Small Business Restructuring. What the...?

Since 1 January 2021 a new regime for dealing with companies in financial distress has been in operation. The process is known as “small business restructuring” (“SBR”). The legislation was rushed through thanks to Covid-19 and the rules and regulations are still very new. Insolvency Practitioners who will manage the process are having to get their heads around the new rules and develop precedents for them. However, enquiries are reaching us from our valued referrers already, with the question “do my clients qualify for SBR?”

 
In the words of one of the insolvency industry peak bodies, ARITA, the answer to this question may often be “clear as mud”. Their recent communications went on to say “the new insolvency reforms to support small business legislation is complex, convoluted and downright difficult to comprehend”! So with that in mind, we try to answer the question “do my clients qualify for SBR..?”

 
But first, What is it?

In brief, the SBR process involves appointing a Restructuring Practitioner (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 (if any) continues to trade under existing Directors sole control and responsibility. There is a raft of notices to creditors and lodgments in relation to what is going on that need to be drafted and distributed. The Restructuring Plan is then put to creditors and outlines what is to happen to the assets along with how and what return creditors may expect to receive within a maximum 3 year period. Creditors will then have 15 BD to vote on it. 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 returns to the Directors - there is no automatic transition into a Liquidation or VA. The Plan, once accepted, can not be varied.

 
The first things to consider before going too far down this path are the rather narrow eligibility criteria... These include:

Total Liabilities under $1m, excluding employee entitlements.

Whilst employee entitlements are excluded, the cap does include secured debts, and related party loans, as well as all of your usual trade suppliers and of course, the Tax Office.

Tax obligations are up to date

Going hand in hand with this, there is accordingly an obligation to have met all current tax lodgment obligations. This will include BAS, IAS and Tax Returns of course, but also includes lesser known ones, like Superannuation Guarantee Charge (SCG) Statements (if you have been late paying SGC) and possibly other returns such FBT and CGT returns.

In order to meet this requirement and have everything outstanding lodged prior to proposing the restructuring plan it will be vital that all of the books and records of the company and the entry of data into accounting databases is up to date, accurate and in a format that can be easily accessed.

Employee entitlements are paid up to date

All employee entitlements that are currently “due and payable”, must be paid. This will obviously include all wages and superannuation currently due, but does not include things like accrued leave entitlements.

In our usual experience, unpaid superannuation amounts are very common in companies experiencing distress, hence this issue may exclude many potential users of SBR. Not only will principal amounts need to be paid, but as referenced above, late payment of Super results in an SGC Statement lodgement being required, as well as payment of the principal super amount and any interest and administration charges that might apply.  

The Company has not been subject to an SBR or simplified liquidation in last 7 years.

The company in distress cannot have been previously subject to either SBR or the simplified liquidation process in the seven years prior.

Directors have not been involved in an SBR or simplified liquidation in last 7 years.

As per above, a current or former (in prior 12 months) Director of the company cannot have been the Director of any other company that has also been subject to SBR or simplified liquidation in the seven years prior.

We can assist with ASIC searches if required to verify these eligibility requirements.

The Challenges…

As previously referenced, the new legislation is highly complex. In addition, the time periods are very short (sometimes impossibly so), there is potential for significant Court involvements, there are a few areas where the process lacks flexibility and imposes onerous obligations. Unfortunately, due to the aforementioned, it may well end up being quite costly also.

So even if you do meet the Qualifying requirements, will it be the best method of dealing with the company’s financial distress? Or will a traditional Voluntary Administration or Liquidation or some other non-formal option provide a simpler and more cost effective outcome…?

What  to do…?

Consideration must be given to whether you meet the eligibility criteria very early. Also, are the company books and records and tax lodgments completely up to date? Given the snail-like pace of many aspects of the ATO’s activities, you would certainly need everything lodged considerably prior to initiating the SBR process in order to have certainty over assessments, lodgement obligations and debts due.

You must also consider what type of Plan would be achievable, and what is the composition of the creditors, and are creditors likely to accept the Plan??

We are always happy to chat…

We are of course 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 best suited to those circumstances. We can assist advisors and clients alike to ensure that the company is likely to meet the eligibility criteria and review what other steps may be required prior to considering an appointment.

We are experienced straight-talking practitioners and are backed by a Team who work efficiently and communicate plainly to assist you to make the best decisions, both for yourself and for all stakeholders.

As always when dealing with insolvency, Directors need to act quickly and in the best interests of the company to comply with their obligations and protect themselves from personal exposure. If the coming months are looking tough - call us now….