small business (sb) restructuring plan

What Is the Small Business Restructuring Process? Here’s What to Know

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In the intricate dance of commerce, small businesses often find themselves navigating treacherous financial waters. The challenges they face are diverse and can range from economic downturns to unexpected disruptions, forcing entrepreneurs to seek innovative solutions to ensure the survival and growth of their enterprises. One such solution that emerges as a beacon of hope in times of financial turmoil is the small business restructuring process. This comprehensive and transformative approach is not just a strategic maneuver but a lifeline for businesses grappling with the complexities of financial distress.

The world of business is dynamic, and in this ever-changing landscape, the ability to adapt and evolve is crucial for long-term success. The small business restructuring process is not merely a set of procedural steps; it's a strategic reimagining of the entire business framework. Through a careful examination of financial health, identification of critical problem areas, and the implementation of targeted solutions, the restructuring process empowers businesses to weather the storm and emerge more resilient than before.

The Basics of Small Business Restructuring

Small business restructuring is a comprehensive approach undertaken to address financial distress and reorganize the company's operations, finances, and structure. At its core, this process aims to provide struggling businesses with the tools and strategies necessary to navigate through turbulent times. It involves a careful evaluation of the company's financial health, identification of key problem areas, and the formulation of a plan to rectify these issues. During the restructuring process, businesses may consider various options such as debt renegotiation, asset reallocation, and operational adjustments. You can click here to learn more about the reputable company that helps with these kinds of situations. The goal is to create a viable and sustainable business model that can withstand economic challenges and ensure the long-term success of the enterprise.

Identifying Financial Distress

Recognizing the signs of financial distress is the first step in the small business restructuring process. These signs may include a consistent decline in revenue, increasing debt levels, cash flow issues, and an inability to meet financial obligations. Business owners must be proactive in monitoring their financial indicators and seek professional advice at the earliest signs of distress.  Financial experts often recommend conducting a thorough analysis of the company's financial statements, cash flow projections, and budgetary constraints. The assessment they provide helps identify the root causes of financial distress and provides a foundation for developing an effective restructuring plan.

Formulating a Restructuring Plan

Once financial distress is identified, the next critical step is formulating a restructuring plan. This involves a detailed analysis of the company's operations, assets, liabilities, and market position. The restructuring plan may include debt restructuring, renegotiating contracts, workforce adjustments, and reevaluating the company's product or service offerings.

Collaboration with financial advisors, legal professionals, and other experts is often essential during this phase. The restructuring plan should be comprehensive, addressing both short-term financial challenges and laying the groundwork for long-term sustainability. Clear communication with stakeholders, including employees, creditors, and investors, is crucial in garnering support for the proposed changes.

Legal Considerations in Small Business Restructuring

Navigating the legal aspects of small business restructuring is a complex but essential component of the process. Depending on the severity of the financial distress, businesses may opt for formal legal procedures such as filing for bankruptcy or utilizing alternative mechanisms like voluntary administration.

Understanding the legal implications of each option is crucial for making informed decisions. Bankruptcy, for example, may involve liquidating assets to repay creditors, while voluntary administration allows businesses to continue operating under the guidance of a restructuring professional. Business owners should seek legal counsel to ensure compliance with relevant laws and regulations throughout the restructuring process.

Implementing Changes and Adjustments

With the restructuring plan in place and legal considerations addressed, the next phase involves implementing changes and adjustments within the organization. This may include renegotiating contracts with suppliers and creditors, downsizing the workforce, selling non-core assets, or streamlining operational processes.

Effective communication with employees is paramount during this stage to minimize uncertainty and maintain morale. Business leaders must provide clear guidance on the changes being implemented and emphasize the long-term benefits for the company. Flexibility and adaptability are key as the organization transforms to align with the new restructuring strategy.

Monitoring Progress and Making Adjustments

The small business restructuring process is an ongoing journey that requires continuous monitoring and adjustments. Regularly reviewing financial performance, assessing the effectiveness of implemented changes, and making necessary adjustments are critical to the success of the restructuring plan.

Financial metrics, customer feedback, and market trends should be closely tracked to gauge the impact of restructuring efforts. If certain aspects of the plan prove ineffective or new challenges arise, business leaders must be prepared to adapt and modify the strategy accordingly. Flexibility and a willingness to learn from ongoing experiences are essential for achieving sustainable results.

Rebuilding and Sustaining Success

As the small business restructuring process unfolds, the ultimate goal is to rebuild the company's financial health and position it for sustainable success. This phase involves capitalizing on the positive outcomes of the restructuring efforts, rebuilding relationships with stakeholders, and fostering a culture of financial prudence within the organization.

