Small Business Restructuring - How is the process going...?

The new Small Business Restructure (SBR) process has been introduced to the Australian corporate landscape, and we blogged on the topic back in February 2021.

A bit of water has passed under the bridge, and the facts are, despite a few problems areas, SBR’s are now being done in increasing volumes and are successfully helping small businesses negotiate with their creditors and offer a lifeline to allow business survival.

So it is worth remembering what is an SBR, and when are they a viable option to deal with financial distress for small business…?

What is an SBR…?

In brief, the SBR process involves appointing a Restructuring Practitioner (usually a Registered Liquidator) to assist the company to develop a Restructuring Plan. During a 20-business day period that Plan is developed whilst the business can continue to trade under the existing Directors sole control and responsibility. There are various notices to creditors and lodgements with ASIC in relation to what is going on. The Restructuring Plan is then put to the creditors – this outlines what is to happen to the assets, along with what return creditors may expect to receive over a maximum 3 year period. Creditors have 15 business days to vote on accepting the proposal, or not. Voting requires a majority in Value only (i.e. > 50%). Related parties can not vote. If the vote is successful, the Plan is enacted. If not accepted, control of the Company returns to the Directors - there is no automatic transition into liquidation or voluntary administration. The Plan, once accepted, can not be varied.

The Eligibility Criteria…

The first things to consider before going too far down this path are the rather narrow eligibility criteria that must all be met in order to qualify to use SBR. These include:

The company must be insolvent and have total Liabilities under $ 1million (excluding employee entitlements).

All Tax lodgements must be up to date (including ITR, BAS, SGC statements (if required), etc).

All due & payable employee entitlements must be paid up to date (i.e not accrued leave).

The company and it’s Directors can not have been subject to / involved in an SBR or simplified liquidation in last 7 years.

The Stats…

The stats are a little hard to find, but broadly speaking the take up of SBR’s was very slow initially, but has now picked up pace in in the post-Covid landscape as small businesses battle to rebuild and ensure survival.

There have been about 148 SBR’s commenced across Australia during 2022 to the end of October. Anecdotally, it appears that around 80% of that number have resulted in successful votes by creditors, with an SBR Plan to be put in place.

Our own success rate, in terms of acceptance of a Plan by creditors, is currently sitting at 100%! (albeit based on only a very small number of cases)!!

What we like about the SBR process...

They are being accepted! The ATO and other creditors are acting commercially and accepting proposals that provide a better return than an alternative liquidation. Generally speaking, it seems that returns need to at least be in the 20 c/$ to 50 c/$ range to be acceptable to the bulk of the creditors.

They are relatively quick and cost effective. The process can happen over approximately a 6-7 week period and costs for the SBR are generally not prohibitive (particularly when compared to the likely cost of a trading voluntary administration alternative).

The business can generally continue to trade without interruption or intervention by the SBR practitioner – which is a much more difficult (and costly) outcome in a liquidation or voluntary administration.

They are being most favourably looked on by creditors where there is a real restructure and pro-active steps have been taken to change and improve the business (eg: real cost reductions, revenue improvements, improved systems and/or accounting, new third party advisors, real capital injections, etc, etc).
A successful SBR will ensure a business and jobs are saved. Suppliers retain ongoing custom. Accounting and other advisores rertain a client for the future. Creditors receive an improved return. It is a win, win, win...

What we don’t like…

The eligibility criteria are too tight! Total debts under $1m. Employee entitlements Iincl. Super) fully paid up. These are the two key issues that are ruling many potential SBR users out of the regime (In some cases, a way can be found to pay the Employee Entitlements - so then the process can commence).

The process is more fiddly and complex than it needs to be, making its aim of being a cost effective solution, challenging…

While taking advantage of SBR could be advantageous for a business, the arrangement does not provide permanent solutions for directors who have personal liability in respect of the company’s debt. Such liability could arise under director personal guarantees, or Director Penalty Notices (DPNs) from the ATO. [More information on director penalty notices can be found in our previous Blogs.]

Taking advantage of SBR could still have implications for other Licensing obligations, including for example, minimum financial requirements for licensing by the QBCC (construction industry regulator in QLD).

There are still some question marks over whether key suppliers and creditors will continue to support and supply the trading business during the restructure. The Directors remain in control of the business and maintain responsibility for future supply and payments.

What next..?

Watch this space for future tweaks by Government with the SBR regime (a major Insolvency review is currently getting started). Whilst changes (improvements?)  appear inevitable it must be noted that the wheels of government move very slowly when it comes to legislation change…

For a small business in distress, if the eligibility criteria are met – this is a real option to save the business.

We are very happy to talk through the process and each set of unique client circumstances, with No Cost and No Obligation. We will be able to provide an opinion on whether the SBR process is the suited to those circumstances. We can assist advisors and clients alike to ensure that a company in distress is likely to meet the eligibility criteria and review what other steps may be required prior to considering a potential appointment.