Small Business Restructuring – all you need to know

Q1: What is Small Business Restructuring?

Small Business Restructuring (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.

Q2: Who is eligible for Small Business Restructuring?

To qualify for Small Business Restructuring, 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.

Q3: What is the role of a Small Business Restructuring Practitioner (SBRP)?

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.

Q4: What are the steps involved in the Small Business Restructuring process?

The process involves two phases:

Restructuring Phase:

• Directors pass a resolution on the (likely) insolvency of the company and appoint an SBRP.
• Directors submit a statement declaring the company’s eligibility for SBR within five business days.
• The company drafts a proposal to creditors within 20 business days from appointment (Proposal Period).
• Creditors have 15 business days to review and vote on the proposal (Decision Period).

Plan Phase:

• If accepted by the majority in value of voting creditors, the plan binds all affected creditors.
• The RP collects and distributes funds to affected creditors according to the plan.
• Once final distribution is made, the company is relieved of compromised claims.

Q5: How does SBR differ from Voluntary Administration or Liquidation?

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.

Q6: What are the benefits of SBR?

• Directors remain in control of the business.
• Lower costs compared to Voluntary Administrations or Liquidations.
• Potential to save the business and preserve jobs.

Q7: What debts can be included in an SBR plan?

Most unsecured debts, such as trade creditors and tax debts, can be included. Secured debts are only included to the extent of the shortfall (debt minus secured asset value).

Q8: Can I use SBR if I have ATO debts?

Yes, company tax debts can be included in the SBR, provided the company meets all eligibility requirements, including up-to-date tax lodgements and employee entitlements.

Q9: How long does the SBR process take?

The Restructuring Phase usually takes 35 business days. The RP can extend the Proposal Period by up to 10 business days on the company’s request if it’s in the creditors' interest. The Plan Phase length depends on the plan terms and can range from a few days to up to three years.

Q10: What is required for a plan to be accepted?

A plan is accepted if the majority in value of the voting creditors approve it by the end of the Decision Period.

Q11: What does it mean to the company if the plan is accepted?

The plan settles debts based on a “cents in the dollar” return. Once effectuated, the balance of debts is written off, but creditors with personal guarantees may still pursue guarantors for shortfalls.

Q12: What happens if creditors reject the restructuring plan?

If the plan is rejected, the SBR will end. The company may need to consider other options, such as liquidation or voluntary administration.

Q13: Can I continue trading during the SBR process?

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.

Q14: How are creditors paid under an SBR plan?

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.

Q15: What happens to employee entitlements under SBR?

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.

Q16: What happens to personal guarantees under 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.

Q17: What happens to secured creditors under SBR?

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.

Q18: What are the costs of SBR?

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).

Q19: Can I use SBR if my business is already in liquidation?

No, SBR is not available if the business is already in liquidation or has entered into a formal insolvency process.

Q20: What happens if the company cannot meet the terms of the restructuring plan?

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.