Rebuilding may include investing in new growth opportunities, expanding market reach, and enhancing operational efficiency. The lessons learned from the restructuring process should be incorporated into the company's strategic planning to ensure resilience against future challenges. Celebrating milestones and communicating successes internally and externally can contribute to rebuilding the company's reputation and instilling confidence in stakeholders.

Navigating the small business restructuring process requires a comprehensive understanding of financial dynamics, legal considerations, and strategic planning. Recognizing the signs of financial distress, formulating a detailed restructuring plan, and implementing changes with precision are crucial steps in this transformative journey. Legal considerations, such as bankruptcy and voluntary administration, must be navigated with care, and ongoing monitoring and adjustments are necessary for sustained success. In the face of financial challenges, small businesses can emerge stronger through proactive restructuring efforts. By embracing change, learning from experiences, and rebuilding with a focus on sustainability, entrepreneurs can navigate the complexities of financial distress and pave the way for a resilient and prosperous future.

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New insolvency reforms to support small business

Changes have been made to our insolvency framework to help more small businesses restructure.

Last updated 20 May 2021

The Australian Government has made changes to our insolvency framework to help more small businesses restructure and survive the economic impact of COVID-19.

Where restructuring is not possible, businesses will be able to wind up faster, enabling greater returns for creditors and employees.

Two new processes are available for small businesses from 1 January 2021:

• simplified liquidation framework
• small business (SB) restructuring plan.

Eligibility

The new processes are available to incorporated businesses with liabilities of less than $1 million:

• simplified liquidation – you must have all your lodgments up to date to be eligible
• paid all employee entitlements that are due and payable (including superannuation)
• your tax lodgments up to date (or at least been 'substantially complying' with this requirement).

You can view your lodgement information in Online services for business .

What practitioners need to do

From 1 January 2021, you can notify us of the proposed plan with supporting documents by either:

• secure mail message in Online services for business
• fax or mail using the Debt insolvency cover sheet (NAT 14588) .

New subject selections are available for both:

• simplified liquidation
• SB restructuring.
• Contacting us about insolvency – submit your information to us via Online services for business or by fax or mail using the cover sheet.
• Insolvency reforms to support small businesses recovery – Treasury media release, 24 September 2020 External Link
• Australian Securities & Investments Commission External Link – for business

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Guide to small business restructure.

David Hurst

Director & asic registered liquidator.

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.

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:

• 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.
• Increasing debt: If your business is taking on more debt to cover expenses, it may signal a restructure is necessary to address underlying issues.
• 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 .
• 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.
• 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.

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 lodgments. It’s critical your business is up-to-date with employee entitlements (superannuation and leave accruals). 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.

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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What Is Business Restructuring?

Why and How Businesses Restructure After Bankruptcy

• Why Does a Business Restructure?

How Restructuring Works

Business restructuring vs. liquidation.

FG Trade / Getty Images

If a business is facing liquidation, it may opt instead for Chapter 11 bankruptcy—a type of bankruptcy that grants a debtor the space and legal protection to restructure their business and pay back creditors over time. In short, it provides a second chance. But the success of a Chapter 11 bankruptcy depends on how a business handles its critical restructuring period.

To restructure a business successfully, a debtor must make strategic, fundamental changes to the company and also have the resources to conduct major upheaval.

Historically, most successful restructures are carried out by large businesses, while small businesses have gone from bankruptcy to liquidation. However, a recently enacted federal law called the Small Business Reorganization Act (SBRA) aims to reduce restructuring costs for individuals and small firms. 

Learn how business restructuring really works and how it could help get back your business back on its feet. 

All businesses have an archetypal structure, developed as a way to establish how the organization functions to execute its goals. A company may be organized based on specialized function, with accountants in the finance department and marketers in the marketing department, for example. Or a company may be structured around business lines or divisions. 

When a company goes through restructuring, it’s organizing the system in a new way to increase the effectiveness of the operation, often changing its original structure. A restructure will likely also include reconfigurations, or more surface-level changes such as adding, splitting, transferring, or dissolving business units that don’t necessarily impact the deeper structure. 

In 1995, for example, IBM restructured its company into a back-to-front matrix, so that divisions such as technology would develop products that the front-end (marketing) team would then serve to customers. This represented a reverse of the company’s previous matrix, and the restructuring was viewed as a success.

Most restructuring under Chapter 11 includes relieving debt obligations that stifle growth, terminating unprofitable contracts, or selling unproductive assets. Delta successfully avoided Chapter 11 in 2007 in part by renegotiating its pilot contracts, for example, saving the company around $280 million annually.

