms of the restructuring plan.
What is your role during this period?
During the restructuring process, you remain in control and trade the business. The consent of the SBRP is required before the directors enter any transactions that are not in the ordinary course of the company’s business.
What is a restructuring Plan?
A restructuring plan is simply the agreement between you and your creditors. The plan can be very flexible.
Usually, the plan will involve a higher return than what creditors would expect if your company were to be placed into liquidation. It can be a one-off payment or a payment over time from future profits or proceeds from the sale of assets. Funds can be sourced from anywhere such as you personally, a third party, a related party or refinancing.
There are some requirements such as:
- Employee entitlements that are due must be paid. These are likely to be wages, superannuation, and payment for leave already taken. It does now include untaken annual leave.
- Tax lodgements must be up-to-date. This will include income tax returns and business activity statements.
- The tax debts do not have to be paid up-to-date, but the returns must be lodged.
Which Creditors Get Paid?
Debts incurred prior to the commencement of the SBR fall within the SBR. Debts incurred after this time cannot be included in the Plan and must be paid in full as they fall due.
Can you do a SBR if you owe tax?
Yes. One matter to keep in mind is that the ATO will not reduce a principal debt outside a formal restructuring regime. Also, the director penalty regime is also caught by the SBR.
What is the effect of a SBR on ordinary creditors?
Unsecured creditors cannot begin or continue their claims against the company without consent of the SBRP or the court’s permission. Legal claims are paused. Sometimes a creditor has commenced a legal action against you. If that legal action has progressed to the stage of an application to the courts, then the action must pause whilst the SBR proceeds.
The court can consider what to do. Usually, if the court is satisfied that it is in the interests of the company for it to continue under the SBR process, then the restructuring will continue rather than winding up the company.
What about the bank?
A secured creditor, usually a bank has taken security over some or all assets of the company. Secured creditors cannot exercise their rights, such as selling company property, without the SBRP’s written consent or with leave of the court.
What is provided to creditors?
The SBRP will provide:
- your restructuring Plan
- the restructuring standard terms
- the company’s restructuring proposal statement
- a declaration from the SBRP about whether the eligibility criteria for restructuring are met and whether the company is likely to be able to meet its obligations under the Plan
- a statement about the completeness of information set out in the company’s restructuring Plan
The SBRP will also ask the creditor to:
- vote yes or no to the Plan
- advise if creditors agree with the amount of their claims as listed and, if not, provide information on the amount they say they are owed.
How do creditors vote?
The SBRP will oversee the voting process. When the Plan is put to creditors, they have 15 business days to vote to accept or reject the Plan.
Note that a related party creditors are not entitled to vote on the plan.
What sort of debt reduction is achievable?
This will depend on your specific set of circumstances. Often there are time when this will be compared to the rate of return creditors can expect if your company was placed into liquidation, this will include any claims a liquidator is able to make in relation to any transactions which can be recovered by a liquidator. The return will also depend on the viability of your proposed restructure. I have seen returns from 10 cents in the dollar. Monetary return is one aspect. Certainty and timeliness of the return is also important to creditors.
What About personal guarantees?
During the restructuring process, personal guarantees cannot be enforced against you or anyone else who signed a personal guarantee.