What is a Small Business Restructure?
Small Business Restructure is a methodical procedure governed by the Corporations Act 2001 ("the Act"), aimed at aiding eligible small businesses in reorganising their debts and recovering from financial difficulties.
This process is a formal debt restructuring for small businesses and one of the most practical financial distress solutions for small businesses under the Act.
SBRs can help if the business is in unsustainable ATO payment arrangements or other types of ATO debts. However, an SBR encompasses all unsecured creditors as of the appointment date.
A business viability assessment is often required to ensure the company can realistically recover before entering the process.
Settle debts for as little as
20 cents
in the dollar
Benefits of a Small Business Restructure
Offer to settle debts for as little as 20c in the dollar
An SBR proposal compares the expected return of the offer you make against the return the creditors would receive in an insolvency event.
These unsecured creditor negotiations can often result in avoiding liquidation through SBR, giving the business a chance to continue operating.
Pay out debts over interest free terms of up to 3 years
The Act allows for proposals submitted to creditors to be paid back on terms of up to three years.
It is important to note, however, that the ATO has released statements confirming they would prefer to see proposals paid out over 2 years.
Avoid director's becoming personally liable for debt
Where Director Penalty Notices (DPNs) haven’t been issued, or an SBR is submitted within 21 days of a non-lockdown DPN expiring, directors can avoid becoming personally liable for the company’s debts.
Generally, once an SBR Practitioner has been appointed, the ATO will cease further action until the plan has been voted on.
Day to day management stays with the directors
Under a Small Business Restructure, day-to-day management of the business stays with the directors.
The beauty of a small business restructure is that it allows directors to remain in control of daily operations while dealing with unsecured creditors, typically over a 3-year interest-free term.
Is Your Business Eligible for a Small Business Restructure?
All ATO Lodgements are up to date
All lodgements to the ATO must be up to date prior to the proposal being issued to the creditors.
Business must operate from a Company
Or from a trust with a company as the trustee.
Less than $1M in unsecured creditors
This includes any creditor that doesn’t hold a security, but generally means business suppliers, the ATO, and credit cards.
No outstanding employee entitlements
All employee entitlements, such as Superannuation, must be paid in full prior to appointment.
These SBR eligibility requirements ensure only viable businesses can access the process.
The SBR Process
In an SBR, a Small Business Restructuring Practitioner ("RP") is appointed, while the directors maintain complete control over daily operations. The RP works behind the scenes, assessing the company’s affairs and compiling a report for creditors that compares the SBR proposal with the anticipated outcomes if the business were to cease operations.
This process acts as a formal insolvency event alternative, giving viable businesses an opportunity to trade through financial difficulties rather than enter liquidation. As part of this, the RP may conduct a business viability assessment to ensure the company is capable of meeting its repayment commitments under the proposal.
Important Note
A Company only gets one shot at making an SBR Proposal to creditors. If the proposal is rejected then there is no scope to resubmit. This means the proposal must be the Company’s best foot forward.
Once the RP is appointed, the process typically spans 35 business days. This period includes 20 business days for the RP to prepare their report and 15 business days for the voting process. These are strict creditor voting requirements under the Corporations Act 2001.
The SBR proposal presents an opportunity to settle the company’s debts in full with creditors, comparing the potential returns from the proposal against those from liquidation. While offers can start as low as 15 cents in the dollar, the ATO has indicated a preference for offers around 25 cents in the dollar.
For an SBR proposal to be accepted, it requires approval from creditors representing at least 50% of the total value of unsecured debts who participate in the vote.
Timing and Funding
Typically, directors of the company have the flexibility to choose a preferred start date for the SBR process. It is advisable to select a time when the company has minimised outstanding supplier accounts and collected debts from customers. A proper business viability assessment at this stage can help determine whether the company is in the right financial position to proceed.
However, the timing of the SBR can become urgent if the company faces a Statutory Demand or Winding-up Notice from the ATO, or receives a Director Penalty Notice ("DPN"). These events often trigger the need for immediate ATO debt help and quick planning to protect the company’s operations.
Undertaking the SBR while the company is still in recovery can leverage this as a justification for financial difficulties. Delaying until the business has fully recovered and profitability has increased might pose challenges in proposing successfully, as the creditors may argue that profits are adequate to settle debts in full.
The Act allows for proposals to creditors to have payment terms of up to 3 years. The ATO have publicly announced they prefer to see plans paid out within 2 years. These preferences are important when structuring unsecured creditor negotiations, as aligning with them increases the likelihood of approval.
Important Note
The best strategy is to offer an upfront amount to the creditors. This is generally received better than payments over time, and also means the SBR is finalised promptly.
