Small business restructuring: An attractive option for directors who want to maintain control

On 1 January 2021, the Federal Government introduced Small Business Restructuring (SBR), a new form of insolvency appointment to assist small businesses with resolving financial distress.

Importantly for directors, SBR is the first insolvency framework in Australia that leaves control of an underperforming company in the hands of its directors throughout the whole process, as opposed to other forms of external administration (e.g. liquidation). Previously reluctant directors, not wanting to consider the traditional forms of insolvency appointment (where they fear losing control of their businesses), may be very interested in the SBR framework where debts are dealt with while the director remains in control of the business throughout the process.

After a slow uptake in the first two years of the SBR regime, we see a sizeable increase in SBR appointments in 2023. The ATO's willingness to accept numerous proposals, including those with a projected return to the ATO of no more than 15 cents in the dollar, is the driving factor behind this. If that continues, SBR will represent a valuable lifeline to directors of some struggling small businesses.

The ASIC reported in January 2023 that from 1 January 2021 to 30 June 2022, the ATO was a creditor in 89% of companies that entered a restructuring plan and was a major creditor in 79%. The ASIC review noted 82 restructuring practitioner appointments during the review period. From those appointments, 78 proposals were sent to affected creditors, of which 72 transitioned to restructuring plans. The ten remaining appointments were either terminated because the company was not eligible, creditors rejected the proposed plan, or the directors ended the restructuring appointment. From an average of approximately four SBR appointments per month over the first 18 months of the SBR regime, we now see more than that number daily. It seems that the ATO’s current attitude towards the consideration of SBR proposals is having a huge impact with directors and their advisers now recognising the SBR regime as a viable and advantageous outcome, where the directors remain in control of the business throughout the whole process.  

In exchange for directors’ retaining control, the framework requires that the company appoint a SBR practitioner (i.e. a registered liquidator) who will act as a facilitator between the company and its creditors, aiding in the formulation of a restructuring proposal/plan that will be presented to and voted upon by the creditors. If accepted by most creditors, the proposal is binding, and the company continues to trade in compliance with the restructuring plan.

Before SBR, many small businesses would be forced to shut down instead of attempting some compromise of their debts to maximise their chances of survival, which in some cases is better for creditors, customers, employees, stakeholders, and the company.

When is a company eligible for the SBR scheme?

To be eligible, the following requirements must be satisfied:

  • The company has total liabilities of less than $1 million, including secured creditors (being the net shortfall after taking into account the assets secured) and related party creditors, but excluding employee entitlements
  • The company is either insolvent or likely to become insolvent
  • The company is up to date with respect to all of its tax lodgements
  • The company has paid the entitlements of employees that are due and payable
  • No person who is a director of the company or who has been a director of the company within the 12 months before the appointment of the restructuring practitioner has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years, unless they are exempt under the regulations
  • The company must not have undergone restructuring or been the subject of a simplified liquidation process within the preceding seven years.

For eligibility, it is important to note that all tax obligations do not need to be paid; rather that companies only need to have lodged tax returns. Additionally, only employee entitlements that are ‘due and payable’ are required to have been paid.

For a company that doesn’t currently meet all of the criteria (e.g. has unpaid superannuation, hasn’t lodged tax returns), it can organise its affairs (e.g. sell an asset and pay the outstanding superannuation, sell an asset to reduce its debts to under $1 million, lodge its tax returns) and then commence the SBR process.

SBR process

There are two phases to the SBR process:

  1. The appointment of the restructuring practitioner (assuming the required eligibility criteria are met)
  2. Entering into a restructuring plan (provided it is approved by creditors).

Directors of an eligible company commence the process by passing a resolution that the company is, or is likely to become, insolvent and that a SBR practitioner should be appointed.

The company then has 20 business days (which can be extended by an additional ten business days by the SBR practitioner) to prepare/propose a restructuring plan to be put to creditors. Once put to creditors, creditors have 15 business days to vote to accept or reject the plan.

A plan is accepted if it receives ‘yes’ votes from more than 50% of creditors by value who participate in the voting process (excluding related party creditors who are not eligible to vote on the plan).

When a company enters the restructuring process, a moratorium is applied to unsecured creditor claims (and some secured creditor claims) which protects the company during this process. Also, during this process the company’s directors remain in control of the company, continuing to manage its day-to-day affairs and making decisions that are in the ordinary course of the company’s business. If a transaction is outside the ordinary course of business, the SBR practitioner must approve the transaction.

If creditors do not ultimately accept the plan, the restructuring process ends, and creditors are no longer prevented from enforcing their rights.

Once a plan is accepted, payments are made to the company’s creditors on the terms set out in the plan. In a plan, all admissible debts and claims rank equally, meaning all creditors are paid the same ‘cents in the dollar’. Once a company pays its obligations under the approved plan, it is released from the debts or claims that were admissible under the plan. Suppose an approved plan fails before its completion, in that case the company remains liable for the liabilities owing prior to the plan commencing, less any repayments made under the plan before it failed.

SBR examples

As an example, the SBR process allows a local tradie who may have been materially financially impacted by a builder that has gone broke, owing the tradie significant money, an option to restructure their financial affairs and continue trading. Compare that to what may historically have been the flow-on effect of the builder’s demise, the liquidation also of the tradie’s company.

Similarly, a local restaurant still trying to get back on top of things (e.g. paying off a sizeable ATO debt) from the impact of COVID-19 could seek to avail itself of the SBR process, whereas previously liquidation was likely the final outcome.

Under both the above SBR examples, the tradie and the restaurateur can remain in control of their businesses throughout the process.

How BDO can help

At BDO we support businesses to manage their position and protect their interests proactively. Our Business Restructuring services cover all aspects of the issues faced by distressed and underperforming businesses.

BDO has a team of professionals experienced in handling both corporate and personal insolvency, including voluntary administration proceedings and court-appointed liquidations and receiverships.              

Learn more about the alternatives available to businesses under debt stress by contacting your local BDO team.