Small Business Restructuring Process

Will businesses in financial distress or teetering on the edge of insolvency start to utilise the small business restructuring process introduced in January 2021 now that we have emerged out of the COVID lockdowns, related legislative protections and support packages?

Will businesses in financial distress or teetering on the edge of insolvency start to utilise the small business restructuring process introduced in January 2021 now that we have emerged out of the COVID lockdowns, related legislative protections and support packages?

It has almost been one year since the Federal Government introduced legislation that provided a new insolvency option to restructure small businesses.

What is small business restructuring?

​The small business restructuring process (SBRP) provides those companies which have accumulated total liabilities of less than $1 million to access a type of restructure or turnaround which is aimed at being more cost-effective and allows the business to remain under the control of the Company’s directors whilst the process is taking place.

A review of the SBRP:

Since its introduction we have not seen a wide scale use of this process. The likely reasoning is due to minimal enforcement from the Australian Taxation Office and the introduction of various laws which provided relief to businesses from critical creditors such as landlords resulting in low insolvency appointments.

In addition to the above, the government also provided significant support packages to ensure that employees for SMEs did not lose their jobs and that mass redundancies and unemployment across the country were avoided. These initiatives achieved that objective. In rolling out these packages, the government injected significant amounts of money into the economy well above what businesses truly required thus causing a sharp drop in insolvency appointments. But was this “pushed down the road?”

We have now reached a point in the economy where the double dose vaccination rate is in excess of 70% and in some states, such as New South Wales over 80% has been achieved, thereby allowing the state economies to reopen. Businesses are reopening and government support packages are slowly being wound back.

The tax office continues to undertake selective and minimal enforcement against business owners that have fallen into tax arrears and we are not likely to see any strong recovery action taken by the ATO until late in the first quarter of calendar 2022.

As these government packages are wound back and businesses reduce their reliance on advisory services provided by their accountant, this is the opportune time for businesses with their advisers to sit down and assess what is the true financial position of their business.

It may demonstrate that the business is about to enter into a strong period of revenue, but it may also mean that as these support packages and legislative protections are wound back and some businesses will be required to deal with the deferred debt that has accumulated as a result of the Covid experience.

It is here where we may see the small business restructuring process start to be utilised in a way that the federal government was hoping it may be.

It is important when you are advising your financially distressed clients whether the business can qualify or is eligible for this restructuring process. An opportunity to perform a turnaround might be required so as to avoid an insolvency of your client.

How do you qualify for the SBRP?

​To determine whether your client is eligible there is the criteria that must be met in order to undertake the process. This includes:

  1. You must be incorporated under the Corporations Act.
  2. It must be a business with total liabilities of less than $1 million on the day it enters into the process. This excludes employee entitlements.
  3. It must be a business who has not engaged in the SBRP or undertaken a simplified liquidation in the last 7 years.
  4. Resolve that it is insolvent or likely to become insolvent at some future time.
  5. Payments to employees for wages, superannuation and other entitlements must be up to date.
  6. Tax lodgements must be up to date.

What next?

​The second stage is that you then determine that you want to save the business and believe that there is a way forward after the restructuring process and that the business can thrive after that restructure.

It is at this point that the company’s directors will appoint a small business restructuring practitioner and that the practitioner’s role will be to assist the company to develop the proposal and plan to present to creditors.

The plan to restructure must ensure that what is being offered to creditors will be a better return than if the business was to be wound up.

It is also through this process that the restructuring practitioner will be required to investigate the company’s affairs.

Once the appointment has taken place, the company and the practitioner will have 20 business days to work through and build a plan to restructure the business. The plan will provide the necessary information to creditors for them to decide on whether the offer that has been put forward to them should be accepted.

The plan will typically outline what the potential return to the creditors will be, how long the process and payment of the proposal will be made and whether it’s in a better return than liquidation.

The small business restructuring practitioner will then prepare a report which will be sent to creditors for them to review the plan being offered to them and determine whether it should be accepted.

It is at this point that the business and the practitioner should ensure that all employing entitlements have been paid, tax obligations are up-to-date and that the company has been substantially complying with the above.

Once the creditors have received the proposal, they will then have 15 business days to determine their vote on whether to accept the proposal or not.

Who has control of the company during a SBRP?

Importantly, during this process, the directors of the company stay in control of the trading operations and can undertake transactions that are in the ordinary course of business. Given the low numbers of restructure plans that have happened to date, it will be interesting to see whether the cr100editor0s and customers will continue to support businesses which choose to run this process.

How is SBRP different to a Voluntary Administration?

When compared to a voluntary administration, the voluntary administration process is a lot more involved for the insolvency practitioner as they are required to take control of the trading and are personally liable for any debts incurred during that period.

It is because of this personal liability that the insolvency practitioner is very vocal and proactive with the customers and creditors of the company. Whilst both processes are quite public, the goal of the SBRP was to try and reduce the cost of the restructure and also to allow the directors to have and maintain relationships with suppliers and customers without the damaging impact of an insolvency practitioner taking control of the trading during the restructure.

Interestingly, it remains to be seen how primarily creditors, will react to the director controlled trading during the process given those same directors, arguably were involved in the cause of the insolvency of the business and loss of full payment to those creditors. I would suggest that creditors will really want to test the restructure proposal put to them in a way that ensures the future trading of the company has changed so as not to result in the same problems going forward.

Due to the low number of insolvency appointments generally, the majority of insolvency practitioners have not been yet been given the opportunity to undertake the SBRP since its inception. Further, it is possible that the issue of the company having liabilities less than $1 million might limit its true value because businesses of this size simply are not willing or are unable financially to restructure and inject those further funds. It will be interesting to see if further legislative changes will lift the limit from $1 million to a greater number (possibly $5m).

Given we are now coming out of the COVID protected lockdowns and businesses now have to deal with whatever deferments they may have accumulated during that period, it is now important for advisors to monitor their clients business even closer and consider whether this option might be worthwhile. Certainly, creditors will be more understandable of such a process given the challenges we all have faced during the COVID pandemic.

​If your client is suffering from financial distress, Cathro & Partners are advisers that are qualified and can assist in these restructures.

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