05 Feb Debt Relief for Small Businesses – Options Available
When small business owners find themselves in a situation where debt appears insurmountable, they may consider ending their business. Whilst in some circumstances, a business may not be viable in the future, in other cases, a small business may be able to take advantage of opportunities to relieve debt, and continue to operate.
In this article we’ll look at the debt relief options available to small businesses, and how Business Rescue Solutions can help match a small business with the right solution.
Small businesses with less than $1 million in debt: The Small Business Restructuring Option
If a small business has liabilities amounting to less than $1 million, then a Small Business Restructure (SBR) may be an optional avenue for relieving debt. An SBR allows small businesses in financial difficulty to work with a Small Business Restructuring Practitioner (SBRP) to negotiate payments of historical debts with their creditors. The SBRP assists the business to develop a debt restructuring plan that identifies a way the company can pay creditors, without needing to fold. The plan outlines how creditors would be paid if the proposed plan is accepted, for example, it may propose creditors be repaid as a proportion of the debt they’re owed. If both the business and the creditors agree to the proposed plan, the business may be required to pay only a reduced amount of debt, and the remaining debt may be written off.
During the SBR period, a moratorium is applied on unsecured creditor claims and some secured creditor claims. This relieves businesses from dealing with enforcement proceedings initiated by unsecured creditors. In addition, owners of property used by the company or occupied by the company, or people who lease such property to the company, cannot recover their property (this excludes perishable property).
Overall, the benefits of the SBR are that:
- A business receives a frank assessment of whether or not their business is viable and can be saved.
- The SBR can result in a compromise of creditors claims, often up to 80% is written off subject to the particular circumstances.
- Businesses have an opportunity to focus on their future success, rather than on the past.
- The SBR offers a swift resolution turnaround, with a resolution being confirmed within 36 business days (the timeframe for paying off the compromised debts can be immediate or over a longer period based on the proposal from the business)
- A Restructuring Practitioner works for a fixed fee, which must be agreed upon before the SBR commences. This means businesses who are already struggling know exactly what they will pay, rather than dealing with costs that may mount over time and become unmanageable.
- During the SBR, business owners and directors are able to retain control of daily operations, rather than handing control over to an external administrator.
Eligibility:
To be eligible for a Small Business Restructure, a company must:
- have total liabilities which do not exceed $1 million on the day the company enters the process (excluding employee entitlements);
- be incorporated under the Corporations Act;
- resolve that the business is insolvent or likely to become insolvent at some future time and that a small business restructuring practitioner should be appointed; and
- appoint a Small Business Restructuring Practitioner to oversee the restructuring process, including working with the business to develop a debt restructuring plan and restructuring proposal statement.
To find out more about Small Business Restructuring, see our SBR page here.
Small businesses with debt exceeding $1 million: The Voluntary Administration Option
Voluntary administration involves a company that is already insolvent (they can’t meet financial obligations) appointing an external Voluntary Administrator (VA) to assess their business and financial affairs. The VA will work to understand how the business came to be insolvent, decide whether or not it is possible for it to continue trading, and report to creditors on what options are available to resolve the problems. The voluntary administrator may recommend one of the following options for the company.
That they:
- Be returned to the control of the company directors (the voluntary administration ends).
- They enter into a Deed Of Company Arrangement (DOCA) if one has been proposed, whereby the company makes a contribution to a fund to settle its debts, and is then considered free of those debts.
- They enter into liquidation (a liquidator is appointed and the company is wound up).
The directors of an insolvent company must appoint an external Voluntary Administrator to assist the business through the voluntary administration process. (A VA may also be appointed by a liquidator, provisional liquidator, or secured creditor with a charge over most of the company’s assets.)
For more information on Voluntary Administration, see our VA page here.
Alternatives to voluntary administration
It’s possible that a business may be able to explore avenues other than voluntary administration. These include:
- Informal Restructuring. This is where a business negotiates directly with creditors to reach an agreement outside of formal insolvency processes.
- Safe Harbour Provisions. This involves a company’s directors seeking protection from insolvent trading liability for the time during which they work on a turnaround plan for the company.
- Liquidation. If, after an assessment of your business, it’s discovered that liquidation is the only realistic path forward, then a registered liquidator will guide your business through the liquidation journey. Liquidation must be processed in accordance with the Corporations Act 2001 and other relevant laws, which means expert assistance is usually required.
To read more about the debt relief options available to your business, click here.
Debt relief options for your business
Business Rescue Solutions can assist you to understand which debt relief solution can help your business. We can talk with you to understand your business situation, and then recommend an appropriate plan of action for your business. We have registered Liquidators on our team who also operate as Small Business Restructuring Practitioners.
Take our 30 second test to find out what solution your business may be eligible for. Or contact us.