Why Does a Business Restructure After Bankruptcy?

A Chapter 11 bankruptcy offers particular incentives to restructure. Per their restructuring plan, a debtor might be able to do things they couldn’t legally do during the normal course of business, such as pausing or amending debts or rejecting unprofitable contracts. 

A company may decide to restructure without the threat of bankruptcy. This may occur to keep up with shifting markets, or when a company enacts other organizational changes, such as a merger with another business. 

After filing for Chapter 11 Bankruptcy, a debtor will draw up a written disclosure statement and a restructuring plan. The plan of reorganization aims to convince creditors and the court that, upon completion of the plan, the company will achieve financial solvency. 

Plan Approval

Under the SBRA, small businesses can significantly reduce their Chapter 11 Bankruptcy costs. For example, small businesses no longer have to pay for a creditors’ committee to oversee and vote on restructuring, a historically prohibitive cost for smaller firms.  

To be considered a small business debtor, the total, noncontingent liquidated secured and unsecured debts of the organization must amount to $2,566,050 or less.

The plan approval process for a company filing Chapter 11 Bankruptcy includes the following:

• A debtor has a 120-day period to file an exclusive restructuring plan. The court may extend this exclusivity period up to 18 months. After that period, a creditor or case trustee may file competing plans to the court.
• The reorganization plan must demonstrate that a business will be capable of meeting all financial obligations going forward, including debts, federal income, and payroll taxes.
• The court appoints a U.S. trustee to oversee proceedings and make sure the plan stays on track. 
• The debtor must report balance sheets, regular earnings and profitability reports, compliance reports, and more to the court throughout the restructuring process. 
• An automatic stay temporarily protects debtors from “all judgments, collection activities, foreclosures, and repossessions of property.”

Debt Management

In addition to implementing functional organizational changes, a company will probably include debt management in its restructuring plan. There are many programs and incentives that allow for debt management under Chapter 11:

• Under certain conditions, a debtor can implement debtor-in-possession (DIP) financing, which means that a debtor can finance certain debt using funds that it may not have been able to previously. This debt repayment outweighs all other debt or equity.
• A restructuring can include preparing some or all company assets for sale. Buyers won’t have to contend with typical legal liabilities (such as potential fraud), making these assets highly desirable. 
• A restructuring enables debtors to legally void certain contracts if they cannot meet the requirements. The contractor must renegotiate or shoulder the loss.
• A restructuring also allows for special exit financing, which helps the company emerge from bankruptcy. Exit financing could make a company more attractive to investors, since it denotes low liability and the company is actively trying to get out of debt.  

If a business doesn’t comply with its Chapter 11 restructuring plan—such as a failure to obtain financing or a failure to file monthly reports—the court will dismiss the case. The trustee may also move to file a Chapter 7 bankruptcy if the debtor does not successfully reorganize and get a debt payment plan approved, thus liquidating the debtor’s assets.

Liquidation means a trustee will convert anything of value into cash, which is used to pay creditors. 

Chapter 7 provides relief to companies, regardless of the amount of debt they owe or whether a debtor is solvent or insolvent. Unlike restructuring, much of the debtor’s property will no longer belong to them. It will be put into the hands of the trustees handling the liquidation. 

Key Takeaways

• A business may avoid liquidation by restructuring its corporate framework and debt.
• Companies are granted leniency during Chapter 11 restructuring, such as the ability to cancel unprofitable contracts and suspend foreclosures.
• A restructuring plan is often a collaborative effort between debtors, creditors, an appointed U.S. trustee and the court. 
• Chapter 11 Bankruptcies were previously unaffordable for small businesses, but the SBRA has reduced costs for these firms.

IBM. “ IBM Highlights, 1990 - 1995 ,” Page 26. Accessed March 26, 2021.

Delta News Hub. " Delta Pilots Ratify Contract ." Accessed March 26, 2021.

American Bar Association. " The Small Business Reorganization Act: Big Changes for Small Businesses ." Accessed March 26, 2021. 

United States Courts. " Chapter 11 - Bankruptcy Basics ." Accessed March 26, 2021.

IRS. " Chapter 11 Bankruptcy - Reorganization ." Accessed March 26, 2021.

Harvard Business Review. " A Primer on Restructuring Your Company’s Finances ." Accessed March 26, 2021.

What you need to know about small business restructuring

Get business advice during times of financial difficulty and uncertainty.

Posted: 9 August 2023 

When your small business faces uncertainty, taking action can feel daunting. To plan the path to business recovery, you need to know what challenges are standing in your way and understand your options. Restructuring your small business may be one way of ensuring its success into the future.

