13 Mar Key Steps in the Small Business Restructuring Process
Australia’s Small Business Restructuring (SBR) scheme aims to assist small businesses that are struggling financially, and enable them to continue to operate. The SBR gives businesses breathing space while a Small Business Restructure Practitioner renegotiates historical debts with the business’ creditors, when those debts are limiting their ability to trade effectively. The SBR allows business owners to remain in control of their company and continue trading whilst the restructure is underway.
From start to finish, the formal restructuring process itself is completed within a 35-45 business-day timeframe. Once the plan is approved by creditors, businesses then follow the repayment terms, which may extend up to three years.
Small Business Restructuring follows a structured approach, so that businesses always have a clear path to recovery. Let’s run through the key steps in the Small Business Restructuring process.
Stage 1 – The Pre-Appointment Phase
Confirming eligibility:
Small business restructuring begins with identifying whether your business is or isn’t eligible for the scheme. You can start by completing an online eligibility assessment.
A company must fit the following SBR eligibility criteria on the day a restructuring practitioner is appointed:
- be insolvent or likely to become insolvent
- total liabilities of the company must not exceed $1 million
- no person who is a director of the company, or who has been a director of the company within the 12 months before the appointment of the restructuring practitioner, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years, unless they are exempt under the regulations
- the company must not have undergone restructuring or been the subject of a simplified liquidation process within the preceding seven years.
At the time the restructuring plan is proposed to creditors, your company must have substantially complied with requirements relating to employee entitlement and tax filing obligations. A restructuring plan can’t be proposed until your small business has:
- paid the entitlements of employees that are due and payable (with the exclusion of employee entitlements not currently due to be paid)
- lodged returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act 1997). [Tax debts do not need to be paid – only the required returns lodged.]
Initiating the Appointment of a Restructuring Practitioner
When a company is confirmed as eligible for small business debt restructure, its directors must formally agree to enter into small business restructuring, and appoint a Small Business Restructuring Practitioner (RP). The RP must be ASIC-registered.
An RP will work alongside business owners or directors to create a proposal to compromise historical debts with creditors. This proposal must be presented to creditors within 20 business days of the SBR commencing.
The SBRP acts as the company’s agent, negotiating a plan with creditors to settle historical debts. Note that during the Small Business Restructure, the RP does not involve themselves in ordinary business operations, and company directors retain control.
Stage 2 – The Restructuring Phase
The restructuring phase officially begins when the RP is appointed. This first phase includes plan preparation, creditor notification, and creditor voting.
The Restructuring Practitioner is Appointed
- The business chooses and appoints the RP
- The fixed fee to be paid to the RP is agreed upon
- The RP publicly announces their appointment and notifies creditors
- During the small business restructuring period, the company must include “Restructuring Practitioner Appointed” on all public documents.
The Restructuring Plan is Prepared
In collaboration with the business owners, the RP develops a restructuring plan, and a restructuring proposal to present to creditors. The proposal will state:
- The company’s current financial position
- The proposed plan to compromise the debts, including the proposed settlement terms and the period of time in which your business will contribute to the settlement of the debts
- How much creditors will receive as part of the plan, specifically outlining the amount of debt owed to each creditor and the percentage of that debt the creditor would receive as part of the plan.
The Restructuring Plan and Proposal Statement is Shared with Creditors
Once the proposal is disseminated to creditors, they have 15 business days to review the plan and to vote on whether or not they agree to the terms.
(Related party creditors are excluded from voting, to prevent conflicts of interest and ensure fairness.)
The Plan is Approved Or Declined
A restructuring plan is approved if creditors holding more than 50% of the total debt by value approve the plan. (See ‘The Small Business Restructuring Plan is Implemented’ for next steps for an approved restructuring plan.
If a plan is declined:
Creditors may decline a small business restructuring proposal plan if, amongst others:
- There was insufficient supporting documentation to show that the business would remain feasible after the proposed plan was enacted, and/or
- They deem that the proposed plan would not provide them with a better return than they would receive under a liquidation scenario.
In this situation, creditors are able to once again enforce their rights, and the business is no longer protected from liability or insolvent trading. The next step in this situation would likely be Creditors’ Voluntary Liquidation.
The Small Business Restructuring Plan is Implemented
After creditor approval, the restructuring plan is implemented. The length of the implementation phase will vary, depending on the terms outlined in the agreed proposal term, however there is a maximum allowable term of three years for implementation.
Execution of the Small Business Restructuring Plan
Once creditors approve the plan, the Small Business Restructuring Practitioner (SBRP) will manage the plan’s execution. They will:
- Ensure that the distribution of payments to creditors occurs, according to the terms agreed upon in the proposal
- Ensure that the business is complying with the terms of the plan
- Generate funds to repay debts via asset recoveries.
During the execution phase, the business directors continue to manage daily operations of the business.
Temporary Debt Relief Via Moratorium
As part of an SBR, a moratorium is placed that ensures:
- Unsecured creditors are prohibited from taking legal action to recover debts from the business
- Personal guarantees provided by directors cannot be enforced
- Some secured creditors are restricted from enforcing their rights
- Ipso facto clauses (which allow contracts to be terminated due to insolvency) are restricted.
This moratorium means that businesses are able to focus on their recovery, without the pressure of legal action.
The Restructuring Plan Ends
A restructuring plan terminates on the day the company’s obligations under the plan, as well as obligations of any other party to the plan, have been satisfied, and all claims or admissible debts have been dealt with in accordance with the plan.
Other circumstances that signal the termination of the plan include:
- The court terminates the plan. (This will be on the day the court determines and specifies the order.)
- A contravention of the plan by a person bound by the plan has occurred, and it has not been rectified within 30 business days of that contravention occurring – (the plan is terminated on the next business after the end of that 30-day period)
- The plan is expressed to be subject to the occurrence of a specified event within a specified period (the specified period cannot be longer than 10 business days after the day on which the plan is accepted) and that event does not occur – (the plan is terminated on the next business day after the end of that specified period)
- The day a voluntary administrator, liquidator or provisional liquidator is appointed.
In Summary…
The structured approach of Small Business Restructuring process gives struggling businesses the opportunity to continue to operate whilst their debts are reorganised. By following the pre-appointment, restructuring, and plan implementation phases, businesses can work toward financial stability while ensuring creditors receive fair compensation. With the guidance of an experienced Small Business Restructuring Practitioner, and the protection of a moratorium, small businesses have a clear pathway to recovery and long-term success.
Save My Business! SBR Support with Business Rescue Solutions
Business Rescue Solutions are here to support small businesses in financial distress to turnaround and restructure their business through small business debt restructuring. Our ASIC-registered Restructuring Practitioners will examine your business to determine eligibility, and then take you through the small business debt restructuring process, answering any questions you have along the way.
Our aim is to make the process as smooth and stress-free as possible, so that you can focus on operating your business and ensuring its viability in the future.
Take our 30 second test to identify the most likely path forward for your struggling business. Or call us to discuss your unique situation.
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