What is Small Business Restructuring?

Small Business Restructuring is a method for companies to settle debts they owe to creditors, while allowing the directors to remain in control of the company. The Small Business Restructuring process can be used by a company to avoid liquidation so that the company can continue trading.

To enter Small Business Restructuring you must appoint a registered Liquidator as Restructuring Practitioner who will manage the process for you and assist you develop a proposal to settle a company’s debts.

Is Your Business Eligible for Small Business Restructuring?

There are certain eligibility requirements which a company must meet to be able to enter into Small Business Restructuring or put a proposal for a restructuring plan to their creditors. They include:

• The company must owe less than $1 million to creditors.
• The company must not owe any overdue employee entitlements including superannuation.
• The company must not have any material overdue taxation lodgements.
• Neither the company nor any related entities must have entered into a Small Business Restructuring within the last 7 years.

If your company is not currently eligible for SBR there may be steps which can be taken for it to become eligible, such as paying superannuation, getting taxation lodgements up to date or reducing overall debt levels.

Why SBR is a Game-Changer for Small Business Owners

SBR is a game changer for companies with unpayable debts. Historically the only options for those companies were to pay the debts in full, enter into voluntary administration or go into liquidation. However, a company with unpayable debts can now use SBR which has significant benefits including:

• In SBR the directors stay in control of the company where as in voluntary administration an administrator takes over the business which can cause significant damage.
• SBR results in a reduction of a company’s debts in most cases of between 50% and 70%.
• For companies with tax debts, SBR results in a reduction of the tax debt but also stops the ATO charging interest on its debt which is charged at a rate of over 10%.
• SBR is carried out for a fixed cost which is generally between $10,000 and $15,000 plus GST (although costs may be higher for complicated matters). Historically companies have been able to use the voluntary administration process to settle debts however this process can cost over $50,000.
• If SBR is successful a company can continue to trade, will be left with little or no debt and is given a fresh start.

The Restructuring Process Explained

The directors of a company can appoint a Restructuring Practitioner and commence Small Business Restructuring if they resolve that the company is or about to become insolvent and that a Restructuring Practitioner should be appointed. Once Small Business Restructuring is entered into the process involves:

1. The directors retain control of the company during the entire process.
2. Within 20 business days the Restructuring Practitioner puts a proposal to creditors to settle their debts. We will help you formulate this proposal.
3. For companies with ATO debts there is an option to put a draft proposal to the ATO for their consideration and comment within approximately 10 business days of the start of the process.
4. Creditors vote on the proposal within 15 business days after it has issued.
5. The proposal is accepted if a majority of unrelated creditors (who actually vote) vote FOR it.
6. If the proposal is accepted:
   • The company is released from external administration.
   • The proposal is binding on all unsecured creditors, even those who did not vote or who voted against it.
   • You must pay any required amounts under the proposal.
   • The company is released from liabilities to its unsecured creditors upon finalisation of the plan.
   • Your company will avoid liquidation or other external administration.
7. If the proposal not accepted then your options are liquidation, voluntary administration or continue trading and pay debts in full.

What Proposal can be put to Creditors to Settle their Debts?

The directors can put a proposal to creditors to settle their debts for a percentage return on the debts, for example creditors will receive 30 cents in the dollar. The funds available for this proposal can come from a contribution from various sources such as:

• A third party (e.g. the directors);
• The sale of a company’s assets;
• Future trading profits or other means.

Payments made under a proposal for a restructuring plan can be made quickly (e.g. up front from third party funds) or over time (either from future trading profits or funds which become available).

The ATO and Small Business Restructuring

In a large number of Small Business Restructurings the ATO is the company’s major creditor and therefore a proposal will not be accepted unless the ATO votes for it. The ATO requires various information regarding a business in Small Business Restructuring to consider any proposal including:

• Up to date financial statements and four years’ of historical financial statements.
• Depending on a company’s circumstances certain other financial records.
• A future cash flow forecast and budget.
• A valuation from a registered valuer of any assets a company owns which have a material value.
• A statement from the directors as to why the company has encountered financial difficulties and what steps have been taken to overcome this.

The ATO will consider all types of proposals, however, their preference is that payments are made quickly and where possible sourced from third party funds. This is because the ATO can be skeptical that a company which has failed to pay historical tax debts will be able to trade profitably in the future and contribute funds from future trading profits. The ATO are unlikely to vote in favour of a proposal put forward by a company if they don’t believe its business is financially viable.

There is an option to put a draft proposal to the ATO for their consideration and comment within approximately 10 business days of the start of the process. If this is done the ATO will want most of the above information within that period so that it can consider any draft proposal. The ATO will provide feedback on any draft proposal put to it which may include whether or not they will vote for the proposal or any suggested amendments.

Frequently Asked Questions (FAQs)

What is the cost of SBR?

SBR is carried out for an initial fixed cost which is generally between $10,000 and $15,000 plus GST (although costs may be higher for complicated matters).

How much will SBR reduce my company’s debts by?

SBR can generally result in a reduction of a company’s debts of between 50% and 70%. In the past the ATO has agreed to proposals which reduced their debt by up to 80%, however, in most cases now days the ATO is seeking a payment of between 30 and 50 cents in the dollar depending on a company’s circumstances.

What happens to my personal guarantees during SBR?

SBR does not release you from your personal guarantees and you will have to pay any shortfall amounts on guarantees entered into. For example, if you owe a guarantee creditor $100,000 and that creditor receives a dividend of $30,000 in SBR then you are still liable to pay them the balance of $70,000.

Can I keep trading during the restructure?

Yes you can keep trading your business during Small Business Restructuring.

How does SBR impact Director Penalty Notices

Entering into SBR will not avoid liability for Lockdown Director Penalty Notice claims. However, if an SBR is entered into within 21 days from the date of a 21 Day Director Penalty Notice liability under that notice will be avoided.

What if the creditors reject the plan?

If creditors reject an SBR proposal then another proposal cannot be put to creditors. The only options for a company in those circumstances are to pay debts owed in full, enter into voluntary administration or go into liquidation

How does SBR affect a company’s credit rating?

SBR will have an impact on a company’s credit rating. SBR will appear as an external administration on ASIC’s records during the period of the initial appointment, however, the company will be removed from external administration once a plan is accepted (or rejected).

What happens to related party debts in SBR?

Related party creditors cannot vote on any SBR plan proposal. However, the proposal is binding on them if accepted and their debts are released upon the plan being finalised.

Advice and Assistance

If you are seeking advice or assistance regarding the options available to your company including Small Business Restructuring please contact our Brisbane or Gold Coast office for an initial obligation free consultation.