What is small business restructuring?

Small business restructuring — also called company restructuring or corporate restructuring — involves making significant changes to the organisation and operation of your business. Under the Corporations Act 2001 , a company can restructure its debts by proposing and agreeing on a restructuring plan with its creditors. 

For small businesses, this might mean looking at the roles and responsibilities of your staff and identifying where efficiencies can be made.

What does the restructuring process involve?

An independent Service NSW Business Connect advisor has been supporting small business owners as they navigate times of financial difficulty. This can include paying back a debt or meeting repayment terms. The advisor can also provide advice to businesses facing insolvency or connect them with a restructuring support specialist. 

'Restructuring your small business can be an emotional process. It can bring up a lot of fear and doubt. I support owners to look at their business objectively and guide them through the many options that may exist for them, depending on their personal circumstances,' the advisor says.

Consider the following steps if you are thinking about restructuring your small business:

• Assess your current financial situation: Get support from your accountant or financial advisor to help assess your financial position, your organisational structure and operations, and your existing challenges and issues. Make a list of your creditors and your debtors.
• Set your restructuring goals: Get clear about what you want to achieve through the restructuring process and create a plan. This could include reducing your costs, finding a new competitive edge, streamlining your operations or meeting new needs in the market. Consider where you are now, where you want to go and  what steps you can take to reach your goals.
• Explore ways to reduce your financial strain: Conduct a detailed financial analysis to identify areas for improvement. You can explore options such as renegotiating loans, refinancing debt or reducing overhead costs. You can also consider setting up new payment arrangements with suppliers or exploring new ways to generate revenue. For example, subscriptions are often a big cost for small businesses. Can you cut costs here? Or are you in a position to pay yourself less?
• Streamline your operations: Identify opportunities to streamline your operations and improve efficiency. This may involve re-evaluating your current processes, adopting new technologies, automating tasks, or outsourcing non-core functions such as admin or IT support, advertising or accounting. 
• Consider adapting your business: What options exist to pivot your business? Can you diversify your service or products? Is there a new target market or niche community that you could tap into? Can you collaborate with a partner or business that complements yours to build a relationship that benefits everyone?

Why is it important to act early?

Successful restructuring depends largely on acting early. It allows you to address challenges quickly to maximise your chances of success. It also enables you to put cash-saving measures in place promptly and minimise disruption to your team, suppliers and customers.

'By taking action at the earliest signs of trouble, you position your business for a more efficient and effective transformation,' added the advisor.

A short-term rental business located in Northern NSW was faced with changing legislation that would cause a 30% downturn of holiday guests. The small business owners booked a call with Service NSW Business Bureau and were connected with their local independent Business Connect advisor.

'They recognised the impact this change could have on their business and acted promptly. They have been consolidating their funds, forecasting their cash flow, testing the holiday market outside of their region and even investigating other business opportunities.' 

The advisor has worked with the owners to implement their small business restructure plan. Their plan will help to preserve their existing business’s value while they pivot into an aligned business market.

Are you considering restructuring your small business? Find a Business Connect advisor who can help you understand the process. 

Related links

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Small business restructuring: What is this pathway & how does it work?

Covid-19 created a tough economic environment and the government made changes to allow small businesses to to restructure debt more easily and with less expense..

What are the benefits of small business restructuring? Small business restructuring was introduced for small businesses, its creditors, and its employees to get the benefits of:

• reduced costs
• shortened turnaround times
• increased and easier access
• retained control by business owners/directors (through the debtor-in-possession model).

Who can access small business restructuring?

Currently incorporated companies with liabilities with less than $1 million (excluding employee entitlements) are eligible. All tax lodgments must be up to date. This means that directors have lodged any returns, notices, statements, applications, or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act 1997 ).

Under the restructuring plan process, all employee entitlements that are due and payable must be paid before that plan can be put to creditors. And requires directors to make a declaration about certain company transactions and what their reasonable grounds are for believing they qualify for a restructuring plan.

The small business restructuring process can only be used once in a seven-year period. This applies to both the company and the directors (including former directors who resigned in the previous 12 months). It also is excluded if both the company and directors entered into a small business restructure appointment or simplified liquidation (which was introduced with the restructuring process reform) in the same seven-year period.

Why would directors choose to use restructuring? 

Directors who want to try to save their business through restructuring company debt while retaining control of business operations and creditor relationships.

Is restructuring available to me? 

Companies are expected to be the primary user of restructuring; however, it is available to other incorporated entities such as registered clubs, co-operatives etc. Sole traders do not have an equivalent option under the personal insolvency regime (although a part 10 agreement under Part X of the Bankruptcy Act 1966 may produce a similar outcome in some cases).

