Small business restructuring: Breaking free from legacy debt
Small Business Restructuring (SBR) provides a framework for businesses to deal with legacy debt whilst leaving the directors in control of the business.
Over the last three years, many businesses have racked up debt, typically tax debt, due to difficult trading conditions and external factors (e.g., COVID-19, inflation, supply chain issues). The ATO is typically a significant creditor for small businesses. Interestingly, the ATO has demonstrated a willingness to support businesses going through the SBR process, having voted in favour of 91% of restructuring proposals.
The framework mandates that the company appoint an SBR practitioner (i.e. a registered liquidator) to facilitate communication between the company and its creditors, aiding in the formulation of a restructuring proposal/plan that creditors will vote upon whilst directors retain control of the business. If a majority of creditors accept, the proposal is binding, and the company continues to trade.
When is a company eligible for the SBR scheme?
The following requirements must be satisfied:
- The company has total liabilities of less than $1 million, including secured and related party creditors, excluding employee entitlements
- The company is either insolvent or likely to become insolvent
- The company is up to date concerning all of its tax lodgements
- The company has paid the entitlements of employees that are due and payable.
For eligibility, companies only need to have lodged tax returns; they do not need to pay all tax obligations. Additionally, only employee entitlements that are ‘due and payable’ are required to have been paid.
Small Business Restructuring process
There are two phases to the SBR process:
- The company appoints the restructuring practitioner if the required eligibility criteria are met
- Entering a restructuring plan (provided creditors approve it).
The appointment of the restructuring practitioner is for seven weeks.
The plan put to creditors is typically a compromise of debt, either paid in a lump sum from an external source (e.g. from the director’s assets) or in instalments from future trading profit. Each plan is different. However, the ATO has supported plans that return approximately 15-20 cents in the dollar (i.e., an 80-85% compromise).
Once a plan is accepted, payments are made to the company’s creditors on the terms set out in the plan. All admissible debts and claims rank equally in a plan, 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.
How can we help BDO Connect members?
SBR is a viable solution for clients with legacy business debt.
Instead of negotiating payment plans with the ATO that may not be achievable or place significant strain on the business, businesses can complete an SBR process in a couple of months. The compromise of debt can cleanse your client’s balance sheet and allow them to start fresh, free of legacy debt.
For example, a local restaurant still trying to get back on top of things (e.g., paying off a sizeable ATO debt) after COVID-19 could use the SBR process to compromise the debt with a reasonable proposal. The restaurant could continue to trade under the control of the directors whilst the plan is prepared.