by Shaw Gidley04.11.22

Small Business Restructuring: A Lifeline for Distressed SMEs

Many small businesses are still under significant financial pressure.

As well as dealing with legacy ATO and other debt, they are still, like all businesses, having to deal with a tight employment market, an increase in operating expenses and supply chain disruptions.

For SMEs in financial distress, where their revenues or income no longer meet or pay for their financial obligations, the situation may be causing considerable anxiety – especially if the ATO and/or creditors are on their back.

However, there are always options to ease the strain and turn things around. One of the best, but to date underutilised, is the small business restructuring process.

Introduced as part of the Government’s significant COVID-19-induced insolvency reforms and effective as of January 1 2021, the small business restructuring process (SBR) is a simpler and more cost-effective way for SMEs to pull themselves out of crisis.

The process requires the appointment of a small business restructuring practitioner who helps the business deal with its debt and turn things around. It also protects directors from personal liability of their company debts.

It is often described as a hybrid of voluntary administration and safe harbour.

As well as helping small businesses deal with their debts, turn their business fortunes around and being simpler and more cost-effective than other insolvency appointments, directors of the company also remain in control.

This means directors stay in control of the process and can undertake transactions in the ordinary course of business and develop and plan a proposal, assisted by their small business restructuring practitioner.

Appointing a small business restructuring practitioner also gives the ATO, suppliers, banks, employees and other stakeholders confidence that the business is taking proactive and positive steps to deal with its financial difficulties.

This can push pause on aggressive recovery action.

To access the small business restructuring process, a business must:

  • Be a small business (<20 employees) facing insolvency
  • Be an incorporated business (Pty Ltd entity)
  • Have total liabilities (including secured and related-party debt) under $1 million
  • Not already be subject to an insolvency administration

The company must also be substantially complying with obligations to lodge their ATO returns, and employee entitlements, including superannuation, must be paid.

Once eligibility to enter the process has been confirmed, the process works as follows:

  • STEP 1: The company appoints a small business restructuring practitioner. Importantly, ASIC and the company’s creditors must be notified of the appointment within one business day.
  • STEP 2: The company and practitioner have 20 days to work on a restructuring plan and provide supporting documentation. A plan typically includes a proposal to pay a specified amount to unsecured creditors. ASIC must be notified of the plan within five business days.
  • STEP 3: The practitioner serves the plan and other required documents to the company’s creditors. This should be done soon after the plan is finalised.
  • STEP 4: Creditors have 15 business days to vote on the plan. If over 50% of creditors approve the plan, it is implemented. If the plan isn’t approved, the process ends, and the company either continue to trade or, more likely, enter voluntary administration or liquidation.

The ideal outcome is that all of the business's obligations in the plan will be met, all admissible debts and claims are fulfilled, and the business is able to continue trading into a more secure financial future.

The chance of small business turnaround is high

While the small business restructuring process has been underutilised to date, this is largely because of a lack of awareness rather than a lack of results.

According to recent figures, only a small percentage of small businesses insolvency appointments have taken advantage of the process. However, the success rate has been around 90% for those that have. In some cases, creditors have agreed to less than 20 cents per dollar. 

It’s definitely an option we would recommend.

If you or a client is financially struggling right now, contact our experts at Shaw Gidley today on (02) 4908 4437 or (02) 6580 0400 to get clarity on your situation and/or start the small business restructuring process. Please be assured that all discussions are confidential.