A Guide to
Small Business Restructuring in Australia

When was it introduced?

Introduced in 2021, SBR is part of a broader initiative to support small businesses in financial distress, particularly during the COVID-19 pandemic. This reform was part of the Australian government’s response to the economic challenges, which left many struggling to maintain solvency. The new law aimed to provide small businesses with an alternative to traditional insolvency processes, offering a lifeline during a period of widespread economic disruption.

Why was it introduced?

Prior to its introduction, many small businesses were forced to close their doors because of the complexity and cost of existing insolvency processes. By creating a more accessible restructuring option, the government aimed to keep businesses afloat, preserve jobs, and protect economic activity. The reform sought to prevent the unnecessary closure of small businesses and provide the opportunity to restructure their debts, avoid liquidation, and give them a better chance to survive and thrive.

The legislative timeline

The government aimed to provide immediate relief to small businesses, with the development of a long-term solution. The key milestones include:

• September 2020: The government first announced the reform as part of its broader COVID-19 response package aimed at assisting small businesses’ economic recovery.
• November 2020: The legislation was passed by Parliament, officially setting out the legal framework for the SBR process.
• January 2021: The SBR process came into effect, providing small businesses a formal, structured path to deal with insolvency. The timeline reflects the urgency of addressing small business struggles and providing a clear path for recovery.

What are the benefits of SBRs?

The introduction of SBR brought numerous key benefits that helped small businesses tackle financial difficulties while minimising the impact on their operations:

• Cost-Effective: The SBR process is designed to be more cost-effective than other restructuring options, such as Voluntary Administration, making it accessible to businesses that might otherwise struggle to afford the cost of formal insolvency proceedings. This makes it an ideal solution for small businesses that may have limited financial resources.
• Preservation of Business Operations: unlike liquidation, one of the key advantages of SBR is that it allows businesses to remain operational throughout the restructuring process. This means they can continue generating revenue and preserve jobs.
• Ownership Retention: One of the most significant benefits of SBR is that SBR allows business owners to retain control over the day-to-day operations during the restructuring process, unlike in other insolvency proceedings where ownership may be transferred.
• Simplified Procedure: The SBR process is designed to be less complicated than other formal insolvency options. With fewer formalities and simpler paperwork, business owners can focus on recovery rather than being bogged down by complex procedures. This makes it more accessible for small business owners who may be unfamiliar with complex legal processes.
• Improved Creditor Engagement: The SBR process promotes cooperative relationships between business owners and creditors, as it provides a structured framework for negotiating and agreeing on debt repayment terms. This approach can result in better outcomes for both parties.

These benefits make SBR a vital tool for small businesses seeking a structured, manageable way to address financial distress while protecting jobs and preserving business assets

Eligibility for a Small Business Restructuring

SBR offers a valuable process for businesses facing financial distress to recover while minimising the risk of liquidation. To qualify for an SBR, a company must meet specific criteria that determine its eligibility.

Who is eligible for an SBR?

To be eligible for Small Business Restructuring, a company must be able to declare that:

• The company is insolvent or about to become insolvent
• The company’s total liabilities, i.e. creditors, do not exceed $1 million on the day it enters the process (exclusive of employee entitlements)
• None of its directors has been a director of another company that has gone through another Small Business Restructuring or a Simplified Liquidation process within the last 7 years

To be eligible to propose a plan (up to 20 business days into the process), the company must also be:

• Up to date with all tax lodgements and
• Able to pay all due and payable employee entitlements

If the company is behind on either point it needs to get them up to date before proposing a Plan.

What is a “Small Business”?

The definition of Small Business can vary, but it is typically agreed a small business is one that has:

• Less than $10 million annual turnover
• Less than 20 full-time employees

Note these are guidelines for definition and not eligibility requirements for the SBR process.

How do I know if my company is insolvent and needs a SBR?

A company is regarded as insolvent when it is not able to pay all of its debts when they become payable. There are a lot of warning signs that a company is insolvent. Very commonly the most prominent warning sign is a large unpaid tax debt. Other signs can include ongoing losses, cashflow problems, overdue tax lodgements and difficulty gaining access to new credit.

How often can a business use Small Business Restructuring?

A business or director of a business can only access the SBR process once every seven years. This restriction is in place to ensure that the process is used as a genuine means of recovery, not repeatedly for financial relief. Upon completing the SBR process, the business must wait for seven years to reapply for another SBR.

What is a Small Business Restructuring Practitioner?

A Small Business Restructuring Practitioner is often referred to as an SBRP. It is a new class of Insolvency Practitioners, charged with the role of administering the Small Business Restructuring process. This person must be registered with ASIC as a “registered liquidator”.

Who can be a Small Business Restructuring Practitioner?

