With effect from 1 January 2021 small business restructuring (SBR) was introduced by the Australian Government as a new form of insolvency appointment which provides a simplified debt restructuring process for eligible small businesses. This useful and cost-effective option for eligible businesses is starting to gain traction with more and more businesses successfully navigating financial distress through the appointment of a SBR practitioner.
It differs from the traditional restructuring process and other insolvency appointments, in that control of the incorporated company remains in the hands of the directors and the company can generally continue to trade in the normal course of business. This often means that relationships between the company and its creditors and clients can be preserved.
An SBR involves two stages: first, the appointment of a registered liquidator as the restructuring practitioner for a company. This is achieved by the directors of a company appointing a restructuring practitioner if the company meets the eligibility criteria and the directors resolve that the company is insolvent or likely to be insolvent, and that a restructuring practitioner should be appointed. A restructuring proposal period of 20 business days then commences during which the company proposes a restructuring plan. Secondly, if one is approved by creditors, a restructuring plan is entered into.
Eligibility for SBR
There are two main requirements for a business to be eligible: first, the company’s debts must not exceed $1 million. This may be achieved by bringing the total liabilities of the company down to $1 million by for instance, discharging secured creditors or paying director penalty notices. Secondly, all of the company’s tax lodgements must be up to date and all employee entitlements that are due must have been paid before a SBR plan can be proposed. This means that a company would therefore have to find sufficient funds to settle employee entitlements. If this cannot be done the company will not be eligible for SBR.
Once the SBR has commenced, the directors must, within 5 days, sign a declaration stating that:
- the company is eligible;
- ii) whether the company has entered into any voidable transactions; and
- iii) that the directors believe on reasonable grounds that the company meets the eligibility requirements and why.
Directors should obtain specialist legal or insolvency advice, particularly in relation to the types of transaction that may be voidable, before making the declaration.
The Proposed Plan and Way Forward
While there are many ways to structure the proposal to creditors, there are certain prescribed terms and conditions that all restructuring plans are required to contain. The plan is also limited to a period of three years. The plan is approved by a majority (by value) of creditors voting in favour of it. Related creditors are however excluded from voting. Where at least some payment is offered upfront and certainty provided as to future payments, ideally over a shorter time frame, the prospect of creditors accepting the proposal will be greatest.
The restructuring practitioner will manage the disbursement of payments under the plan. Once the terms of the approved plan are fully complied with, the plan comes to an end and the company is released from the debts covered by the plan. There are however several instances in which the plan may terminate early, for instance if the company breaches the plan and this breach is unremedied for 30 days.
As the restructuring practitioner’s remuneration is a fixed fee for the proposal stage and a fixed percentage of the recoveries from the plan, which creditors will approve, compared to other options, SBR provides directors and shareholders with a restructuring option that is more affordable, more flexible, and lower risk.
Further Information
Marino Law has extensive experience acting for directors and business owners, liquidators, lenders and financiers in the administration of all corporate insolvency appointments. Our highly experienced lawyers regularly advise clients in the following areas of corporate insolvency:
- voluntary administrations;
- liquidations;
- enforcement of securities;
- statutory demands; and
- SBR’s.
We also regularly provide advice to directors and business owners, liquidators, lenders and financiers regarding the registration of security interests on the PPSR, the validity of those registrations and their enforceability.
Should you require assistance in any of the above areas, please contact one of our highly experienced lawyers.