Directors must also resolve that the company is insolvent or is likely to become insolvent at some future time and that a restructuring practitioner should be appointed.

Liabilities for the purposes of restructuring includes debts to related parties and includes contingent liabilities.

What do directors need to declare?

Within five business days after the restructuring begins (or longer if approved by the restructuring practitioner), directors must provide the restructuring practitioner with a signed declaration stating that:

• The company is eligible.
• Whether the company has entered into a voidable transaction.
• The directors believe on reasonable grounds that the company meets the eligibility criteria, and why.

Transactions outside the ordinary course of business, such as material asset transfers and forgiving related party debts, are the sorts of transactions that might be voidable in a liquidation. If in doubt, directors may require appropriate advice before making the declaration.

How does the restructuring process work?

Directors can continue to trade in their company’s normal course of business (subject to certain control and restrictions) while undergoing the restructuring process.

The process can take up to 35 business days and is broken down into two phases:

• The proposal phase : Directors and external practitioner work on plan for up to 20 business days.
• The acceptance phase : Creditors have up to 15 business days to vote thereby approving or rejecting the plan.

The flowchart below outlines the steps involved.

Are there restrictions on the plan directors can put forward?

All restructuring plans must include several prescribed terms and conditions. For example, admissible debts and claims must rank equally and receive a pro-rata share of the funds available for distribution (including related creditors). Additionally, a creditor cannot receive a transfer of property other than money.

The restructuring plan can be conditional on a future event occurring e.g. a sale of property/asset within a maximum of 10 days after creditors accept the plan.

The restructuring plan is limited to a three-year term.  

How are secured creditors impacted?

Secured creditors are subject to similar moratorium provisions as applies in a voluntary administration and will only be bound by a restructuring plan to the extent they agree to be bound, under regulation 5.3B.29. However, any shortfall a secured creditor sustains will be covered by the restructuring plan and again they are bound by it.

How are related creditors impacted?

Related creditors do not get to vote on the plan. However, they receive a distribution under the restructuring plan.

How does an approved restructuring plan become complete?

When an approved restructuring plan is fully effectuated in accordance with its terms, it terminates (is completed), and the company is freed from the debts covered by the plan.

Can an approved restructuring plan be terminated?

Yes. A plan can be terminated if:

• A creditor obtains a court order.
• If the plan is conditional on a particular event occurring within 10 business days after the plan is made, and the event does not occur within that period (i.e. a condition precedent).
• If there is a breach that goes un-remedied for 30 business days.
• If an administrator, liquidator or provisional liquidator is appointed to the company.

Can an approved restructuring plan be varied later?

Yes. However, varying an approved restructuring plan might not be commercially viable in many cases as a court order is required.

What does the restructuring practitioner do? 

All registered liquidators are automatically entitled to act and be appointed as a restructuring practitioner. Only registered liquidators can act and be appointed to the new simplified liquidation process.

The restructuring practitioner’s role includes:

• helping determine eligibility
• supporting the directors to develop its plan and review the company’s financial affairs
• certifying the plan for creditors to vote on
• managing disbursements if plan is approved. 

Directors stay in control of the company’s day-to-day activities, therefore the restructuring practitioner is not personally liable for the company debts/actions.

What does a small business restructuring plan cost?

The basis for the restructuring practitioner’s remuneration is:

• A fixed fee for the proposal phase, which directors resolve prior to the appointment.
• A fixed percentage of the recoveries from the plan, which creditors approve. 

The fixed fee covers the following duties:

• supporting the company to develop its plan and review its financial affairs
• certifying the plan for creditors to vote on. 

Referral fees are prohibited in all other types of formal insolvency; however, they are impliedly permitted by regulation 5.3B.16.

How should a company under a restructuring plan be referred to?

A company subject to the restructuring process must advertise this status. For example, ABC Pty Ltd should be described on all public documents as “ABC Pty Ltd (restructuring practitioner appointed)”.

Last updated: 11 01 24

What is the SMALL BUSINESS RESTRUCTURING PROCESS?

SBR was introduced in 2021 to assist small businesses in financial difficulty. SBR allows a small business to propose a Plan to its creditors to restructure its debts while the directors remain in control of the business. SBR has become the “go-to” solution for many small companies in financial difficulty.

Written by  Brad Vincent , fact-checked by  Cliff Sanderson

WHAT IS SMALL BUSINESS RESTRUCTURING?

