What is Small Business Restructuring
Small Business Restructuring (SBR) was introduced in 2021 to assist small business in financial difficulty settle debts which they owe. SBR allows a small business to propose a Plan to creditors to restructure its debts while the directors remain in control of the business.
SBR eliminates the cost to an external administrator of taking possession of the debtor’s assets and trading its business, which is a major impediment to a voluntary administration.
What is a Related Creditor
In the context of SBR a related creditor is defined as an entity that has a specified relationship with the company entering into the SBR. A related creditor can include individuals, companies and trusts and includes parties such as directors, their close family and companies which have common directors to the entity entering into the SBR.
This definition is crucial as it effects voting rights in an SBR and what insolvency appointments can be entered into.
How are Related Creditors Dealt with in a Small Business Restructuring
In an SBR a related creditor is classified as an excluded creditor.
An “excluded creditor” in relation to a company under restructuring, means a creditor of the company who:
- is the restructuring practitioner for the company; or
- was, at the time the restructuring began, a related creditor of the company; or
- was, on becoming an affected creditor, a related creditor of the restructuring practitioner.
The directors of a company entering SBR must fully disclose the company’s debts including related creditor debts. Related creditors must participate in an SBR arrangement but cannot vote For or Against any SBR proposal and cannot receive preferential treatment.
Whilst related party creditors cannot vote on an SBR proposal if a proposal is accepted it is binding on them.
Related creditors are also required to be paid in the same manner as other creditors so for example a related creditor cannot agree not to claim as a creditor so as to improve the return for other creditors.
In an SBR the Restructuring Practitioner will likely heavily scrutinise attempts to unfairly prioritise or manipulate related creditor structures so as to alter any outcomes or returns for creditors.
What Can be Done if Related Entities are Not to Receive a Dividend
If a related creditor does not want to claim a dividend from an SBR pool alongside other creditors, they typically must completely forgive or write-off debt if an SBR proposal is accepted. This does happen in some circumstances where a director or another close party is owed a debt but is prepared to write off that debt so as to improve the return to other creditors.
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Practical Examples
For example, the structure and shareholding of the group was as follows:
- Company A was considering an SBR with its creditors;
- Company C and Company D are creditors of Company A;
- The director of Company A relied on the claim of Company D (material to affect the outcome of the Restructuring Plan by voting in favour thinking that it was not a related creditor of Company A.
- Company B is related to Company A by virtue of its shareholding in Company A.
- The director of company D is the son of the director of Company B and meets the Section 9 definition above therefore those entities are considered related.
- As a result, Company B & D’s relationship, Company D may also be deemed related to Company A.
- Company C would also be a related creditor by virtue of its shareholding in Company A.
We have also undertaken a SBR where one of the creditors of the company was the mother and father of the director and in another SBR one of the creditors of the company was a related company which held common directors.
In both SBR’s, the related party’s debts were included as part of the threshold of under 1 million dollars to be able to proceed with a SBR, however both parties were excluded from voting for the Plan, in their respective administrations.
