What is Small Business Restructuring?

Written by Ignatius Camps of Hall Chadwick and Andrew Gouveia of JHK Legal

What is Small Business Restructuring?

Since early 2021, small businesses have been able to access and engage in a new insolvency framework known as the small business restructuring framework (SBR). The SBR is the first insolvency framework in Australia that leaves control of an underperforming company in the hands of its directors as opposed to a liquidator. In exchange for retaining control, the framework requires that the company appoint a small business restructuring practitioner, who will act as a facilitator between the company and its creditors, to assist in the preparation of a restructuring plan, that is then presented to creditors, who are entitled to vote on the proposal. If accepted the proposal is binding and the company continues to trade in compliance with the restructuring proposal.

Prior to the SBR, Australia had a ‘one size fits all’ model for dealing with insolvent companies, which tended to be either too expensive, or complicated for a small business, and as a result many businesses would be forced to shut down, as opposed to attempting some reconstruction of their debts to maximise their chances of survival, which is better for creditors, customers, employees, and the company. 

What underpins the SBR framework, is that it aims to leverage the experience, knowledge and understanding that small business owners have with respect of their businesses to develop restructuring plans that may be more appropriate and adaptable to the industry, payment timeframes and other factors which are unique to the business, and what small business owners are acutely aware of. This way small businesses can continue to trade, but also be able to obtain affordable professional advice when it comes to dealing with insolvency or potential insolvency.

Would your company be eligible for the SBR scheme?

To be able to engage in the SBR framework, there are six requirements which must be satisfied, which are as follows:

• Less than $1 million in total liabilities
• The company is either insolvent or likely to become insolvent in the near future
• Fulfilled all required tax lodgements
• Made payment of all employee entitlements currently due and payable
• The directors (current or in the previous 12 months) have not engaged with the small business restructuring process or simplified liquidation within the past seven years
• The company must not be under other restructuring or administration including a deed of company arrangement or liquidation

It is important to note that all tax obligations do not need to be paid, rather they only need to be lodged. Additionally, only employee entitlements that are ‘due and payable’ are required causing entitlements not due yet for payment such as annual leave or long service leave not needing to be paid prior to commencement.

What is the process of Small Business Restructuring?

Initially, the directors are required to convene a meeting with the company directors to determine the following:

• The company is insolvent or likely to become insolvent
• The eligibility criteria to be applicable for SBR has been met (see above).
• A Restructuring Practitioner should be appointed
• The remuneration of the Restructuring Practitioner is determined

Subject to satisfying the above criteria, the directors (with the help of a Restructuring Practitioner) are provided with a period of twenty (20) business days to prepare and propose a Restructuring Plan to creditors which must include:

• Identification of the company property that will be dealt with
• How that company property is to be dealt with
• The remuneration of the restructuring practitioner for the plan
• The date on which the restructuring plan was executed

The restructuring plan can also include:

• The authority for the restructuring practitioner to deal with the property in the way specified within the plan
• Any matter relating to the company’s affairs
• A condition on the occurrence of a specified event within a specified period (cannot be longer than ten (10) business days after the day the proposal is accepted)

After this restructuring plan is created it will need to be proposed to creditors along with:

• The restructuring plan standard terms
• Restructuring proposal statement
• The restructuring practitioner’s declaration to creditors that the eligible criteria for SBR have been met, if the company is able to enact on the plan obligations and a statement that the practitioner believes information within the proposal is complete

Once this proposal has been provided, creditors have a period of fifteen (15) business days to respond, by either accepting or refusing the proposal. If over 50% of creditors accept the proposal it passes and the restructuring plan will take full effect on the day after the acceptance period has ended.

Any creditors bound by the restructuring plan cannot:

• Make an application for an order to wind up the company based on an admissible debt or claim
• Proceed with such an application made before the plan became binding on the person
• Begin or proceed with a proceeding against the company in relation to any of its property to recover an admissible debt or claim
• Begin or proceed with an enforcement process in relation to property of the company to recover an admissible debt or claim.

In the alternative, if the restructuring plan is not accepted by more than 50% of creditors, creditors are still able to proceed with actions against the company, which may cause the company to enter liquidation or voluntary administration depending on the circumstances.

Why engage in Small Business Restructuring?

There are several benefits to engaging with the SBR framework, given that the directors retain control of the company, and following the appointment of a restructuring practitioner the company then has 20-days to review their business, assess the debts that are outstanding, to develop a plan to make the business viable moving forward. If the restructuring plan is accepted by its creditors, any secured or unsecured creditors are barred from commencing proceedings against the company while the agreement remains in place, which provides the company and its directors an opportunity to reorganise and refocus without the threat of constant litigation by its creditors.

Legislation and specific references to law

The law which establishes the SBR was introduced by way of amendment to the Corporations Act 2001 (Cth) (via the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth)), with the new addition being within Part 5.3B ‘Restructuring a Company’. Additional amendments were also made to the Insolvency Practice Rules by the Insolvency Practice Rules (Corporations) Amendments (Corporate Insolvency reforms) Rules 2020 (Cth).

Recent cases, previous experience/precedents

ASIC recently published a report into the SBR framework and how it has performed since its introduction, and found that during the period between 2021 to 2022, ASIC had received notification of 82 appointments of small business restructuring practitioners, and of those appointments, it was confirmed that 72 restructuring plans were put forward to creditors (with a majority of those plans being approved), and the remaining 10 appointments were terminated either because the company was not eligible, creditors rejected the plan, or the directors elected to end the appointment. 

The data collected by ASIC also found that the Australian Taxation Office was a creditor in 89% of companies which entered a restructuring plan and was a major creditor in 79% of the companies, which indicates that the ATO is actively engaging in the SBR framework to provide some relief for small businesses.

Overall, it is expected that appointments will continue to rise in this economic climate, but the SBR frameworks provides a useful mechanism for small businesses to be able to reassess, plan and move forward with their business.