Small Business Restructure – Basic Considerations

Small Business Restructuring or “SBR” is a simplified debt restructuring process introduced in by the Australian Federal Government on 1 January 2021. The purpose of an SBR is to enable debt restructuring for smaller corporate businesses at a fraction of the cost of more traditional types of external administration such as Voluntary Administration or a Deed of Company arrangement.

It is the first type of formal insolvency appointment which leaves control of the insolvent company in the hands of the director – not the appointed registered liquidator.

It is fair to say that there was an initial slow uptake in the adoption of the SBR process. In the first eighteen months following the introduction of the new regime there were only 82 SBR appointments Australia wide.  We are now seeing more than 50 appointments per month (55 in May 2023 and 54 in June 2023, per ASIC published notices).  The level of appointments will likely continue to dramatically increase as more insolvency practitioners undertake these types of appointments, become comfortable with the process, and more actively market this type of appointment.

In a nutshell a SBR allows financially distressed “small” businesses to engage a registered liquidator as a Restructuring Practitioner to assist the company/director(s) in putting forward a single, cents in the dollar payment plan to creditors, while allowing the directors of the debtor company remain in control of their business and continue to trade.

All amounts owed to ordinary unsecured creditors as at the date the debtor company commences the SBR process will be subject to and bound by the proposed restructuring plan, if accepted.

The eligibility criteria for a debtor company to undertake an SBR are as follows:

• The debtor Company has total liabilities which do not exceed $1 million on the day the debtor enters the SBR process.
• The debtor company has all employee entitlements paid up to date.
• All required tax lodgments have been lodged by the debtor (outstanding taxation obligations do not need to be paid); and
• The debtor company is insolvent or likely to become insolvent at some future time.

Some commentators have suggested that the $1 million worth of liabilities is too low/restrictive.

During the process, the Restructuring Practitioner will issue the company’s proposed restructuring plan to creditors and will provide details and commentary as to whether the Restructuring Practitioner believes that it is in the best interest of creditors to accept the plan.  Unlike Voluntary Administration, there is no meeting of creditors to discuss the proposal, rather creditors will complete a written voting proposal form and either vote for or against the proposal.

It will be the majority in value of responding creditors who decide (related party creditors are excluded).  The actual number of creditors voting for or against is not relevant. i.e., if a single creditor with an outstanding liability of $120k resolves to accept a SBR plan and 15 creditors, with combined outstanding liabilities of $90k, resolve to reject the plan, then the plan will still be accepted notwithstanding that only one creditor voted for the plan in this instance.

On 17 January 2023, ASIC released a paper reviewing the SBR process with respect to the first eighteen months of operation.

Some of the interesting statistics to come out of this report were:

• 92% of proposed restructuring plans were approved by affected creditors.
• The Australian Taxation Office was a major creditor in 79% of those companies.
• The majority of companies where a restructuring plan was effectuated appeared to be continuing to operate their business.
• The main industry groups that accessed restructuring during the review period were accommodation and food services (21%), construction (20%) and retail trade (16%).

With out a doubt, the ATO will have a substantial voice when it comes to deciding whether SBR proposal are approved or not.  In a recent SBR that I assisted with, the relevant contact person within the ATO provided some insight into key considerations to be considered. The considerations included:

• The quantum of outstanding loans owed by the director(s). The ATO want the directors to have paid everything back and will likely not accept the plan if there are large loans outstanding.
• Whether the Company’s business will be profitable going forward, and detailed cashflow forecasts to substantiate same – The ATO advised that they need to be certain that in accepting any plan, the Company won’t default shortly thereafter.
• They prefer the plan contributions are paid as early as possible.
• They would like to see debt forgiveness by directors and related party loans owed by the company.
• That the debtor company has a good compliance history – limited overdue lodgments, past defaults on payment arrangements, etc.
• History of director compliance – whether the director has been involved in other past insolvent entities.

Throughout the SBR process, suppliers may continue to deal with and supply on credit to debtor company, with all supply after the date the debtor enters into the SBR process being payable in full within the determined credit terms. However, unlike a voluntary administration, the external insolvency practitioner appointed is not personally liable for debts incurred by the debtor company during the restructuring period.

Should the SBR plan be accepted by creditors, then the Restructuring Practitioner will collect the restructuring plan contributions from the debtor company and distribute that amount to creditors.

Should the plan be rejected by creditors, the debtor company will not be automatically placed into liquidation (or another form of external administration) and the directors of the are free to make a decision as to the future of the debtor company.

A constant threat to credit suppliers is the receipt of preference payment demands from a liquidator.  Should a debtor Company enter into the SBR process, then amounts received by creditors in the six-months prior to the SBR practitioner are not voidable by the SBR practitioner. It should be noted however that if the proposed restructuring plan is rejected by creditors and the debtor company subsequently enters into liquidation, then a liquidator will be obliged to investigate any preferential payments made.

There are both pros and cons with the relatively new SBR regime.  For example, a SBR is likely to be more cost effective than a voluntary administration/deed of company arrangement, but the level of oversight from the appointed qualified insolvency practitioner will similarly be less. I have no doubt that credit managers will be seeing more and more SBR proposals in the coming months/years, and SBR’s popularity as form of restructuring will likely increase amongst the various stakeholders.

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