Small Business Restructuring
Small Business Restructuring allows an eligible company with a viable underlying business to remain in control while it proposes a formal compromise of its debts to creditors.
I am a Small Business Restructuring Practitioner, registered liquidator and Principal at Worrells with more than 27 years’ experience in insolvency and restructuring. I assist directors and professional advisers to assess eligibility, viability, plan funding and the practical requirements of the restructuring process.
What is Small Business Restructuring?
Small Business Restructuring, commonly called SBR, is a formal insolvency process available to eligible companies experiencing financial difficulty where the underlying business may still be viable.
The company remains in control of its business while it develops a restructuring plan with the assistance of a registered liquidator acting as restructuring practitioner. Creditors then decide whether to accept the proposed compromise.
SBR is not an informal payment arrangement or simply a mechanism for writing off tax debt. It is a formal process with eligibility requirements, statutory timeframes, creditor rights and director obligations.
When Small Business Restructuring may need to be considered
SBR is generally best suited to an eligible company where the underlying business is viable, but historical debt is preventing the company from moving forward.
- The company has historical ATO or trade debt but current operations are viable or have a credible path to profitability.
- Total liabilities are within the $1 million eligibility threshold.
- The company has not used Small Business Restructuring or simplified liquidation in the previous seven years. Restrictions can also apply where a current director, or a person who was a director during the previous 12 months, was involved with another company that used either process.
- Required tax lodgements can be brought substantially up to date.
- Employee entitlements that are due and payable can be paid before the plan is proposed.
- The company has sufficient working capital to continue paying wages, rent, suppliers and ongoing tax obligations.
- There is a realistic and identifiable source of funding for a restructuring plan.
- Creditors have a commercial reason to accept the proposed compromise rather than the likely alternative.
- A Director Penalty Notice has been received, or unpaid PAYG withholding, GST or superannuation is creating potential personal exposure for the directors.
The Small Business Restructuring process
Assess eligibility and viability
The company’s liabilities, prior restructuring history, tax lodgements, employee entitlements, books and records, trading performance and proposed plan funding are reviewed.
Appoint the practitioner
The directors resolve that the company is insolvent or likely to become insolvent and appoint a consenting registered liquidator as restructuring practitioner. The directors remain in control of the company.
Prepare the restructuring plan
The company enters a proposal period that generally lasts 20 business days. The plan and proposal statement are prepared with supporting financial information and a realistic source of funding.
Creditors decide
The practitioner sends creditors the prescribed documents, including the restructuring plan, proposal statement, practitioner’s declaration and voting information. Creditors generally have 15 business days to accept or reject the proposal. The plan is accepted if a majority in value of the unrelated creditors entitled to vote and who actually vote support it.
What does Small Business Restructuring mean in practice?
The practical outcome depends on eligibility, the company’s ongoing viability, creditor claims and the funding available for the plan. My detailed guide explains the major issues that commonly arise, including:
- the $1 million liability threshold and other eligibility requirements;
- tax lodgements and due employee entitlements;
- the directors remaining in control and restrictions on dealings with company property;
- the 20-business-day restructuring proposal period;
- what can be included in a restructuring plan and the three-year maximum term;
- how a plan may be funded and why ongoing cash flow matters;
- creditor voting and the exclusion of related creditors from voting;
- the ATO’s position where it holds most of the unrelated voting debt;
- temporary protection from certain creditor and enforcement action;
- personal guarantees and Director Penalty Notices;
- what happens if creditors accept or reject the plan; and
- the company’s release from admissible debts once an accepted plan is fully performed.
Business Financial Health Check
The Business Financial Health Check asks 12 Yes or No questions across five areas and provides an indicative summary of potential warning signs. It takes about three minutes and does not determine whether the company is insolvent or eligible for Small Business Restructuring.
Other options that may be available
Small Business Restructuring is not the appropriate process for every company experiencing financial difficulty.
Voluntary Administration and DOCAs
Where the company is larger or more complex, control needs to pass to an independent administrator, a business sale is being pursued or a more flexible deed of company arrangement is required.
Voluntary Administration and DOCAs →Creditors’ Voluntary Liquidation
Where the company is insolvent and there is no realistic or properly funded restructuring outcome available.
Creditors’ Voluntary Liquidation →Refinancing, recapitalisation, a business sale or a properly structured informal arrangement may also be relevant depending on the company’s circumstances.
Small Business Restructuring FAQs
Who can use Small Business Restructuring?
SBR is available to eligible companies, including companies that operate as trustee of a trading trust. It is not available to sole traders or partnerships.
Core eligibility requirements include total liabilities not exceeding $1 million, restrictions relating to previous use of SBR or simplified liquidation, tax lodgements being substantially up to date and employee entitlements that are due and payable being paid before the plan is proposed.
Do the directors remain in control of the company?
Yes. SBR is a debtor-in-possession process and the directors continue to control the company during the restructuring.
That control is not unrestricted. Transactions affecting company property generally need to be in the ordinary course of business, approved by the restructuring practitioner or authorised by the Court.
What has to be done before a restructuring plan can be proposed?
The company’s required tax lodgements must be substantially up to date, although the tax debt itself does not need to be paid in full. Employee entitlements that are due and payable, including wages and superannuation, must also be paid before the plan is proposed, subject to the specific rules applying to related parties.
The proposal also needs reliable financial information, a realistic source of plan funding and evidence that the business can meet its ongoing obligations.
How do creditors vote, and what if the ATO is the main creditor?
Creditors generally have 15 business days to accept or reject the proposal. The plan is accepted if a majority in value of the unrelated creditors entitled to vote and who actually vote support it. Related creditors are excluded from voting.
Where the ATO holds most of the unrelated voting debt, its vote may determine the outcome. The company’s compliance history, records, employee entitlements, viability, loan accounts and the credibility of the proposed funding are then particularly important.
What happens to personal guarantees and Director Penalty Notices?
An accepted restructuring plan releases the company from the admissible debts covered by the plan once it has been fully performed. That release applies to the company.
It does not automatically release directors or other guarantors from personal guarantees, and it does not release a director from a separate Director Penalty Notice liability. DPNs need to be reviewed separately and promptly.
What happens if creditors reject the plan or the plan later fails?
If creditors reject the proposal, the restructuring ends. The company does not automatically enter liquidation, but its position and the directors’ duties should be reviewed immediately.
If an accepted plan later terminates before completion, the company does not obtain the completion release from the admissible debts covered by the plan. Voluntary administration, liquidation or another properly advised course may then need to be considered.
Need to discuss a matter with me?
If you would like to discuss Small Business Restructuring, eligibility or a proposed restructuring plan, use the Contact page to provide a short summary.
If there is an urgent deadline, winding-up application, creditor enforcement or Director Penalty Notice, include that information when you contact me.