Small Business Restructuring: What is it and is now the right time?

The current lockdowns might give you or your clients the ideal opportunity to take advantage of the new Small Business Restructuring laws.

On 1 January 2021, as part of the recent changes to Australian insolvency laws, a new restructuring regime for small business came into effect, commonly referred to as small business restructuring (SBR).

The SBR process allows eligible companies through the appointment of a restructuring practitioner (RP) to:

• retain control of the business, property, and affairs of the company while it develops a plan to restructure the company’s affairs with the assistance of a restructuring practitioner (Restructuring Phase); and
• enter into a restructuring plan with creditors (Plan Phase).

To be eligible for SBR:

• total liabilities of the company must not exceed $1 million
• no person who is a director of the company, or who has been a director of the company within the 12 months before the appointment of the RP, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years, unless they are exempt under the regulations
• the company must not have undergone restructuring or been the subject of a simplified liquidation process within the preceding seven years

The Restructuring Phase commences following the appointment of a RP during which the company has 20 business days to prepare and execute a restructuring plan (Proposal Period) which will then be put to creditors to vote on. The Proposal Period may be extended in certain circumstances.

It is important to note that before the Restructuring Plan can be put to creditors the Company must have:

• paid all employee entitlements that are payable; and
• given all returns, notices, statements, applications or other documents as required by taxation laws within the meaning of the Income Tax Assessment Act 1997 (Cth), although tax debts do not need to have been paid – only the required returns need to have been given.

If the above conditions are not met by the Company it will be deemed that the company failed to propose a restructuring plan within the Proposal Period and the SBR process will terminate.

It is crucial that directors consider prior to the appointment of a RP not only the eligibility criteria but also the prerequisites for putting the Restructuring Plan to creditors.

Once the restructuring plan is put to creditors, ordinarily creditors have 15 business days to vote on the restructuring plan and verify or dispute the Company's assessment of their admissible debts or claims (Acceptance Period). If during the Acceptance Period, the majority of creditors (in value) vote to accept the restructuring plan, the company will enter the Plan Phase the day after the Acceptance Period ends.

During both the Restructuring Phase and Plan Phase directors remain in control of the company and are responsible for the continued trading of the business of the company (if still trading).

Although to date there has been limited experience with SBRs in the economy it is said that the benefits of the SBR include:

• a simpler and lower-cost alternative to traditional formal insolvency appointments such as voluntary administration
• the directors remain in control and avoid insolvent trading liability as they attempt to restructure their business and pay off their debts and in turn minimise the disruption to the business.

One of the practical implications of directors remaining in control during the Restructuring Phase is the company’s ability or inability to induce creditors to continue to supply goods and services. Ordinarily during a voluntary administration of a company, creditors are willing to continue to supply the company in the knowledge that the voluntary administrator is personally liable for any debts he or she incurs. With a SBR creditors are not provided with that guarantee and with the knowledge of the company’s insolvency may be unwilling to continue to supply. This could seriously impact the successful restructuring of a company.

With the current COVID restrictions and strict lockdowns in New South Wales and Victoria and threat of further lockdowns in other states a lot of small businesses will now have significantly reduced trade or will be completely dormant and as such have a limited need for ongoing supply. Now that the vaccine rollout is starting to gather pace and governments have provided a pathway to a future without restrictions now may be the most opportune time for a company to consider a SBR.
It is important to note that a RP must be a registered liquidator. Although there is a new “class” of registered liquidator, they are only allowed to act as small business restructuring practitioners and not as voluntary administrators or liquidators. At DW Advisory our registered liquidators have extensive experience in restructuring and all types of external administrations and are best placed to assist you through the restructuring process.