Survival through Small Business Restructuring
When facing financial distress, small businesses now have a practical alternative to traditional insolvency routes: Small Business Restructuring (SBR). Introduced in Australia on 1 January 2021, SBR is a streamlined, cost-effective process designed to help struggling businesses reorganise their finances while allowing directors to retain control. This approach differs significantly from traditional insolvency, where external administrators often take over company operations.
What is Small Business Restructuring?
Small Business Restructuring is a formal process that allows distressed companies to restructure their debts and continue operations, with oversight from a restructuring practitioner. Directors remain in charge of the business, supported by the practitioner’s guidance. SBR aims to offer businesses a viable path to recovery that preserves company value, maintains operations, and minimises disruptions to daily business activities.
What happened before the Small Business Restructuring Scheme was introduced?
Traditionally, insolvency resulted in the appointment of an external administrator (e.g. a voluntary administrator or liquidator) who would take control of an underperforming company in an attempt to either restructure or wind the business down. In both cases, this meant that directors would
relinquish control of the company.
What impact has SBR had since it was introduced?
Since its introduction, SBR has rapidly gained traction, with appointments of SBR practitioners increasing by over 200% between 2023 and 2024. Today, SBR represents nearly 13% of all external administrations in Australia, underscoring its effectiveness in providing small businesses a practical restructuring option.
When is a company eligible for small business restructuring?
To be eligible for SBR, a company must satisfy the following criteria:
The company has total liabilities of less than $1 million. This includes all unsecured and secured creditors (although excluding any fully secured debts) and related party creditors but does not include any employee entitlements.
The company is either insolvent or is likely to become insolvent at some future time;
The company must be up-to-date with its tax lodgements;
The company must be up-to-date on employee entitlements that are due and payable;
The company has not been under restructuring or subject of a simplified liquidation process within the last 7 years; and
The company does not currently have or did not in the last 12 months have, a director who has been director of another company subject to restructuring or a simplified liquidation process within the last 7 years.
Directors should bear in mind that the company is not required to pay all its tax obligations before commencing the SBR process. The only requirement is that the company has no outstanding lodgements due to the ATO before and during the SBR process.
The above eligibility criteria must be met “on the day on which” a small business restructuring practitioner is appointed. This means that if your company doesn’t meet the criteria right now, it can take steps to arrange its affairs before commencing the SBR process.
How does a company appoint a Restructuring Practitioner?
To appoint a SBR practitioner, the company’s directors must pass an ordinary resolution, that:
The company is insolvent or likely to become insolvent; and
The SBR practitioner should be appointed to restructure the company’s debts.
The ordinary resolution must be passed at a directors’ meeting which is properly convened and has satisfied any quorum requirements. A summary of those requirements is as follows:
Notice: A directors’ meeting may be called by giving reasonable notice to every other director. The directors of a company may also pass a resolution without convening a directors’ meeting if all the directors agree in writing that they are in favour of the resolution.
Contents of Notice: The notice must advise the other directors of the time, date and place of the meeting and the resolutions proposed.
Quorum: For a company with more than 2 directors, a minimum of 2 directors must be present.
Voting: A simple majority of votes cast by directors entitled to vote.
What does a Small Business Restructuring Practitioner (SBRP) do?
The SBR practitioner plays a key role in guiding the restructuring process. Their responsibilities include:
Assisting in creating a restructuring plan: The SBRP helps outline a payment plan for creditors, detailing how the company will manage its liabilities.
Supervising the company’s activities: Directors remain in control but must consult with the SBRP for major decisions outside day-to-day operations.
Managing creditor communication: The SBRP is responsible for circulating the restructuring plan to creditors and managing the voting process.
The practitioner’s role is distinct from that of an administrator or liquidator; rather than taking over, they support directors in managing their company’s restructuring.
What does Small Business Restructuring cost?
