From Distress to Success: A Guide to Small Business Restructuring

Small businesses face unique challenges that may require a restructuring process. Whether it's to overcome financial distress, adapt to market changes, or position for future growth, restructuring can be a pivotal strategy for small businesses.

Restructuring a small business is a strategic decision that requires careful planning and execution. However, with the right approach, it can lead to renewed growth, improved efficiency, and a stronger competitive position.

In this guide, we will take you through the ins and outs of essential considerations for small businesses from inception to completion.

What does entering a Small Business Restructuring mean?

A new formal debt restructuring process for eligible smaller companies to allow a faster and less complex process to restructure existing debt and maximize their chances of survival.

Who can act as a Small Business Restructuring Practitioner (SBRP)?

Only registered liquidators can consent to the appointment of an SBRP. A person that is connected with a company may not be appointed as an SBRP in relation to that company except with the Leave of the Court.

What is the role of the Directors during a Small Business Restructuring?

Directors have a very active role during a Small Business Restructuring. During the restructuring process, the directors remain in control of the company and trade the business.

Who controls the Company? What does it mean to trade in the ordinary course of business?

During Small Business Restructuring a company can continue to trade in line with its normal operations. However, some transactions might be deemed to be outside the ordinary course of business.

What are the features of Small Business Restructuring?

Where a payment is made, a transaction is entered into or any other thing is done in good faith by the SBRP, the company with the consent of the SBRP or (by the company) in accordance with a court order, each will be valid and effectual at law and not liable to be set aside in a subsequent winding up of the company.

How does a Small Business Restructuring process commence?

The directors of a company can appoint a Restructuring Practitioner and commence a Small Business Restructuring process by making “Resolutions”. That is, there is no Court or creditor involvement in the decision. The company signs a document that resolves:

• that the company is insolvent or likely to become insolvent at some time in the future;

• that the company should appoint a Small Business Restructuring Practitioner; and

• a fixed amount of remuneration of the Restructuring Practitioner for the proposal period.

What are the responsibilities of the SBRP?

Once a SBRP is appointed the appointment cannot be revoked. However, the Act provides a simple process enabling SBRP to be replaced in the event of a vacancy such as e.g. where the SBRP resigns. The Court also has a residual power to appoint a SBRP where a company is under restructuring, but no SBRP is acting.

The Regulations prescribe that the SBRP has the power to investigate the company’s business, property, affairs and financial circumstances for the purposes of:

• preparing a declaration in relation to the restructuring plan;

• deciding whether to terminate the restructuring of the company;

• resolving a disagreement relating to a creditor’s admissible debts or claims; or

• performing or exercising any other function, duty or power as the small business restructuring practitioner for the company.

What are the additional functions of the SBRP?

The Regulations prescribe that the SBRPs have the following additional functions:

• receiving money from and holding money on trust for the company;

• paying money to creditors in accordance with the plan;

• if requested by the company’s directors:

1. realising any property available to pay creditors in accordance with the plan; and

2. distributing the proceeds of any realisation of property among creditors in accordance with the plan;

• anything else that is incidental, necessary or convenient for the purpose of administering the plan;

• dispose of the property and secure creditors of lessor’s rights;

• the SBRP may sell company property in order to make payments to creditors in accordance with the plan;

• normally the SBRP must not dispose of property that is subject to a security interest, or where the property may be used by, occupied by, or in possession of the company but someone else is the owner or lessor;

What notice of the Small Business Restructure (SBR) must be provided in public documents?

Every public document must set out the phrase “Restructuring Practitioner Appointed” after the company’s name where it first appears in the document. So public documents will include things such as company letterhead, the website and purchase orders.

Can the appointment of SBRP be revoked, removed or replaced?

No, it can’t be revoked – once started the process must continue to one of the possible conclusions. Yes, the Restructuring Practitioner can be replaced, but only under very limited circumstances. The directors can resolve to appoint a new practitioner where the original practitioner has passed away, becomes prohibited from continuing or has resigned. Unlike a voluntary administrator or a liquidator, the Restructuring Practitioner cannot be removed and replaced by resolution of the creditors.

What do I need to do before putting a restructuring Plan to my creditors?

There are specific requirements that must be met before a Plan can be put to creditors:

• Employee entitlements that are due must be paid. That will typically be wages, superannuation, and payment for leave already taken. It will not include untaken annual leave.

• Tax lodgements must be up to date. That will include income tax returns and business activity statements. The tax debts do not have to be paid up to date, but the returns must be lodged.

What is the restructured Phase / Plan?

The period of the Plan cannot exceed 3 years. Again, the company continues to trade during the Plan phase under the control of the directors.

Where can the funds come from to pay into the Plan?

Often a Plan creates a pool of monies which is applied in full and final settlement of all unsecured creditors. There is no set requirement for where the funds come from. The source could be from the director or a related party, future profits, or a bank refinancing.

Do creditors have to get paid in full from the Plan?