Small Business Restructuring is a simple process under the corporations law for a company to restructure its debts by proposing and agreeing a Plan with its creditors. It allows small businesses to restructure while the directors remain in control.

Related Information

• What is Small Business Restructuring?

What does the Small Business Restructuring process look like?

Is small business restructuring popular, what are the expected outcomes of a small business restructuring, how do i know if my company is insolvent and needs a sbr, what does a small business restructuring process cost, does my small business qualify for small business restructuring.

• Pre-Appointment
• The Restructuring Phase
• The Plan Phase

How does a Small Business Restructuring process commence?

Who controls and trades the company during the small business restructuring process, what does it mean to trade “in the ordinary course of business”, what notice of the sbr must be provided in public documents, can the appointment of a sbrp be revoked, removed, or replaced, what happens if the restructuring plan is not accepted by creditors, when does a small business restructuring process end.

• What do I need to do before putting a restructuring Plan to my creditors?
• Where can the funds come from to pay in the Plan?
• Do creditors have to get paid in full from the Plan?
• What debts are included in the Plan?
• What happens once a Plan is accepted?
• What sort of debt reduction is achievable under a Small Business Restructuring?
• Are there some examples of recent SBR Plans that have been approved?
• Why is a SBR better than a Payment Arrangement with the ATO?
• Does a SBR avoid a 21-Day Director Penalty Notice from the ATO?
• Is the ATO supportive of Small Business Restructurings?
• Does the ATO actively participate in Small Business Restructuring process?
• Who can be a Small Business Restructuring Practitioner?
• Does the Small Business Restructuring Practitioner need to be independent?
• What is the role of the Small Business Restructuring Practitioner?
• What qualifications do Small Business Restructuring Practitioners have?
• How will I know if a Small Business Restructuring Practitioner is registered?
• Can more than one person be appointed as an SBRP to a company?
• What is the effect of a Small Business Restructuring on ordinary creditors?
• What is the effect of a SBR on a creditors’ winding up process?
• What is the effect of a Small Business Restructuring on secured creditors?
• How do creditors vote on a restructuring Plan?
• What will creditors consider in accepting a restructuring Plan?

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

What if the directors have provided personal guarantees to creditors, how is sbr compared to voluntary administration, is simplified business restructuring similar to “chapter 11” in the united states.

Under the guidance of a Small Business Restructuring Practitioner (SBRP), an insolvent small business has 20 business days to come up with a restructuring Plan, and creditors vote on whether to accept it within 15 business days after that. If creditors accept the Plan, then the company pays what is agreed under the Plan, then is free of the balance of the debt. It has “cleared the debt” and can proceed to trade successfully into the future. It is a very popular alternative to a Payment Arrangement with the ATO. In recent times, Plans agreed have ranged from 9c to 35c in the dollar for creditors. So SBRs have achieved up to a 91% debt reduction for a company.

Yes, it is now very popular. In the second half of 2022, the number of SBRs increased significantly. This coincided with the ATO resuming its debt collection activities, having paused debt collection because of COVID-19. Most commonly it has been used to come to an agreed Plan with creditors including the ATO.

Initially the company and its directors work with a restructuring practitioner to create a restructuring Plan. That Plan is then put to creditors by the restructuring practitioner and creditors get to vote on whether to accept the Plan. Meanwhile, the business continues to trade under the control of the directors. The restructuring practitioner is responsible for administering the Plan and distributes funds to creditors. The plan is complete when its terms are satisfied. The company is then released from the past debts covered by the Plan.

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.

As a guide, fees can range from $15,000 to $30,000 inclusive of a fixed fee for the restructuring phase and a percentage fee for the planning phase. Fees will depend on your company’s individual circumstances. The fees need to be compared to the possible savings that can be achieved through a successful Plan. For example, a company may have creditors of $500,000 and agree on a Plan with those creditors at say 30 cents in the dollar. So, the company might get a “saving” being a debt reduction of $350,000 (70% of $500,000) and pay fees of $30,000 to achieve that outcome. By law, registered Small Business Restructuring Practitioners are required to quote a fee upfront for the fixed cost of the Restructuring Phase. The restructuring practitioner will also be paid a percentage of the amount returned to creditors in the Plan Phase.

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.

How does a Small Business Restructuring process work?

There are three phases to the Small Business Restructuring process.

– Pre-Appointment

• The process starts with a company appointing a Small Business Restructuring Practitioner to guide its directors through the process. • The Restructuring Practitioner will assess the company to confirm that it is eligible to proceed with Small Business Restructuring and that it is a suitable solution for the company.

