A Guide to Small Business Restructuring

Insolvency

Navigating financial difficulty is a significant challenge for any small business owner. When your company faces an uncertain financial future, understanding your options is the first step toward regaining control. The small business restructuring (SBR) process offers a powerful framework for eligible companies to manage their debts proactively while the directors remain in charge.

At Dormer Stanhope Lawyers, we provide expert guidance to help businesses navigate this complex terrain. This guide explains the small business restructuring process, its benefits, and how it can provide a viable path forward for your company.

What is Small Business Restructuring?

Small business restructuring allows an incorporated company facing financial distress to propose a single, binding offer to its creditors. This offer, known as a restructuring plan, aims to settle company debts for a reduced amount. The entire process is overseen by a registered small business restructuring practitioner, but crucially, the directors retain control of the business operations.

Unlike more disruptive insolvency procedures, SBR is designed to be a streamlined and cost-effective solution, allowing your business to continue trading and preserving its value.

The Key Benefits of Small Business Restructuring

The SBR framework was introduced to provide a lifeline for small enterprises, offering several distinct advantages over other formal insolvency processes like voluntary administration.

The primary benefits include:

• Directors Retain Control: The directors continue to manage the day-to-day operations of the company.

• Reduced Costs: The process is generally less expensive than voluntary administration, preserving more value for the business and its creditors.

• Faster Turnaround: The SBR process has defined, shorter timeframes, providing certainty and a quicker resolution.

• Less Stigma: It is often perceived as a proactive step to resolve financial issues rather than a business failure, which can help maintain relationships with suppliers and customers.

Is Your Business Eligible for Restructuring?

To access the small business restructuring process, your company must meet specific criteria. Understanding these requirements is essential before proceeding.

Eligibility Checklist:

• Company Structure: Must be an incorporated company.

• Total Liabilities: Liabilities must be less than $1 million. This figure excludes employee entitlements but includes debts to related parties and secured creditors.

• Tax Lodgements: All required tax lodgements, such as Business Activity Statements (BAS) and income tax returns, must be up to date with the Australian Taxation Office (ATO).

• Employee Entitlements: All outstanding employee entitlements, including superannuation, that are due and payable must be paid before a restructuring plan can be presented to creditors.

• Previous Restructuring: The company, and any director (or former director from the past 12 months), cannot have used the SBR process or a simplified liquidation within the last seven years.

The directors must also resolve that the company is insolvent or is likely to become insolvent in the future.

Small Business Restructuring vs Voluntary Administration

While both processes are initiated when a company is or is likely to become insolvent, they differ significantly. The main distinction lies in who controls the company. In an SBR, directors remain in control, whereas in a voluntary administration, an appointed administrator takes full control.

Here is a comparison of the key differences:

Criteria	Small Business Restructuring (SBR)	Voluntary Administration (VA)
Control	Stays with the directors, supervised by a restructuring practitioner.	Shifts entirely to the appointed voluntary administrator.
Trading	The business continues to trade under the directors' control.	Trading is possible but is managed by the administrator.
Duration	A 20-business day proposal period, followed by a 15-business day voting period for creditors.	A more extended process, typically lasting 20 business days (or more) until the second creditors' meeting.
Cost	Generally lower due to the directors' continued involvement.	Can be significant, particularly if the business continues to trade, impacting creditor returns.
Outcome if Rejected	The process ends, and creditors can resume their claims. The company may then enter VA or liquidation.	The company typically proceeds directly into liquidation if the proposal is rejected.

Choosing SBR can be a strategic decision for directors who wish to steer their company through a difficult period and maintain operational continuity.

How the Small Business Restructuring Process Works

The SBR process is structured and follows a clear timeline, providing certainty for both directors and creditors.

1. Appoint a Practitioner: The directors resolve that the company is insolvent (or likely to become so) and appoint a small business restructuring practitioner.

2. Develop the Plan (Up to 20 Business Days): The directors work with the restructuring practitioner to develop a formal restructuring plan. During this time, a moratorium is placed on most unsecured creditor claims, providing breathing room.

3. Directors' Declaration: Within five business days of the process starting, directors must provide a declaration to the practitioner. This confirms the company's eligibility and discloses any potentially voidable transactions.

4. Certify the Plan: The practitioner reviews the company's financial affairs and the proposed plan. If satisfied, they certify the plan and send it to creditors for consideration.

5. Creditor Voting (15 Business Days): Creditors have 15 business days to vote on the proposed plan. A plan is approved if a majority in value of the unrelated creditors who vote agree to it. Related creditors are not entitled to vote.

6. Implement the Plan: If approved, the company is bound by the restructuring plan. The practitioner administers the plan, which typically involves making payments to creditors over a period of up to three years.

The Role of the Restructuring Practitioner

A restructuring practitioner is a registered liquidator who acts as an independent and professional guide throughout the SBR process. Their role is not to take control of your company but to support you.

The practitioner’s duties include:

• Assisting directors in determining eligibility for the SBR process.

• Helping directors develop the restructuring plan and prepare the necessary financial information.

• Reviewing the company's affairs and certifying the plan for creditors.

• Communicating with creditors and facilitating the voting process.

• Administering the plan funds and making distributions to creditors if the plan is approved.

Because the directors remain in control of day-to-day activities, the practitioner is not personally liable for company debts incurred during the restructuring period. Dormer Stanhope Lawyers can connect you with trusted and experienced restructuring practitioners to ensure the process is managed effectively.

Navigating Business Debt Solutions with Dormer Stanhope Lawyers

Facing financial insolvency can be an incredibly stressful experience. The small business restructuring process provides a structured and supportive path to recovery, but navigating it requires expert legal and financial guidance.

We can help you understand if SBR is the right option for your company, ensure you meet all eligibility criteria, and guide you through each step of the process. Our goal is to protect your business and provide a strategy for a sustainable future.

If your business is facing financial pressure, contact Dormer Stanhope Lawyers today to discuss how we can help you explore small business restructuring.