Small Business Restructuring

What is Small Business Restructuring?

On 24 September 2020 Federal Treasurer Josh Frydenberg announced a US-style chapter 11 ‘debtor in possession’ insolvency regime, designed to assist SME businesses with debts of less than $1 million to restructure and avoid winding up. Or where winding up is unavoidable, to provide for a lower cost, streamlined liquidation process. Schemes are administered by a ‘Small Business Restructuring Practitioner’ who must be a registered liquidator. IRT Advisory is available to undertake Small Business Restructuring engagements.

These measures were prompted by the need to assist the recovery of SME business enterprises from government-imposed lockdowns and trading restrictions arising from the COVID-19 pandemic, as these are progressively eased and government financial support to business is wound back.

Additionally, there was a recognition that the financial affairs of many small businesses are not complex, and a more cost effective and less intrusive regime was needed in these situations than that afforded by the existing voluntary administration and deed of company arrangement provisions.

Importantly, the business owner remains in control of day-to-day trading of the business while the plan is implemented.

To qualify for a Small Business Restructuring plan, your business must meet the following conditions:

  • The company must have less than $1 million in total debts (excluding employee entitlements); and
  • Neither the company nor any current or past director (who resigned in the previous 12 months) has entered into a Small Business Restructuring or simplified liquidation in the past 7 years.

Importantly, the company must have something to offer its creditors. Typically this would be a return of something less than 100 cents in the dollar to unsecured creditors, paid in a lump sum or over a period of time. The dividend may be funded by a voluntary sale of the business, an injection of cash from directors or related parties, future cash flows of the business, or a combination of some or all of these sources.

Some key things to be aware of are:

  • The company must pay all of its employee entitlement obligations in full as part of the plan;
  • All statutory tax lodgements must be up to date (though payments of tax may be in arrears);
  • Related parties cannot vote on the proposal;
  • The Small Business Restructuring Practitioner can end the restructuring in certain circumstances;
  • The maximum time for a restructuring plan is 3 years.

The following is a simplified description of the steps involved in implementing a Small Business Restructuring Plan:

  • The Small Business Restructuring Practitioner (SBRP) confirms eligibility of the company to enter into restructuring, consents to act and reaches agreement with the directors in regard to the SBRP’s fee;
  • The SBRP is appointed to develop and document the plan while the business continues to trade under the directors’ control (‘Proposal Period’ – lasting 4 weeks);
  • The plan is sent to the company’s creditors, who consider and vote on it by means of a postal ballot (‘Acceptance Period’ – lasting 3 weeks);
  • The plan is approved if a majority in value of creditors vote in favour of it;
  • If approved, the plan is then implemented and monitored by the SBRP;
  • If the plan is not approved, the company exits restructuring and is once again subject to the usual actions creditors may take to enforce payment of monies owed.