Understanding Small Business Restructuring

Benefits of SBR

An SBR can effectively provide companies with a significant saving on debts in a short timeframe. Key benefits of the SBR include:

  • Retain Control: Unlike the other insolvency appointments, such as liquidation or voluntary administration, the directors retain control of the business, allowing for continued operation and decision-making;
  • Reduce debt: SBR offers the opportunity to negotiate debt reductions with creditors, providing financial relief to struggling businesses;
  • Preserve Business: By avoiding liquidation or administration, SBR helps preserve the business and its assets, maximising the chances of long-term viability;
  • Preserve Jobs: By avoiding liquidation or administration, the employees keep their jobs;
  • No Director Banning: By avoiding liquidation, the directors avoid a strike against their name;
  • Reduce director personal liability: The SBR may assist the directors to avoid personal tax liabilities.
Eligibility and Process

To qualify for SBR, a company must:

  • be an incorporated business (Pty Ltd entity);
  • be insolvent or likely to become insolvent at some future time;
  • Have total liabilities (excluding employee entitlements) not exceeding $1 million;
  • have all tax lodgements up to date by the time the proposal is sent to creditors;
  • have all employee entitlements due and payable (including Superannuation Guarantee Charge/SGC) paid up by the time the proposal is sent to creditors;
  • together with its related entities, not adopted SBR or simplified liquidation in the last seven years.

After a board resolution and appointment of a Small Business Restructuring Practitioner (SBRP), the process involves two phases: i) Restructuring, and ii) Plan.

Restructuring Phase

During this phase, the company works with the SBRP to draft a proposal to creditors within 20 business days. The proposal allows for a restructure of debts by way of a proposal for a “cents in the dollar return”. Creditors have 15 business days to review and accept the proposal. Once accepted, the plan binds all affected creditors.

Plan Phase
  1. Up to and following plan acceptance, the company operates as usual and makes payments as per plan terms to the SBRP.
  2. After the plan funds are distributed to creditors, the company is relieved of all the compromised claims.
  3. Affected Creditors and ATO Debts
  4. Unsecured debts owed by the company upon entering SBR, excluding employee creditors, are included in the SBR process. ATO debts are included in the process. Superannuation Guarantee Charge, being late superannuation payments and associated charges (SGC), is excluded from the process and must be paid in full.
  5. Secured creditors are only included as affected creditors for the shortfall they suffer (if any) between the amounts owing to them and the value of any collateral security.

Employee Entitlements Payable

Employee entitlements due and payable (including SGC) are required to be paid up by the time the SBRP sends out the proposal to the affected creditors.

The SGC required to be paid up before the proposal is issued to creditors includes all SGC components (i.e. the shortfall, interest and administration fees) following components.

Director Penalty Notices (DPN)

If a 21-day DPN is received, an SBR can help alleviate personal liability. Unfortunately, an SBR is not a cure for a lockdown DPN but still provides a mechanism for a distressed company to restructure its debts.

Costs and Example:

Total SBR costs vary but generally range from $20,000 to $100,000 (while reducing outstanding creditor claims by significantly more than the SBR costs. The following example demonstrates significant debt reduction achieved through SBR:

  • A construction company based in NSW has affected creditors totalling $420,000 before SBR. The director received a 21-day DPN and appointed an SBRP within the 21-day window.
  • Under the SBR, creditors accepted the plan of a distribution of 18 cents in the dollar, that is $75,000 to the affected creditors, within three months.
  • The SBRP paid the distribution to the creditors at the end of the plan term. The SBRP’s fees were $30,000.
  • The SBR cost the company $105,000 in total in exchange for the discharge of debts of $420,000. That is a net saving of $315,000, in a c. 2-3 month period.
  • The company came out of the SBR process, operating as usual with no liabilities and with the director relieved from personal liability for the company tax debts.

Before opting for an SBR, ensure compliance with tax lodgments and employee entitlements, understand personal liability implications, and consider potential insurance and creditor acceptance issues and sources of funds for the process.

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Wexted Advisors specialise in guiding businesses through financial distress. Contact us for a free consultation if you're considering SBR as a solution.

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