What is a Small Business Restructure?
Small Business Restructuring is a methodical procedure governed by the Corporations Act 2001 ("the Act"), aimed at aiding eligible small businesses in reorganizing their debts and recovering from financial difficulties.
An SBR encompasses all unsecured creditors as of the appointment date.
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.
This means that you can generally present offers to settle debts a lot lower than through informal means.
Pay out debts over 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 DPNs haven't been issued, or an SBR is submitted within 21 days of a non lockdown DPN expiring, director's 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 debts of the business are crystalised on the day of appointment, and the process, once an SBR Practitioner is appointed, takes around 35 days.
SBR Eligibility Criteria
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.
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.
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.
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 on the dollar, the ATO has indicated a preference for offers around 25 cents on 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 minimized outstanding supplier accounts and collected debts from customers.
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").
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 payments terms of up to 3 years. The ATO have publicly announced they prefer to to see plans paid out within 2 years.
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.
Issues that may arise with an SBR
The below are some examples of issues that arise with client's that undertake an 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 director's are in the best position possible.
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.
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.
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 crditors.
Commercial Agreements
An SBR is considered an insolvency event, which may create issues with commercial agreements the business has. Generally major creditors, like the ATO are supportive of the process.
ATO Firmer Action
ATO firmer action, such as Director's Penalty Notices, Statutory Demands or Winding up Notices, can have significant impacts on the availability and timing of an SBR for a business.
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 licences.
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 director’s, holistic advice that protects the director’s interests as much as possible.
This is where we come in. When appointed we work with you to do the following:
Review the Company’s position and identify the issues that affect the Company and it’s directors personally;
Work with the director’s 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 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.
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.