Running a small to medium sized business in Australia comes with immense rewards, but also unique pressures, especially when financial difficulties arise. If your business is navigating choppy waters, the Small Business Restructure (SBR) program, introduced by the government in January 2021, offers a structured, cost-effective pathway to help reorganise your affairs and steer towards calmer seas.
This initiative is a fresh approach to insolvency, allowing company directors to maintain control while working with creditors to develop a plan for settling existing creditor debts and ensuring the continuity of the business operations.
In circumstances where financial pressures might typically signal the end of a business, SBR can provide a lifeline for eligible businesses, enabling them to restructure their debts and operations under the expert guidance of a Restructuring Practitioner.
However, any debts incurred from trading after the appointment of the Restructuring Practitioner must be paid in the normal course of business operations and are not covered by the restructure.
Circumstances that may lead to an SBR appointment
The circumstances that may give rise to an SBR appointment can include a loss of key customers, significant bad debt exposure, and other unexpected, out-of-the-ordinary events affecting the company’s profitability and cashflow.
To qualify for the SBR program, businesses must meet certain criteria:
- Total debts must be under $1 million.
- There must be sufficient compliance with taxation lodgement obligations, with payment of all tax debts not a requirement.
- Employee entitlements, including superannuation guarantee amounts, must be up to date.
- Current or recent company directors must not have participated in an SBR within the past seven years.
The inclusion of up-to-date employee entitlements as a measure indicates that if a company cannot meet its obligations to staff, it is likely to be insolvent, leaving liquidation or administration as the only options.
Working with a Restructuring Practitioner
While working with a qualified Restructuring Practitioner to devise a plan for the company and its creditors, the directors retain control of the business operations.
Directors may also need to implement specific strategies before an SBR appointment to ensure the company meets the eligibility criteria. This could include settling superannuation debts, preparing and filing outstanding income tax returns and converting related party debt into equity.
It is important to note that appointing a Restructuring Practitioner is a valid response to a non-lockdown director penalty notice by the ATO. This action allows directors to avoid personal liability for tax debts.
How does Small Business Restructuring work?
The SBR process is quick, taking 35 business days from the date of appointment of the Restructuring Practitioner to the final date for approval of the restructuring plan by creditors. If needed, this period can be extended by an additional 10 business days.
The proposed plan for a business restructure could be designed in various ways, such as through future trade contributions, debt or equity contributions. However upfront cash payments to creditors with a clear timeframe for payment are often the most appealing, as they provide a quick resolution and reduce the risk associated with longer term proposals.
In our experience in this process, the Australian Taxation Office (ATO) is often one of the largest creditors. So, they have issued guidelines around the information they require and they will actively engage the Restructuring Practitioner early in the process to discuss the draft restructure proposal and provide feedback, which also helps build confidence in the SBR process.
A major advantage of utilising this form of restructuring is the official and permanent elimination of any tax liabilities that are outlined in an approved restructuring plan.
While SBR was off to a slow start, it is gaining traction and emerging as a viable commercial alternative to liquidation or administration as it enables company directors to retain control of the business throughout the process. This rising trend is reflected in the increasing number of restructuring appointments has increased since implementation, from 70 appointments in the 2022 financial year to 1,424 last financial year.
Contact your local William Buck Restructuring and Insolvency advisor if you need any further assistance with this transition.
