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Small Business Restructuring
Small Business Restructuring process (SBR) is a formal debt restructuring process introduced in January 2021. It allows eligible small businesses to restructure their debts with the help of a Small Business Restructuring Practitioner (SBRP or RP) while the business owners remain in control of their business during this process.
To qualify for SBR, a company must:
- be an incorporated business (i.e. Pty Ltd entity);
- be insolvent or likely to become insolvent at some future time;
- have total liabilities (excluding employee entitlements) not exceeding $1 million;
- together with its related entities, not have adopted SBR or simplified liquidation in the last seven years.
An SBRP assists the business in preparing a restructuring plan, liaises with creditors, collects and distributes to affected creditors under the plan terms, and ensures compliance with legal requirements. Unlike a liquidation or voluntary administration, the SBRP does not take control of the business which leaves the control of the business in the director’s hands and can reduce the costs of the process significantly.
Board of directors must pass a resolution on the (likely) insolvency of the company and appoint a Small Business Restructuring Practitioner (SBRP or RP), the process involves two phases i) Restructuring Phase and ii) Plan Phase.
Restructuring Phase
During the Restructuring Phase, within the first five business days, the directors must submit a statement declaring the company’s eligibility for SBR (i.e. that it meets the criteria above). In the meantime, the company works with the SBRP to draft a proposal to creditors within 20 business days from appointment (Proposal Period). The proposal allows for a restructure of debts by way of a proposal for a “cents in the dollar return”.
The company must (1) have all its tax lodgements up to date and (2) have all employee entitlements due and payable (including Superannuation Guarantee Charge/SGC) paid up by the end of the Proposal Period / the time the proposal is sent to creditors
Creditors then will have 15 business days to review and vote on the proposal (Decision Period). Once accepted, the plan binds all affected creditors.
Plan Phase
If the proposal is accepted by the majority in value of the voting creditors, the plan is deemed to have been accepted by all affected creditors, hence, binding all affected creditors. The plan is made on the next business day after the Decision Period ends.
During the Plan Phase, the RP will collect and distribute funds to the affected creditors pursuant to the plan terms. Once the final distribution is made, the directors advise the RP of the effectuation of the plan and the company is relieved of all the compromised claims.
In SBR, the directors remain in control of the business during the restructuring process, whereas in Voluntary Administration or Liquidation, an external administrator takes control.
- Directors remain in control of the business.
- Lower costs compared to Voluntary Administrations or Liquidations where the business continues to trade.
- Potential to save the business and preserve jobs.
Most unsecured debts can be included in an SBR, such as trade creditors and tax debts (employee entitlements are excluded).
Secured debts (e.g. car finance or business loans) are only included to the extent of the difference between the debt amount and the value of the collateral (i.e. the shortfall calculated as the debt minus the secured asset value).
Yes, company tax debts can be included in the SBR, provided the company meets all eligibility requirements including its tax lodgements and employee entitlements payable (incl. SGC) both being up to date.
The Restructuring Phase usually takes 35 business days. The RP can extend the Proposal Period (i.e. the first 20 business days) by up to 10 business days on the company’s written request if the RP is satisfied that the extension is in the interest of the affected creditors.
The Plan Phase length depends on the plan accepted, which can range from a couple of days to up to three years.
The Restructuring Phase usually takes 35 business days. The RP can extend the Proposal Period (i.e. the first 20 business days) by up to 10 business days on the company’s written request if the RP is satisfied that the extension is in the interest of the affected creditors.
The Plan Phase length depends on the plan accepted, which can range from a couple of days to up to three years.
A plan is deemed to be accepted by all affected creditors if the majority in value of the voting creditors accept the plan by the end of the Decision Period.
The plan usually proposes to settle the debts owed to the affected creditors for in exchange for a certain cents in the dollar return, with the balance of those debts effectively written off after the effectuation of the plan, i.e. if the plan is accepted and effectuated, creditors at the commencement of the process will receive an agreed percentage of the amounts owed under the plan, with the balance of their claim written off..
We do note that creditors who hold personal guarantees may still be entitled to pursue guarantors (if any) for any shortfall.
If the plan is rejected, the SBR will end. The company may need to consider other options, such as liquidation or voluntary administration.
Yes, the business can continue trading under the control of its directors during the SBR process. However, the company cannot declare a dividend or dispose of its assets outside the ordinary course of business without the SBRP’s consent.
Creditors are paid according to the terms of the restructuring plan, which may be a lump sum payment within a few weeks after acceptance of the plan, or by payment instalments over a period of up to three years.
The company trades as usual under the control of its directors. Employee entitlements payable (e.g. weekly wages and leave taken) are paid in the ordinary course of business. Accrued entitlements are excluded from the SBR process, i.e. they are not going to be compromised through SBR.
Personal guarantees are not automatically released through SBR. Creditors are prohibited from pursuing personal guarantees during the Restructuring Phase without Court leave, however, they may still enforce guarantees after, unless specifically agreed otherwise.
Secured creditors are not allowed to enforce their security during the Restructuring Period without RP written consent or Court leave. They retain their rights to enforce their security after the restructuring.