– The Restructuring Phase

• Directors have 20 business days to come up with a restructuring Plan. They will do so whilst working with the appointed Restructuring Practitioner. • There is no set formula for what will be included in the Plan. The Plan may involve proposing significant changes to the structure of the business. • The Restructuring Practitioner will send the Plan to creditors. • Creditors are asked to vote on the Plan within 15 business days: either agreeing or disagreeing with the proposed restructuring Plan. If the majority (over 50% by value that vote) of the creditors vote “yes”, the restructuring Plan can commence. • If creditors don’t accept the Plan, the company is free to choose to proceed with a new simplified company liquidation process, voluntary administration or other actions. • The company can continue to trade during this period under the control of the directors.

– The Plan Phase

• If the majority in value of the creditors accept the Plan, then the Plan proceeds. Often that will be a one-off contribution by the director into a Fund and the Restructuring Practitioner will distribute those funds to creditors. • The period of the Plan cannot exceed 3 years. • Again, the company continues to trade during the Plan phase under the control of the directors.

The directors of a company can appoint a Restructuring Practitioner and commence a Small Business Restructuring process by making “Resolutions”. That is, there is no Court or creditor involvement in the decision. The company signs a document that resolves:

• that the company is insolvent or likely to become insolvent at some time in the future. • that the company should appoint a Small Business Restructuring Practitioner. • a fixed amount of remuneration of the Restructuring Practitioner for the proposal period.

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.

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

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.

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 where 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 resolution of the 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.

When the Plan is completed, the company becomes free from all its debts and it can carry on with its business. Therefore, the Small Business Restructuring process ends when:

• the terms of the Plan are completed; or • the Plan has been terminated because the company did not comply with the Plan terms. If the Plan is terminated, then all of the company debts that had been frozen become due and payable again. Directors will often consider appointing a liquidator or voluntary administrator.

What is a restructuring Plan?

A restructuring Plan is simply the agreement between a company and its creditors. There are no set requirements for a Plan so they can be very flexible. They typically involve a one-off contribution from someone, such as the director, which is paid to creditors by the Restructuring Practitioner. But the Plan could also include contributions from future profits over a period of time or the sale of some assets.

– What do I need to do before putting a restructuring Plan to my creditors?

There are specific requirements that must be met before a Plan can be put to creditors:

• Employee entitlements that are due must be paid. That will typically be wages, superannuation, and payment for leave already taken. It will not include untaken annual leave. • Tax lodgements must be up to date. That will include income tax returns and business activity statements. The tax debts do not have to be paid up to date, but the returns must be lodged.

– Where can the funds come from to pay in the Plan?

Often a Plan creates a pool of monies which is applied in full and final settlement of all unsecured creditors. There is no set requirement for where the funds come from. The source could be from the director or a related party, future profits, or a bank refinancing.

– Do creditors have to get paid in full from the Plan?

No. A Plan will usually involve creditors receiving a payment from the fund but usually, creditors will not be paid in full. The amount paid under the Plan will vary but the outcome for creditors will usually be set at a level higher than the expected return if the company were to be placed in Liquidation.

– What debts are included in the Plan?

The concept is that a line is drawn on the day that the company enters the Small Business Restructuring process. Debts prior to the SBR are “caught” by the Plan. Debts incurred after the day the SBR commences cannot be included in the Plan and must be paid in full as they fall due. The exception is employee entitlements. Employee entitlements that are due must be paid up to date before a Plan can be proposed.

– What happens once a Plan is accepted?

Once a Plan is approved, payments are made to an account controlled by the Restructuring Practitioner. The Restructuring Practitioner then calls for details of creditor claims from the creditors. When the amount of creditors is agreed upon, payments are made by the Restructuring Practitioner to the company’s creditors in accordance with the terms set out in the Plan. All creditors are paid the same “cents in the dollar” and all are paid at the same time. When a company pays off its obligations under the Plan, it is released from all claims that were caught by the Plan.

– What sort of debt reduction is achievable under a Small Business Restructuring?

In recent times, numerous SBR Plans have been approved and they are commonly in the range of paying creditors 9% to 35% of their debts. That is a debt reduction (haircut) of up to 91%.

– Are there some examples of recent SBR Plans that have been approved?

The aim of an SBR is for a company to agree on a Plan with its creditors. Here are some recent examples of Plans that have been approved using SBR.

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.

– Why is a SBR better than a Payment Arrangement with the ATO?

– does a sbr avoid a 21-day director penalty notice from the ato.

Yes. A Director Penalty Notice is a Notice that the ATO can send to a director which can make the director personally liable for some of the company’s tax debt. That can include PAYG, Superannuation and GST that has not been paid to the ATO. Many DPNs give a director 21 days to take certain actions and if the director does that, then they avoid personal liability under a DPN. One of those actions is to commence a Small Business Restructuring within 21 days.

