Small Business Restructuring now a key tool in business turnaround
New Small Business Restructuring (SBR) laws came into play earlier this year, enabling eligible small businesses to enter into a formal restructuring process rather than following a path that leads to insolvency.
New Small Business Restructuring (SBR) laws came into play earlier this year, enabling eligible small businesses to enter into a formal restructuring process rather than following a path that leads to insolvency. There are certain criteria that need to be met first, and the process must be undertaken by a registered small business restructuring practitioner.
Who does it apply to?
In order to be eligible, the following prerequisites must be met:
- Have total liabilities which do not exceed $1 million on the day the company enters the process. This excludes employee entitlements;
- Employee entitlements which are due and payable have been paid*,
- Tax lodgements are up to date meaning all relevant tax returns and activity statements are lodged with the ATO*, and
- No previous restructuring or insolvency in the previous 7 years.
* Note the above requirements must be complied with before a restructuring plan is issued to creditors.
The Restructuring process has two phases:
- The Restructuring phase; and
- The Restructuring Plan phase.
The restructuring phase begins when a small business restructuring practitioner is appointed by the company (the RP). The RP will advertise their appointment and notify creditors. The company will then have to disclose that they have entered into a SBR.
The RP will assist the company to:
- Prepare its restructuring plan and restructuring proposal statement; and
- Circulate the restructuring plan and restructuring proposal statement to creditors.
Creditors, except for Related Party creditors who are excluded from voting, have 15 business days to consider the restructuring plan and proposal and vote on whether they accept it or not.
Should creditors accept the restructuring plan, the RP manages the requirements set out in the plan, including realising any recoveries as set out in the plan and paying distributions to creditors in accordance with the plan.
A moratorium begins when the company enters the restructuring phase. This means that unsecured creditors and some secured creditors are prohibited from taking action against the company, personal guarantees cannot be enforced and there is a restriction on the operation of ipso facto clauses similar to that applying in a voluntary administration.
In essence, this provides the company with some ‘breathing space’ to develop a plan that will provide for the continuation of the business and the best return for creditors given its financial circumstances.
The importance of the role of the company’s directors and the RP
While the RP oversees the debt restructuring, it is important to note that the company’s directors remain in control of the business.
However, the consent of the RP is required before the directors can allow the Company to enter into any transaction that is not in the Company’s ordinary course of business.
If the company continues to trade during the Restructuring phase or the Restructuring Plan the company will be liable for any debts incurred during this period (not the RP).
Before joining Rodgers Reidy, Chris spent 5 years in the insolvency and restructuring division of a Big 4 professional services firm. Since joining Rodgers Reidy 2012, he has gained extensive expertise in formal insolvency appointments, restructuring and advisory appointments across a wide range of industries.