The cost of SBR can vary depending on the complexity of the company’s finances and the restructuring plan’s requirements. However, SBR is often more affordable than traditional voluntary administration. Directors should discuss fee arrangements with the restructuring practitioner to understand the costs upfront, which can include both an initial appointment fee and ongoing remuneration for the SBRP’s role in overseeing the restructuring plan.
What happens once a small business restructuring practitioner is appointed?
Once the SBR practitioner is appointed, the company enters a formal restructuring process. The Company will have 20 business days (which the SBR practitioner can extend by 10 business days) to prepare and circulate a restructuring plan to creditors.
During this time, there is a moratorium on claims by unsecured creditors (and some secured creditors) to protect the company’s assets during the SBR process.
The restructuring plan must:
Identify the company’s property that is to be dealt with. Generally, a plan will propose that all participating and eligible creditors of the company rank equally and will be paid the same “cents in the dollar”, which is often significantly less than their actual debts;
Provide the practitioner’s fees for managing the plan.; and
Specify the date on which the restructuring plan was executed.
Once the restructuring plan is circulated to the creditors of the company, they have 15 days to cast their vote in favour of or against the restructuring plan. A restructuring plan will be accepted if more than half of participating and eligible creditors vote “yes” to the plan.
When the restructuring plan has been approved by the creditors of the company, it becomes binding on all parties: the company, its officers and members, the restructuring practitioner and the creditors who have an admissible debt or claim. If the creditors of the company reject the restructuring plan, the restructuring process comes to an end and the company must explore voluntary administration or creditors’ voluntary winding up.
The distinct feature of SBR as against the other forms of voluntary administration is the preservation of the role of the directors throughout the process. During the restructuring process, the directors remain in control of the company and may enter into transactions or deal with company assets in the ordinary course of business or with the consent of the SBR practitioner.
What happens to assets and debts during SBR?
Under the restructuring plan, eligible creditors receive payment on agreed terms. Directors remain in control, allowing them to make ordinary business decisions, although asset sales or significant transactions require the practitioner’s consent. As mentioned earlier, the plan offers a “cents on the dollar” payment to creditors, usually lower than the total debt, making it a viable way to reduce liabilities without liquidating the company’s assets entirely.
When does the restructuring process end?
The SBR process can end in one of two ways:
Successful Completion of the Restructuring Plan: If the company fulfils its obligations under the plan, the company’s debts to unsecured creditors are discharged, and the directors resume full control without further oversight.
Plan Failure: If the company fails to meet the restructuring plan’s terms, protections for the company are lifted, and creditors can resume enforcement actions. The company may then consider options like voluntary administration or liquidation.
How will my business look after restructuring?
A successfully restructured company will have addressed its outstanding debts and liabilities, placing it in a stronger financial position to continue operations. Directors can then focus on growth and stability without the immediate pressures of insolvency, although continued diligence in managing finances remains essential.
How can Gear & Co Lawyers help?
Gear & Co Lawyers have extensive experience advising clients on the different forms of external administration and assisting companies in restructuring to overcome financial difficulties.
If your company is struggling financially, it does not always mean the end. There are a range of options available to you to overcome those difficulties while retaining control of the company. However, it is crucial that you obtain advice from a suitably experienced insolvency lawyer or an insolvency practitioner and take a proactive and coordinated approach. At Gear & Co, we are experienced in insolvency matters and can guide you through the SBR process, providing essential support in evaluating eligibility, appointing a restructuring practitioner, and creating a restructuring plan that suits your business needs.
If you or someone you know would like to discuss what restructuring options may be available to a business, do not hesitate to contact Chad Gear or Aman Singh on (07) 3209 2547 or by email at info@gearandco.com.
Copyright © 2023 Chad Gear
While attempts have been made to ensure the currency of information contained in this publication, it is not guaranteed. This publication is intended to provide only general information on matters of interest. It is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice. You should seek legal or other professional advice which is specific to your circumstances.
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