Secured creditors are only included in the restructuring plan to the extent of the difference between their debt amount and the value of the collateral. They will be bound by the plan if it is accepted by majority of the voting creditors, even if the Secured Creditor did not participate in voting.
Costs vary depending on the complexity of the case but are generally lower than voluntary administration. SBR costs can be paid from the business's assets and/or third-party contributions (e.g. from the directors).
No, SBR is not available if the business is already in liquidation or has entered into a formal insolvency process.
If the company fails to meet the plan's terms and the contravention cannot be rectified within 30 business days beginning on the day the contravention occurs, the plan will terminate, and all the debts will become due and payable immediately.
The company may need to consider other options, such as liquidation or voluntary administration. Creditors may take further action, such as winding up the company.
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Voluntary Administration
Voluntary Administration is a process where an insolvent company appoints an external administrator to assess its financial situation and determine the best course of action for creditors and the company.
Companies typically enter Voluntary Administration to address financial difficulties, protect the business from creditor actions, and explore options to restructure or wind up the company.
Voluntary Administration under Part 5.3A of the Corporations Act (the Act) facilitates the development of a DOCA, allowing the company to restructure its debts and operations to maximize returns for creditors and potentially ensure its long-term viability.
VA creates a structured environment for creditors to negotiate terms, particularly under a DOCA. This can lead to outcomes that maximize recoveries compared to liquidation.
By appointing a Voluntary Administrator, directors fulfill their duty to act in the best interests of creditors when the company becomes insolvent, as required under Section 588G of the Act.
A Voluntary Administrator can be appointed by the company's directors, a secured creditor, or a liquidator.
The administrator takes control of the company, investigates its financial affairs, and reports to creditors. Creditors then decide on the company's future, such as returning control to directors, entering a Deed of Company Arrangement (DOCA), or proceeding to liquidation.
Under Section 437A of the Act, the administrator has control over the company's business, property, and affairs. They are responsible for investigating the company's financial position and reporting to creditors on the best course of action.
Administrators must assess the viability of trading on, including the availability of working capital, the risk of incurring trading losses, and the potential impact on secured creditors. They must also consider the Personal Property Securities Act 2009 (Cth) to ensure compliance with secured asset registrations.
The process typically lasts around 25 to 30 business days, but this can vary depending on the complexity of the case, public holidays and any extensions granted by the court.
Administrators must prepare a report to creditors under Section 439A of the Act, outlining the company's financial position, the investigation findings, and recommendations for the company's future (e.g., liquidation, DOCA, or returning control to directors).
Following the investigation and reporting, the Administrators are responsible for convening two key meetings:
First Meeting (Section 436E of the Act): Within eight business days of the appointment to allow creditors to confirm the administrator's appointment or replace them.
Second Meeting (Section 439A of the Act): Held to decide the company's future (e.g., DOCA, return to directors, or liquidation).
A DOCA is a binding agreement between the company and its creditors that outlines how the company's affairs will be managed to maximize returns for creditors.
A DOCA, governed by Section 444A of the Act, allows the company to restructure its debts and operations. In complex cases, such as those involving multiple secured creditors or trade-on scenarios, the DOCA must address competing interests and ensure compliance with statutory priorities under Section 556.
Employees may continue to work if the business trades during administration. Their entitlements, such as wages and leave, are prioritized in the event of liquidation or under a DOCA.
Employee entitlements are given priority under Section 556 of the Act. If the company trades on, the administrator must ensure that wages and entitlements are paid as they fall due. This ensures their claims are addressed ahead of many others, providing security that may not exist in other insolvency processes.
No, a moratorium is placed on creditor actions during the administration period, providing the company with temporary protection.
Section 440D of the Act imposes a moratorium on legal proceedings against the company during VA, except with the administrator's consent or leave of the court. The moratorium prevents legal proceedings and enforcement actions against the company during the administration period. This allows the administrator to focus on investigating the company's affairs and identifying viable options without the interference of legal claims or debt enforcement.
Yes, under Section 437B of the Act, administrators may decide to trade on the business if it is in the best interests of creditors. However, administrators are personally liable for debts incurred during the administration (Section 443A), which makes this decision highly scrutinized.
Administrators may choose to trade on the business if it is viable, preserving goodwill, protecting employee jobs, and maximizing the company’s overall value. This can yield better outcomes for creditors than immediate liquidation.
In cases where both a Voluntary Administrator and a Receiver are appointed, their roles and responsibilities may overlap. For example, the Receiver focuses on secured creditors' interests, while the Administrator deals with unsecured creditors and the company's overall future. Coordination is critical to avoid conflicts.
Secured creditors retain their rights to enforce security over the company's assets unless restricted by the moratorium under Section 441A. However, their claims may be affected by the administrator's trading decisions or a DOCA proposal.
Administrators must review security interests registered under the Personal Property Securities Act 2009 (Cth) to identify any defects or unperfected securities. Defective securities may be void against the administrator under Section 267 of the PPSA.
Cross-border insolvency matters are addressed under the Cross-Border Insolvency Act 2008 (Cth), which incorporates the UNCITRAL Model Law. Administrators must consider the recognition of foreign proceedings and the coordination of assets and creditors across jurisdictions.
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