Guide to Small Business Restructure

With interest rates rising and predictions a global recession might be on the cards, many small businesses in Australia are finding it difficult to meet their financial obligations and find themselves wondering what they can do to keep their business operational. It should come as some comfort to know that business distress doesn’t necessarily mean the end of the line.

Eligible small business owners in Australia might be able to consider a business restructure using the Small Business Restructuring Process (SBRP). The small business restructuring process allows eligible businesses to restructure their debts and operations under the supervision of a restructuring practitioner, who will assist in developing a restructuring plan and restructuring proposal statement to be presented to creditors for their consideration (and agreement/approval) to achieve an outcome that enables the Company to continue in existence.

It is important to note that seeking professional advice and careful consideration of the options available is crucial before commencing a small business restructure. In this article, I have tried to answer some of the most common questions I hear from distressed small businesses weighing up their best course of action.

Business distress doesn’t mean the end of the line, a Small Business restructure can provide a solution to get Australian businesses back on the front foot.

What is a small business restructure?

A small business restructure is a process that allows eligible Australian businesses to reorganize their operations and debts with the assistance of a restructuring practitioner. The goal is to achieve a sustainable outcome and avoid insolvency.

Key elements of the SBRP are that the process allows directors of eligible companies to:

  • Retain control of the business, property and affairs of the company whilst a restructuring plan is developed.
  • Work with a restructuring practitioner to develop a restructuring plan; and

Enter into a restructuring plan with creditors which is binding if accepted by them.

What are the warning signs I might need to restructure my small business?

There are several warning signs to look out for, which may indicate small businesses need to consider a business restructure:

  1. Cash flow problems: If your business is struggling to pay bills on time or experiencing a decline in sales, it may be a sign of cash flow issues that could indicate the business needs to restructure its operations.
  2. Increasing debt: If your business is taking on more debt to cover expenses, it may signal a restructure is necessary to address underlying issues.
  3. Loss of key customers: If your business is losing its key customers or experiencing a decline in customer base, it could indicate the business needs to restructure its operations.
  4. Lack of profitability: If your business is consistently operating at a loss, a restructure might be necessary to improve its financial position and ongoing viability.
  5. Legal action or creditor pressure: If your business is facing legal action or pressure from creditors to pay debts, it’s time to speak to a restructuring advisor.

What is the restructuring process?

The restructuring process involves the development of a restructuring plan with your restructuring practitioner and entails providing a restructuring plan to creditors to reach an agreement about how to pay your debts.

The restructuring practitioner oversees the process and manages communication with creditors.

A small business may choose to restructure to reduce debt, renegotiate payment terms and improve cash flow.

What are the outcomes of a small business restructure?

The outcomes of a successful small business restructure could be a debt reduction, renegotiated payment terms, and improved cash flow. The best part is your business can continue trading and avoid insolvency.

How do I know if I qualify for a small business restructure?

Eligibility for a small business restructure depends on meeting certain criteria, such as having total liabilities of less than $1 million and being up-to-date with tax lodgements. It’s critical your business is up-to-date with employee entitlements (superannuation and unpaid wages), and you (the company or any director) must not have used the restructuring or simplified liquidation process in the last seven years.  That said, it’s important to seek professional advice to determine eligibility.

What is a restructuring plan?

A restructuring plan outlines the proposed changes to the business’ operations and payment terms for creditors. Creditors have 15 days to consider the plan and vote on it and it requires more than 50% (in value) to agree to it for it to proceed.

Once it is approved, your business can keep trading and the restructuring practitioner administers the agreed plan. During the repayment period, most of your creditors are unable to pursue legal recovery actions and directors are also immune to some enforcements by creditors, such as ipso facto contract clauses.

Ipso facto clauses are where one party may terminate or modify the operation of a contract upon the occurrence of a specified insolvency-related event (such as the appointment of an administrator, receiver or liquidator) against another party.[1]

What happens if creditors reject the restructuring plan?

If creditors reject the restructuring plan, you can consider other formal appointment options such as voluntary administration or liquidation.

What is the role of the restructuring practitioner?

The restructuring practitioner is responsible for overseeing the restructuring process and developing the restructuring plan. They advise the company and its directors and then they assist in communication with creditors. They then administer the agreed plan and distribute funds to creditors. The restructuring plan is complete when its terms are satisfied.

A small business restructure can provide tax relief for businesses in debt to the ATO.

Can a small business restructure be used to resolve ATO debt?

Yes, the ATO small business restructure rollover provides tax relief for eligible businesses that undertake a debt restructuring process. This can help to resolve ATO debt.

What is the difference between a small business restructure and administration?

A small business restructure is the process of debt restructuring and reorganising operations with the existing management team still able to run the business throughout the restructuring process, while administration involves appointing an external administrator to take control of the business and assets.

The goal of administration is to maximize returns for creditors, while a restructure is to avoid insolvency and achieve a sustainable outcome.

If after reading this article, you still have questions and wonder if a small business restructure is right for you, don’t hesitate, get in contact with us today for a free consultation.


[1] https://www.bakermckenzie.com/en/insight/publications/2020/03/ipso-facto-prohibition-australia

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