A Small Business Restructuring Practitioner must be a Registered Liquidator. Of course, Restructuring Works has several Registered Liquidators who can act as SBRPs.

Does the Small Business Restructuring Practitioner need to be independent?

Yes, an SBRP must be “independent”. This means that someone “connected” to the company cannot seek to be appointed as its SBRP. A “connected individual” includes someone who:

• has a debt of more than $5,000 owing to the company
• is a creditor of the company for more than $5,000
• is a director, senior manager, secretary or employee of the company
• is an auditor of the company.

What is the role of the Small Business Restructuring Practitioner?

The Small Business Restructuring Practitioner assists in debt restructuring whilst the company’s directors remain in control of the business. During the Small Business Restructuring process, the SBRP:

• assists the company in preparing its restructuring Plan and restructuring proposal statement
• circulates the restructuring Plan and restructuring proposal statement to creditors
• certifies to creditors that they believe the company is eligible for restructuring and that the company is likely to be able to meet its obligations under the Plan
• manages the disbursement of payments to the company’s creditors based on the terms set out in the Plan.

What qualifications do Small Business Restructuring Practitioners have?

SBRPs must be Registered Liquidators. To get registered as a Registered Liquidator, they must possess suitable experience, knowledge and abilities, and have their registration granted by an independent committee convened by ASIC. A new classification of Registered Liquidator can take on the role of Restructuring Practitioner only. They are required to be recognised accountants who have demonstrated the capacity to perform the functions and duties of the role.

How will I know if a Small Business Restructuring Practitioner is registered?

The ASIC website keeps a list of Registered Liquidators. That list can be found on the ASIC website under “Search Our Registers” then “Professional Registers”. Of course, RestructuringWorks has a number of Registered Liquidators who can act as SBRPs.

Can more than one person be appointed as an SBRP to a company?

Yes, it is often just one, but two or more Restructuring Practitioners may be appointed to act. Two or more is often referred to as a “joint and several” appointment.

What effect does the appointment of an SBRP have on creditors?

The primary purpose of a Small Business Restructuring is so that a company can deal with its creditors and change their rights. That could be to reduce the amount owing or change the terms of payment or both. As a result, the Small Business Restructuring process has a significant effect on creditors. Creditors fall into various classes and the effect is different for each.

What is the effect of a Small Business Restructuring on ordinary creditors?

While the company is in restructuring, ordinary unsecured creditors cannot begin or continue their claims against the company without the Restructuring Practitioner’s consent or the court’s permission. That is, any legal actions against the company are paused whilst the Small Business Restructuring process is ongoing.

What is the effect of an SBR on a creditors’ winding-up process?

Sometimes the situation will arise that a creditor has already commenced a legal action against a company. If that legal action has progressed to the stage of an application to the courts to have the company wound up, that is, to have a liquidator appointed, then the action must pause whilst the Small Business Restructuring proceeds. The court can consider what to do. Usually, if the court is satisfied that it is in the interests of the company for it to continue under the Small Business Restructuring process, then the restructuring will continue rather than winding up the company.

What is the effect of a Small Business Restructuring on secured creditors?

A secured creditor is usually a bank or financier who has lent money to the company and has taken security over some or all assets of the company. Secured creditors cannot exercise their rights, such as selling company property, without the Restructuring Practitioner’s written consent or with leave of the court.

How do creditors vote on a restructuring Plan?

The Restructuring Practitioner oversees the voting process. The Restructuring Practitioner provides creditors with the restructuring Plan and proposal statement. When the Plan is put to creditors, they have 15 business days to vote to accept or reject the Plan. During this time, creditors also seek to correct errors in the amount they are owed. A Plan is accepted if more than 50% of the creditors by value (so not in number) that vote, vote to accept the plan. Related party creditors are not entitled to vote on a restructuring Plan.

What will creditors consider in accepting a restructuring Plan?

A variety of documents are provided to creditors to help them consider the proposed Plan. The Restructuring Practitioner will provide:

• the company’s restructuring Plan
• the restructuring Plan standard terms
• the company’s restructuring proposal statement
• a declaration from the Restructuring Practitioner about whether the eligibility criteria for restructuring are met and whether the company is likely to be able to meet its obligations under the Plan
• a statement about the completeness of the information set out in the company’s restructuring Plan

The Restructuring Practitioner will also ask the creditor to:

• vote yes or no to the Plan
• advise if creditors agree with the amount of their claims as listed and, if not, provide information on the amount they say they are owed.

How are secured creditors impacted?

As their claims are backed by security interests held in the business’ assets, secured creditors may be still impacted by the terms of the restructuring process even if they generally have a higher priority in the SBR process. If the business is unable to meet its obligations, secured creditors may receive less than what they owed. Although the timing of repayments may be extended, which can affect cash flow and create uncertainty for the creditor. Secured creditors might have to weigh up whether accepting a reduced amount under the restructuring plan is preferable to a potential liquidation, where they could face the risk of less or no recovery.