No. A Plan will usually involve creditors receiving a payment from the fund but usually, creditors will not be paid in full. The amount paid under the Plan will vary but the outcome for creditors will usually be set at a level higher than the expected return if the company were to be placed in Liquidation.

What debts are included in the plan?

The concept is that a line is drawn on the day that the company enters the Small Business Restructuring process. Debts prior to the SBR are “caught” by the Plan. Debts incurred after the day the SBR commences cannot be included in the Plan and must be paid in full as they fall due. The exception is employee entitlements. Employee entitlements that are due must be paid up to date before a Plan can be proposed.

What happens if the restructuring Plan is not accepted by creditors?

For a Plan to be approved, it must be supported by more than 50% of the creditors by value that vote. If the restructuring Plan is not accepted, the restructuring process ends. The directors stay in control of the company but creditors are no longer prevented from enforcing their rights, for example, by taking legal action. Also, when the company comes out of Small Business Restructuring, a director is no longer protected from personal liability for insolvent trading. Directors in this situation will often consider placing the company into liquidation or voluntary administration.

How do creditors vote on a restructuring Plan?

The Restructuring Practitioner oversees the voting process. The Restructuring Practitioner provides creditors with the restructuring Plan and proposal statement. When the Plan is put to creditors, they have 15 business days to vote to accept or reject the Plan. During this time, creditors also seek to correct errors in the amount they are owed. A Plan is accepted, if more than 50% of the creditors by value (so not in number) that vote, vote to accept the plan. Related party creditors are not entitled to vote on a restructuring Plan.

What sort of debt reduction is achievable under a Small Business Restructuring?

What happens once a Plan is accepted?

Once a Plan is approved, payments are made to an account controlled by the Restructuring Practitioner. The Restructuring Practitioner then calls for details of creditor claims from the creditors. When the amount of creditors is agreed upon, payments are made by the Restructuring Practitioner to the company’s creditors in accordance with the terms set out in the Plan. All creditors are paid the same “cents in the dollar” and all are paid at the same time. When a company pays off its obligations under the Plan, it is released from all claims that were caught by the Plan.

If a company has a large ATO debt, is SBR a good solution?

Yes, absolutely. If a director attempts to negotiate a deal with the ATO, it will usually result in a Payment Arrangement, which will require payment in full, plus interest, payable within 2 years. A Plan under an SBR can be for up to 3 years but it is often a one-off payment, due to the reduced debt level.

Why is SBR better than a Payment Arrangement with the ATO?

What is the ATO’s position on Director Penalty Notices?

A Director Penalty Notice is a Notice that the ATO can send to a director which can make the director personally liable for some of the company’s tax debt. That can include PAYG, Superannuation and GST that has not been paid to the ATO. Many DPNs give a director 21 days to take certain actions and if the director does that, then they avoid personal liability under a DPN. One of those actions is to commence a Small Business Restructuring within 21 days.

Does the ATO actively participate in Small Business Restructuring process?

Yes. The ATO has appointed dedicated staff to review SBRs. They are active in reviewing Plans and often ask for specific information and provide feedback to Restructuring Practitioners on the Plans.

What is the effect of a Small Business Restructuring on ordinary creditors?

All legal actions against the company are paused whilst the Small Business Restructuring process is ongoing unless a creditor obtains the consent of the restructuring practitioner or leave of the Court.

What is the effect of Small Business Restructuring on creditors’ winding up?

The Court will usually make an order pausing the winding up application if it is satisfied that it is in the interest of the company for it to continue under the SBR process.

What is the effect of a Small Business Restructuring on secured creditors?

Secured creditors cannot exercise their rights, such as selling company property, without the Restructuring Practitioner’s written consent or with leave of the court.

What will creditors consider in accepting a restructuring Plan?

A variety of documents are provided to creditors to help them consider the proposed Plan. The Restructuring Practitioner will provide:

• the company’s restructuring Plan;

• the restructuring Plan standard terms;

• the company’s restructuring proposal statement;

• a declaration from the Restructuring Practitioner about whether the eligibility criteria for restructuring are met and whether the company is likely to be able to meet its obligations under the Plan;

• a statement about the completeness of information set out in the company’s restructuring Plan.

What if the Directors have provided personal guarantees to creditors?

It will often be the situation that a director has signed personal guarantees with suppliers or financiers. During the restructuring process, a personal guarantee cannot be enforced against a director or anyone else who signed a personal guarantee.

What are the advantages & disadvantages of an SBR compared to Voluntary Administration?

When does the Small Business Restructuring Process End?

When the Plan is completed, the company becomes free from all its debts and it can carry on with its business.

Cowell Clarke’s Insolvency & Turnaround team works closely with in-house commercial and dispute resolution teams to ensure seamless service delivery for any financial workout, insolvent administration or asset or business transaction. If you would like assistance in this area please contact the author Gerard Breen or a member of insolvency and turnaround team.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.