Small Business Restructuring: Key Points
Overview: Restructuring can help small businesses overcome financial distress, adapt to market changes, or prepare for future growth. It requires strategic planning and careful execution to ensure renewed growth, efficiency, and competitiveness.
What is Small Business Restructuring? A formal debt restructuring process for eligible small companies, enabling a faster, simpler way to manage existing debt and improve survival chances.
Role of the Directors: Directors remain in control and manage the business throughout the restructuring process.
Who is the Small Business Restructuring Practitioner (SBRP)? Only registered liquidators can act as SBRPs. An SBRP cannot be connected to the company without court approval.
Features of Small Business Restructuring: Transactions made in good faith during restructuring are legally valid and cannot be voided later.
Commencing the Process: Directors can appoint a Restructuring Practitioner by resolving that the company is insolvent or likely to become so and setting the SBRP’s remuneration.
SBRP Responsibilities:
- Investigate the company’s affairs.
- Prepare a restructuring plan.
- Resolve disputes over creditors’ claims.
- Administer the plan, including managing and distributing funds.
Public Notice: All public documents must state “Restructuring Practitioner Appointed.”
Revocation or Replacement of SBRP: The appointment cannot be revoked but can be replaced if the SBRP resigns, is prohibited, or passes away.
Before Presenting a Plan to Creditors:
- Pay due employee entitlements (wages, superannuation, taken leave).
- Ensure tax lodgements are up to date (returns must be filed, not necessarily paid).
The Plan Phase: The restructuring plan can last up to 3 years, with the company continuing to trade under directors’ control. Funds can come from various sources, including directors, related parties, future profits, or refinancing.
Creditor Payments: Creditors are not usually paid in full but receive more than they would in liquidation. Pre-restructuring debts are included in the plan, while post-restructuring debts must be paid in full.
Plan Rejection: If over 50% of voting creditors (by value) reject the plan, the process ends, and creditors can enforce their rights. Directors may then consider liquidation or voluntary administration.
Creditor Voting: Creditors have 15 business days to vote on the plan, with a majority (by value) needed for acceptance. Related party creditors cannot vote.
What sort of debt reduction is achievable under a Small Business Restructuring?
| Type of company | Total Company Debts | Creditors agreed to reduce debts to | Cents in the dollar for creditors | Debt forgiven (haircut) |
| Developer | $700,000 | $600,000 | 9 cents | $640,000 |
| Gym | $205,000 | $45,000 | 23 cents | $155,000 |
| Café | $190,000 | $31,000 | 16 cents | $159,000 |
What Happens Once a Plan is Accepted?
Once a plan is approved, payments are deposited into an account managed by the Restructuring Practitioner (RP). The RP then collects creditor claim details and, once verified, distributes payments according to the plan’s terms. All creditors receive the same “cents in the dollar” payment simultaneously. Once the company fulfills its obligations under the plan, it is released from all included claims.
Is Small Business Restructuring (SBR) a Good Solution for Large ATO Debt?
Yes, it is. Unlike negotiating directly with the ATO, which typically results in a payment arrangement requiring full repayment with interest within two years, an SBR plan can extend up to three years and often involves a one-off payment at a reduced debt level.
Why is SBR better than a Payment Arrangement with the ATO?
| Likely negotiated Outcome | Common SBR Outcomes | |
| Payment Terms | An ATO Payment Arrangement will require payment in full, plus interest, within 2 years | Payment terms can be up to 3 years, but are often much shorter due to the reduced debt amount – a one-off payment is common |
| Debt reduction (write-off / haircut) | The ATO will rarely agree to a negotiated debt reduction | The ATO has approved SBRs with between 65% and 90% debt reduction |
What is the ATO’s Position on Director Penalty Notices?
A Director Penalty Notice (DPN) from the ATO can hold a director personally liable for certain company tax debts, including unpaid PAYG, Superannuation, and GST. Directors usually have 21 days to act to avoid personal liability, with one option being to commence a Small Business Restructuring within this period.
Does the ATO Actively Participate in the Small Business Restructuring Process?
Yes, the ATO has dedicated staff for reviewing Small Business Restructuring (SBR) plans. They actively review plans, request specific information, and provide feedback to Restructuring Practitioners.
Effect on Ordinary Creditors:
During the SBR process, legal actions against the company are paused unless the restructuring practitioner or the Court consents.
Effect on Winding Up:
The Court typically pauses winding-up applications if it deems it beneficial for the company to continue under the SBR process.
Effect on Secured Creditors:
Secured creditors cannot exercise their rights, such as selling company property, without the Restructuring Practitioner’s written consent or Court approval.
Considerations for Creditors in Accepting a Restructuring Plan:
Creditors review several documents provided by the Restructuring Practitioner, including:
- The company’s restructuring plan
- Standard terms of the plan
- The company’s restructuring proposal statement
- A declaration from the Restructuring Practitioner on eligibility and the company’s ability to meet obligations
- A statement on the completeness of the information in the restructuring plan
Effect on Personal Guarantees:
During the restructuring process, personal guarantees signed by directors or others cannot be enforced.
What are the advantages & disadvantages of an SBR compared to Voluntary Administration?
| Small Business Restructuring | Voluntary Administration | |
| Fixed Cost? | ✓ | ✗ |
| Directors retain control? | ✓ | ✗ |
| Designed for small businesses? | ✓ | ✗ |
| Company returned to directors if deal fails? | ✓ | ✗ |
| Rough cost before Plan contribution | $15 – 35,000 | $60 – 150,000 |
| Duration? | 35 business days | 35 business days |
| Level of investigation and reporting? | Low | High |
When does the Small Business Restructuring Process End?
When the Plan is completed, the company becomes free from all its debts and it can carry on with its business.
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