How are related creditors impacted?

Related creditors, such as business partners, family members, or affiliates of the business are not permitted to vote on the restructuring plan like other creditors.

Frequently Asked Questions

Can creditors enforce debt collection during SBR?

Creditors are generally prohibited from pursuing any legal action to enforce debt collection. The business will be protected while it attempts to restructure.

What if the restructuring plan is rejected?

If creditors reject the restructuring plan, the business is free to seek another option to resolve its financial difficulties.

Can creditors negotiate the terms of the plan?

Yes, they can negotiate with businesses or administrators regarding the terms of the plan before voting. Although the terms may not be significantly different, creditors may suggest modifications that could make the plan more favourable.

Are creditors bound by the decisions of the majority in voting?

Yes, creditors who vote against the plan may be bound by the decision of the majority, depending on the voting results.

Can creditors challenge the SBR process?

It’s possible, but it would be an expensive and complicated legal process.

Who controls and trades the company during the Small Business Restructuring process?

The big advantage of Small Business Restructuring is that the company’s directors retain control of the company throughout. A dedicated Restructuring Practitioner’s role is to assist the directors in devising and overseeing the plan as it takes effect. If the directors want to do something that is outside “the ordinary course of business”, they can do so but need the Restructuring Practitioner to agree to the transaction.

What does it mean to trade “in the ordinary course of business”?

During Small Business Restructuring a company can continue to trade in line with its normal operations. However, some transactions might be deemed to be outside the ordinary course of business. If a transaction is outside the ordinary course of business, it can still be done but the Restructuring Practitioner must approve the transaction. Some transactions regarded as outside the ordinary course of business include:

• paying a creditor that arose before the restructuring began
• the transfer or sale of the whole or a part of the business
• the payment of a dividend to shareholders

What notice of the SBR must be provided in public documents?

Every public document must set out the phrase “Restructuring Practitioner Appointed” after the company’s name where it first appears in the document. So public documents will include things such as company letterhead, the website and purchase orders.

Why would directors choose to use restructuring?

Directors may choose to use the restructuring process as a way to avoid liquidation and to provide the business with an opportunity to reorganise its debts and possibly recover. By choosing to use SBR, the business can negotiate with creditors while continuing operations whilst expecting the ongoing generation of revenue. Directors may believe that with a restructuring plan, they can turn the company around and eventually repay creditors in full, or at least recover more than would be possible in liquidation. Directors may also use the SBR process to protect the jobs of employees, preserve the value of the business and to give breathing space to reorganise operations, which can be crucial for the business to recover from financial distress.

How much will creditors be paid under a Small Business Restructuring?

The amount creditors will be paid under an SBR depends on several factors, including the business’ financial situation, the value of its assets, and the terms of the restructuring plan. The main highlights include:

• Unsecured creditors typically receive a fraction of the amount owed to them.
• Secured creditors are generally given higher priority as they have collateral backing for their debts.
• Payment schedule, which allows the business to manage its cash flow while repaying creditors in instalments as it is often spread over time, depending on the terms of the restructuring plan.
• Creditors’ vote, the terms are ultimately decided by the creditors, who vote on the proposed restructuring plan, which must be agreed upon by a majority of creditors.

What happens if the restructuring Plan is not accepted by creditors?

For a Plan to be approved, it must be supported by more than 50% of the creditors by value that vote. If the restructuring Plan is not accepted, the restructuring process ends. The directors stay in control of the company but creditors are no longer prevented from enforcing their rights, for example, by taking legal action. Also, when the company comes out of Small Business Restructuring, a director is no longer protected from personal liability for insolvent trading. Directors in this situation will often consider placing the company into liquidation or voluntary administration.

Are ATO debts included in Small Business Restructuring?

Yes, ATO debts are included in the restructuring plan as unsecured debts. The ATO is often one of the largest creditors, which can mean they significantly influence the plan’s acceptance. However, it is important to engage with the ATO early in the process and ensure compliance with ongoing tax obligations, such as filing returns, and paying current liabilities, to maintain goodwill during negotiations.

If a company has a large ATO debt, is SBR a good solution?

Yes, absolutely. If a director attempts to negotiate a deal with the ATO, it will usually result in a Payment Arrangement, which will require payment in full, plus interest, payable within 2 years. A Plan under an SBR can be for up to 3 years but it is often a one-off payment, due to the reduced debt level.

