What you Need to Know about Small Business Restructuring

Global markets are in flux and interest rates are climbing. Consequently, many small businesses in Australia are feeling the pinch. They’re struggling to fulfil their financial duties and keep their operations running smoothly.

The Australian government instituted the Small Business Restructuring Process (SBR) to aid struggling yet sustainable firms. Introduced on January 1, 2021, businesses can work with an SBR practitioner to restructure their debts. 

Small Business Restructuring: Overview and Purpose

SBR refers to a strategic process to tackle financial challenges and improve their overall business performance. A restructuring practitioner or a registered liquidator guides the process. Once a strategy is created it is presented to creditors for their review and approval so that the business can continue to operate and ideally, recover.

The primary goal of SBR is to:

• Provide the company time to create a plan to present to creditors.
• Improve financial stability.
• Mitigate the risk of insolvency.

Key benefits of small business restructuring

There are several benefits of a well-executed business restructuring plan:

• Early intervention:

A  small business restructuring plan (SBRP) enables businesses to seek viable help.

• Simplified method

SBRPs make reorganisation easier and more manageable for smaller companies than conventional alternatives.

• Enhanced economic stability

Financially, SBR can be a stress reliever. It facilitates struggling enterprises’ debt consolidation and is designed to make restructuring more affordable for small businesses than traditional insolvency options like voluntary administration.

• Maintaining authority

During a restructure, directors maintain control of their companies. It helps viable businesses continue trading while addressing their financial difficulties. SBR can give businesses facing temporary financial distress some breathing space, allowing them to restructure their debts and operations to become financially sustainable again.

• Insolvency moratorium for creditors

Creditors, including government agencies like the ATO, are barred from pursuing legal action to recover debts during the SBR process. 

• Debt restructuring

By entering the SBR process, small businesses can put a plan to their creditors to restructure their debts. 

Eligibility criteria for small business restructuring

Companies should consider whether they qualify for the SBR procedure. The key criteria include:

• The business must be operated as a company, which means sole proprietorships or partnerships are not eligible.
• This process is reserved for small businesses; therefore, the company’s liabilities can’t exceed $1 million.
• The corporation must have sufficient funds to pay all outstanding employee entitlements before submitting a restructuring plan to its creditors. In addition, you must have filed your tax returns and submitted all required paperwork to the Australian Taxation Office (ATO).
• The corporation cannot have used the small business restructuring or simplified liquidation processes in the prior seven years.

Small business restructuring: The process

• Appointment of RP

A corporation has 20 business days to create a restructuring plan, and submit the proposal to its creditors. 

• Development of restructuring plan and documentation

The RP is responsible for assisting the directors in developing the plan to be presented to the creditors. 

• Trading to continue during proposal time

The incumbent directors continue operations during the restructuring process. Debts incurred after the RP’s appointment are not included in the restructuring plan and must be paid by the Company.

• Time of acceptance

Creditors have 15 business days  to approve or reject the proposal. Disputes might occur about the claimed debt amounts, and the RP is responsible for resolving them.

• The termination and application of plans

If most creditors approve the plan, the business must proceed as outlined. When the  goals are met, the business can operate debt-free. However,  If the plan is not followed or is discontinued for any reason, the obligations become due immediately. 

Key takeaway

A small business restructure presents a significant opportunity for financially challenged yet viable businesses to restore stability and foster growth.