Small Business Restructuring (SBR) is a legal framework introduced in Australia in January 2021 as part of insolvency reforms aimed at supporting small businesses facing financial distress. It offers a streamlined and cost-effective way for businesses to restructure their debts while maintaining operations. SBR is an alternative to liquidation, designed to protect jobs and preserve the value of small businesses.

Background to the Small Business Restructuring regime

The SBR process was introduced in response to the economic challenges posed by the COVID-19 pandemic. Recognising that small businesses are the backbone of the Australian economy, the government sought to create a process tailored to their unique needs.

Unlike traditional insolvency processes, SBR allows business owners to remain in control of their operations while working with creditors to develop a manageable repayment plan. This approach aligns with modern insolvency principles that emphasise recovery and continuity. A major criticism of the scheme is that creditors must write off a large proportion of any debts owed by trading partners engaging in an SBR.

SBR also reflects global trends in insolvency law reform, where emphasis is placed on business recovery to mitigate the economic and social impacts of business failures. By providing a formal structure for debt restructuring, SBR aims to reduce the stigma often associated with insolvency while promoting creditor collaboration.

Eligibility for Small Business Restructuring

To access the Small Business Restructuring framework, businesses must meet certain eligibility criteria:

1. Business size:

   • The business must have total liabilities not exceeding $1 million (excluding contingent liabilities such as guarantees).

2. Solvency:

   • The business must be insolvent or likely to become insolvent in the near future.

3. Director status:

   • Directors must not have been involved in a previous restructuring or simplified liquidation process within the previous seven years.

4. Tax lodgements:

   • The business must have up-to-date tax lodgements, including Business Activity Statements (BAS) and Income Tax Returns.

5. Employee entitlements:

   • All outstanding employee entitlements, including superannuation, must be paid or provisioned for.

These criteria ensure that the framework is accessible to genuinely distressed businesses that demonstrate responsible financial management.

The Small Business Restructuring process

The SBR process is designed to be efficient and straightforward, providing businesses with a structured pathway to negotiate with creditors. Below is an outline of the key steps:

1. Appointment of a restructuring practitioner

• A Small Business Restructuring Practitioner (SBRP) is appointed to oversee the process. The practitioner works with the business to prepare a restructuring plan.
• The SBRP’s role includes ensuring compliance with legal requirements, advising on the plan’s feasibility, and liaising with creditors.

2. Business operations continue

• During the restructuring process, the business retains control of its operations, allowing directors to focus on trading and preserving value. This control is a distinctive feature of SBR compared to voluntary administration.

3. Development of a restructuring plan

• The SBRP assists the business in preparing a restructuring plan, which outlines how the business intends to repay its debts. Key features of the plan include:
  • A detailed list of creditors.
  • The proposed amount to be repaid.
  • The timeline for repayments (usually over three years).
  • Supporting documents, such as financial forecasts and cash flow statements.

4. Plan proposal to creditors

• Once finalised, the restructuring plan is presented to creditors for approval. Creditors are given 15 business days to review and vote on the plan.
• Creditors cannot take enforcement action against the business during this period, providing breathing space for the business to finalise the proposal.

5. Creditor approval

• The plan requires approval by a majority in value of creditors (over 50%) who vote on the proposal. Non-voting creditors are not counted in the majority calculation.

6. Implementation of the plan

• Upon approval, the business implements the plan under the supervision of the SBRP. Payments are made as per the agreed terms, and the SBRP monitors compliance.

7. Completion of restructuring

• Once all terms of the restructuring plan are met, the business is deemed to have completed the process, allowing it to move forward without the burden of unmanageable debt. If the plan fails, creditors may pursue other insolvency options.

Examples of Small Business Restructuring

Example 1: Retail business

A small retail clothing store is facing declining sales due to changing consumer trends and online competition accumulated debts of $800,000. The owner appoints an SBRP who helps prepare a plan to repay $400,000 over three years. The plan is approved by creditors, allowing the business to continue trading while restructuring its operations to include online sales. As part of the process, the business develops a marketing strategy and invests in an e-commerce platform, leading to increased revenue.

Example 2: Manufacturing business

A small manufacturing company with liabilities of $950,000 faces supply chain disruptions and rising material costs. Through the SBR process, the company proposes a plan to repay $500,000 over four years, with the remaining debt written off. Creditors approve the plan, enabling the company to streamline operations, secure alternative suppliers and focus on higher-margin products.

Small Business Restructuring was designed to provide a viable lifeline for Australian businesses facing financial distress. By meeting the eligibility criteria and following the structured process, businesses can realign their financial obligations, preserve value, and secure a sustainable future.

However, it should be acknowledged that creditors have voiced their frustration with the process, complaining they often come out of the experience far worse off particularly where there is a larger creditor that dominates or controls the voting outcome.

The framework’s emphasis on collaboration and recovery makes it a valuable tool for businesses navigating economic challenges. For businesses considering SBR, seeking advice from qualified professionals is essential to ensure a successful outcome.

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