Meeting employee entitlements under Small Business Restructuring

Before the company can propose the plan, all employee entitlements, including superannuation, must be fully paid. Failure to do so will result in disqualification of the business from using the SBR process. This compliance is a prerequisite for advancing the restructuring process, ensuring employees are not disadvantaged during the business’ financial recovery. It also demonstrates the business’ commitment to fair and ethical practices during the restructuring.

What do directors need to declare?

As part of the SBR process, directors must declare the business’ eligibility to the creditors and the RP. Directors must provide a detailed statement outlining debts and claims addressed in the restructuring plan. These declarations ensure transparency and help creditors make informed decisions about the plan. False or misleading declarations can result in legal consequences for directors, including personal liability.

What is the role of the directors during a Small Business Restructuring?

Directors have a very active role during a Small Business Restructuring. During the restructuring process, the directors remain in control of the company and trade the business. The consent of the Restructuring Practitioner is required before the directors enter into any transactions that are not in the ordinary course of the company’s business. The directors will also receive advice from the Restructuring Practitioner on the proposed Plan and will work with the Restructuring Practitioner to arrive at an appropriate Plan. It is possible that a director will need to explain to some creditors why it is in their interest to agree to the restructuring Plan.

What if the directors have provided personal guarantees to creditors?

It will often be the situation that a director has signed personal guarantees with suppliers or financiers. During the restructuring process, a personal guarantee cannot be enforced against a director or anyone else who signed a personal guarantee.

How is SBR compared to voluntary administration?

Small Business Restructuring was only introduced in 2021. The other main restructuring tool available to companies was, and is, voluntary administration. If a company qualifies for Small Business Restructuring, then it is very likely that it is better for a company to use Small Business Restructuring rather than voluntary administration. When comparing Small Business Restructuring to voluntary administration, the key difference is the person taking control of the business. Under SBR, the company directors remain in control of the business whereas in voluntary administration control of the company passes to the administrator. The Small Business Restructuring process is designed to be shorter and less regulated and as a result it also costs much less than voluntary administration. Here is a summary of other key differences:

Are there restrictions on the plan directors can put forward?

Yes, restructuring plans must comply with several restrictions:

• The plan must treat all unsecured creditors equally unless secured creditors are involved.
• Employee entitlements must be fully paid before proposing the plan.
• The plan must not exceed three years and must provide fair terms to creditors.

Can an approved restructuring plan be terminated?

Yes, an approved restructuring plan can be terminated by the RP if:

• The business breaches the terms of the plan.
• Creditors or courts raise any issues that warrant termination.
• Continuation is deemed not in creditors’ best interests. Termination restores creditors’ rights to pursue the business for unpaid debts.

Can an approved restructuring plan be varied later?

No, the approved restructuring plan cannot be varied after approval. Any necessary changes require proposing a new plan, which would also require the creditor approval process again.

How does an approved restructuring plan become complete?

An approved restructuring plan becomes complete if the business fulfils all obligations, such as making agreed payments to creditors. Upon completion, creditors have no further claims on the business for debt included in the plan.

Can the appointment of an SBRP be revoked, removed, or replaced?

No, it can’t be revoked – once started the process must continue to one of the possible conclusions. Yes, the Restructuring Practitioner can be replaced, but only under very limited circumstances. The directors can resolve to appoint a new practitioner when the original practitioner has passed away, becomes prohibited from continuing or has resigned. Unlike a voluntary administrator or a liquidator, the Restructuring Practitioner cannot be removed and replaced by the resolution of the creditors.

How should a company under a restructuring plan be referred to

The business must disclose its status as “subject to a restructuring plan” on all official documents and correspondence. This ensures stakeholders are informed of its financial status.

Does my small business qualify for Small Business Restructuring?

The Small Business Restructuring process is available to incorporated businesses, which commonly means Pty Limited companies, with creditors of less than $1 million. To be eligible for Small Business Restructuring, a company must be able to declare that:

• The company is insolvent or about to become insolvent
• The company’s total liabilities, i.e. creditors, do not exceed $1 million on the day it enters the process (exclusive of employee entitlements)
• None of its directors has been a director of another company that has gone through another Small Business Restructuring or a Simplified Liquidation process within the last 7 years
• The company is up to date with its tax lodgements and all employee entitlements (exclusive of leave and other entitlements that are not currently due to be paid) – if the company is behind on lodgements it needs to get them up to date before proposing a Plan.

Is Simplified Business Restructuring similar to “Chapter 11” in the United States?

Well, sort of! Small Business Restructuring is similar to other countries that have “debtor-in-possession” restructuring frameworks. By debtor-in-possession, we mean that the directors keep control of the business while a restructuring process is undertaken. Chapter 11 of the United States Bankruptcy Code is a federal law in the US that provides for a well-known restructuring alternative to traditional corporate bankruptcy. However, Small Business Restructuring is designed for small businesses and is much cheaper than the Chapter 11 process.