SBR proposals which are to be paid from future cash flow need to be supported by budgets and forecasts. Accurate financials, supported by the RP’s creditor voting requirements and clear forecasting, play a critical role in gaining creditor support.
Issues that may arise with an SBR
The below are some examples of issues that arise with clients that undertake a Small Business Restructure.
Most of the time, there are strategies and actions we can take prior to the appointment of an SBR to mitigate these risks. This is part of what Thryvv.io does during our appointment to ensure the directors are in the best position possible. A proper business viability assessment is often conducted to address potential concerns early, helping with smoother unsecured creditor negotiations and a higher chance of proposal acceptance.
Personal Guarantees
If the director has signed personal guarantees for any of the debts that fall in the SBR, then it’s likely that the creditor will take action against them personally to recover the component that isn’t paid in the SBR. Company debt consolidation options or informal agreements may sometimes need to be explored before entering the process to minimise these risks.
Credit Files
The business' ASIC status updates to "Externally Administered" for the duration of the proposed SBR plan. This can, at times, create issues with the company’s credit and affect financing and credit cards. These updates are considered part of the creditor voting requirements, as they give creditors visibility on the company’s financial status.
Related Party Loans
If there are related parties that, on the Balance Sheet of the business, owe money to the company, then the creditors may take the stance that this needs to be paid to fund repayment to the creditors.
Commercial Agreements
An SBR is considered an insolvency event, which may create issues with commercial agreements the business has. However, for many businesses, it serves as a practical insolvency event alternative, helping them continue operations without resorting to liquidation. Generally, major creditors, like the ATO, are supportive of the process.
ATO Debt Help
Firmer action on ATO debt, such as Director Penalty Notices (DPNs), Statutory Demands or Winding-up Notices, can have significant impacts on the availability and timing of an SBR for a business. Seeking ATO debt help early can prevent escalations that might reduce the likelihood of proposal acceptance.
QBCC
To date, the QBCC have been supportive of the SBR process, and whilst technically an insolvency event, an SBR does not negatively affect QBCC licensing during restructure.
Is your business in financial distress?
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Our Role: We act for you
It’s important to understand that the RP’s job is to present an independent report to the creditors. They have strict rules to follow, and as such are typically conflicted from providing the company, and its directors, holistic advice that protects the directors’ interests as much as possible.
This is where we come in. We focus on director-centred strategies that align with business viability assessments and strong unsecured creditor negotiations to maximise the likelihood of proposal acceptance.
When appointed we work with you to do the following:
Review the company’s position and identify the issues that affect the company and its directors personally;
Work with the directors and their advisors to mitigate these issues as much as possible on behalf of the directors;
Structure, formulate and compile an SBR proposal to take to an RP; and
Manage the SBR process on your behalf, allowing you to focus on the day-to-day operations of the business.
If you don’t already have an RP you want to use, we will select one that we believe will yield the best outcome for the company and its directors in the circumstances. We often collaborate with a small business restructuring practitioner who understands how to meet creditor voting requirements and present proposals that creditors are more likely to support.
We work closely with a large number of SBR Practitioners, and as such get access to discounted costs. This often means that we can offer director-centric services for the same or very similar costs as going directly to an RP.
Ultimately, our role is to manage the SBR process on your behalf, working with you prior to the RP appointment to gather the necessary information for the process, then liaise with the RP on your behalf throughout the appointment period to allow you to focus on the day-to-day of the business. We also guide you through ATO debt help options and other compliance matters to ensure the proposal addresses all creditor concerns.
And Lastly....
On the basis the proposal is accepted, you make the payments under the agreed terms, the matter is finalised and you obtain substantial savings on the debt.
If the proposal is rejected, the RP’s engagement ends and the Company continues as it was previously.
Important Note
There is no guarantee the SBR proposal will be accepted, however in our experience creditors, such as the ATO, are extremely receptive to proposals which make sense.
So, is an SBR right for your business?
If your business is:
- struggling to meet its financial obligations,
- facing creditor pressures, experiencing cash flow challenges, or,
- struggling to meet taxation liabilities, extraneous ATO payment plans, or having issued Director Penalties or reported debts to credit bureaus?
Then a Small Business Restructure could be a powerful solution for you. With our support and guidance, you could overcome these challenges, regain financial stability, and position the business for sustainable growth and success. Leaving you with a stronger relationship in the long term.
Book your FREE call with us to see if an SBR is right for you.
With more than 15 years’ experience in both financial consultative roles and in corporate level leadership, we can identify options to help your business achieve financial independence.