Small Business Debt Restructuring – The Solution You Need to Know About

Small businesses will inevitably face tough patches, but for businesses in genuine financial distress, their ongoing viability may come into question. Can they continue to operate, or will monetary pressures lead them to fold?

If your business is facing financial circumstances so challenging, you don’t know how to move forward, then small business debt restructuring may help. In this article, we’ll look at Small Business Restructuring, understand what it is, which businesses are eligible to take advantage of it, and how the process works.

Small Business Debt Restructuring

Small Business Restructuring (SBR) is a simplified debt restructuring scheme that was introduced by the Australian government in January, 2021. The scheme involves small businesses in financial strife accessing a streamlined process to restructure debts, allowing them to remain in control of their business. It is an alternative to Voluntary Administration and Liquidation, and usually has more favourable outcomes for the small businesses involved.

How does the Small Business Restructure (SBR) work?

An SBR involves business owners appointing a Small Business Restructuring Practitioner (SBRP), who helps them to develop a plan to repay their creditors, and ensures that the business carries through with the plan. The SBRP must be a Registered Liquidator.

During the SBR process, the company’s directors remain in control of the business and the business can continue to operate. This allows business owners some breathing space from pressure from creditors, and gives clarity on their survival.

Summary of the SBR process:

• A small business identifies that it faces insolvency.
• The business checks that it meets the eligibility requirements for Small Business Restructuring. To be eligible, a company must:
  • Be incorporated under the Corporations Act;
  • Have total liabilities that do not exceed $1 million when the company enters the process (excluding employee entitlements and the value of secured assets);
  • Have its tax lodgements up to date or be substantially complying; resolve that it is insolvent or likely to become insolvent at some future time and that a small business restructuring practitioner should be appointed.
  • Appoint a small business restructuring practitioner to oversee the restructuring process, including working with you to develop your debt restructuring plan and restructuring proposal statement.

• The business approaches a Small Business Restructure Practitioner (SBRP), who will confirm the business’s eligibility for the scheme and consider the future viability of the business with the director.
• The business formally appoints the SBRP, and the fee for the small business debt recovery is confirmed (this fee is fixed).
• During the SBR, the company stays in control of the process and may undertake transactions that are in the ordinary course of business.
• Once appointed, the SBRP will help the company to:
  • Create the restructuring plan and proposal statement (see next section for more details)
  • Circulate the plan and proposal statement with the company’s creditors.
  • Certify to creditors that the company is likely able to meet its obligations under the plan and verify this claim.
• Creditors assess the proposal statement and restructuring plan, and decide whether to accept the plan. (The plan must be supported by more than 50% of the creditors by value who vote, or it will not proceed.)
• Once the small business debt restructuring plan is accepted, the SBRP manages the disbursement of payments to the company’s creditors according to the terms of the plan.The maximum payment term for Small Business Restructuring is 3 years; however, the term may be shorter and must be clearly stated in the Restructuring Plan submitted to creditors.

The Proposal Statement and Restructuring Plan

The Restructuring Plan and Proposal Statement are key documents that help creditors to:

• Understand how much they’re likely to be paid
• Assess the risk and likelihood of business success
• Compare the plan to what they might receive under a liquidation scenario
• Vote on whether or not to approve the plan.

The Restructuring Plan is the formal document that outlines how your business intends to repay its debts. It includes the:

• Amount you propose to pay creditors (is usually significantly less than the total owed)
• Payment schedule (e.g., lump sum or instalments over a period—maximum of 3 years)
• Sources of repayment funds (e.g., asset sales, business income, third-party contributions)
• All unsecured creditors are treated equally (and an explanation of why)
• Method by which employee entitlements will be paid (these must be paid and up to date before the plan is proposed)
• Company’s current trading structure and operations (to show ongoing viability).

The Restructuring Proposal Statement is a supplementary document giving creditors important background information on the company to help them make an informed decision. It must be signed by both the company director(s) and the SBRP. It must include a:

• Declaration of company eligibility for SBR
• Summary of the company’s financial position, including:
  • Total assets and liabilities
  • Estimated return to creditors under the plan
  • Comparison with likely returns under liquidation
• List of creditors and amounts owed (excluding employees)
• Statement from the SBRP that:
  • They believe the company is likely to meet the obligations under the plan
  • They’ve taken reasonable steps to verify the information provided
• Details of any third-party contributors to the plan
• Any relevant legal proceedings or contingent liabilities
• Confirmation that employee entitlements and tax lodgements are up to date.

What does it mean if the restructuring plan is not accepted by creditors?

If the plan is rejected by more than 50 percent of the creditors by value that vote, then business owners retain control of the company; however:

• The company could be trading whilst insolvent if it continues to trade, and
• Creditors are also no longer prevented from enforcing their rights.

In these circumstances, some companies commence Voluntary Liquidation or liquidation.

What are the benefits of Small Business Restructuring for a business?

If your small business is facing insolvency, a Small Business Restructure may benefit you in the following ways:

• You receive an honest assessment
  An SBRP will consider your business and your current situation. This may assist your assessment as to whether the business is viable, and whether or not it is worth rescuing.
• You have a strategy for the future
  The SBR can help to identify areas for future success, rather than focusing on past errors.
• You may reduce debt
  As part of an SBR, business debt may be reduced through negotiated compromises with creditors including tax relief.
• The process is cost-effective
  An SBR has a fixed price, which means costs aren’t liable to grow, as they might with voluntary administration or liquidation. The fee for working with an SBRP must be agreed upon as part of their appointment, and it cannot change, meaning you know what cost your business needs to manage up front.
• You’re protected from creditor action
  During the small business restructure, creditors are prevented from taking fresh legal action against your company.
• It’s a court-free process
  The SBR is an entirely administrative process, meaning there’s no court involvement. This reduces costs and stress, and helps to protect business reputation.
• Improves stakeholder confidence
  Going through a small business restructure shows that your company is taking proactive steps to recover your business.
• Better outcomes than liquidation
  Offers a higher chance of survival, better creditor returns, and a fresh start for the business.
• Quick turnaround
  The SBR plan should be confirmed within 36 business days, quickly giving you clarity on your situation and a better understanding of how to save your business and how to progress with paying off creditors.
• Expert-led process
  The SBRP must be an ASIC-registered liquidator. This means they will have specialist knowledge in business turnaround strategies, and can assist with alternatives if the SBR is not suitable.
• Business continuity
  Businesses going through the SBR are able to continue to operate during the restructure. This means there’s minimal disruption or need to close the business, and jobs are preserved.
• Director retains control
  Under the guidance of the SBRP, business directors are able to remain in control of day-to-day operations.

Small Business Restructuring

If you need to consider a small business restructure to deal with business debt, then small business debt recovery via the SBR will likely be the best option. To find out if your business is eligible, Business Rescue Solutions has created a 30 second test that will help to assess your unique situation. Our ASIC-registered liquidators can act as Small Business Restructuring Practitioners in this situation.