– Is the ATO supportive of Small Business Restructurings?

Yes. The ATO has been very supportive of the Small Business Restructuring process. Many SBRs have the ATO as a major creditor. The ATO has not agreed to all Plans proposed, but they have voted in favour of the majority of Plans.

– Does the ATO actively participate in Small Business Restructuring process?

Yes. The ATO has appointed dedicated staff to review SBRs. They are active in reviewing Plans and often ask for specific information and provide feedback to Restructuring Practitioners on the Plans.

What is a Small Business Restructuring Practitioner?

A Small Business Restructuring Practitioner is often referred to as a SBRP. It is a new class of Insolvency Practitioner, 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, RestructuringWorks has several Registered Liquidators who can act as SBRPs.

– Does the Small Business Restructuring Practitioner need to be independent?

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

• assists the company to prepare 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 a 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 a 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 it obligations under the Plan • a statement about the completeness of 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.

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 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.

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.

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:

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.

Restructuring Law can be a complex area and circumstances vary, so we recommend a telephone call for your initial consultation. We will then gladly meet you or just confirm our advice and quote in writing.

Please either give us a call or submit the form and we will get back to you.

1300 166 765

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The New Restructuring Regime for Small Businesses

By Vanessa Swain Senior Lawyer

Updated on August 9, 2021 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

Small Business Restructuring Process

Eligibility criteria, additional criteria, key takeaways, frequently asked questions.

On 1 January 2021, the Federal Government’s restructuring regime for small businesses came into effect. The reform sees the introduction of a new ‘debtor in possession’ restructuring model for eligible small businesses as a possible alternative to voluntary administration. This article sets out:

• what the restructuring process looks like; and
• the eligibility criteria that small businesses must meet.

1. Pre Engagement

The first step is to consult with a small business restructuring practitioner. A restructuring practitioner will help determine if the company is eligible and help the director(s) to get their proverbial ‘ducks in a row’. Currently, only qualified liquidators can act as a restructuring practitioner.  

2. Engagement

A restructuring practitioner will provide their consent to act in writing. After this, company directors then pass a resolution to the effect that, in their opinion, the company is insolvent or likely to become insolvent in the future. Furthermore, that the restructuring practitioner is to be appointed to the company.  

3. Director Declaration

Within five business days of the restructuring practitioner’s appointment, each director must provide the restructuring practitioner with a declaration stating, in their opinion, whether:

• there are reasonable grounds to believe that the company has entered into any voidable transactions; and
• the c ompany has met the eligibility criteria (set out below).

4. Developing a Restructuring Plan

Next, the company must, within 20 business days from the appointment of the restructuring practitioner, prepare and execute a restructuring plan. The restructuring plan must: 

• be in the approved form; 
• identify what and how they will deal with the company property;
• provide for payment to the restructuring practitioner; and 
• specify the e xecution date of the restructuring plan.

5. Restructuring Practitioner Declaration

Once a restructuring plan has been executed, the restructuring practitioner must sign a declaration stating whether: 

• they believe the company meets the eligibility criteria; 
• if the restructuring plan is made, the company is likely to be able to comply with their payment obligations under the restructuring plan; and 
• all information required to be set out has been set out.

The declaration must also identify any creditors that are a related entity to the restructuring practitioner.

6. Putting the Proposal to Creditors

The restructuring practitioner sends the restructuring plan to as many creditors as possible, asking them to vote on the plan and to verify or dispute the company’s assessment of its admissible debt or claims. Additionally, the restructuring practitioner must lodge a copy of the restructuring plan with ASIC.

Creditors have 15 business days from the date the r estructuring practitioner provides them with the restructuring plan, to vote on the plan and verify or dispute the company’s assessment of its admissible debt or claims. Furthermore, voting is determined by a simple majority vote (in value of debt) of those creditors who vote within the requisite 15 business days. If the majority of creditors (in value) vote to accept the restructuring plan, that plan will be made upon the expiry of the 15 business days.  

The restructuring plan then becomes binding on the company and its officers, members and creditors. Once made, only a Court Order can vary the restructuring plan.  

The new restructuring process is only available to small businesses that can satisfy the eligibility criteria. Prior to the engagement of the restructuring practitioner, the company must meet the following prerequisite criteria. 

1. Company Liabilities Do Not Exceed $1 Million

It is essential that directors fully consider the extent of the company’s liabilities. These may include, but are not limited to: 

• any amounts owed to trade creditors; 
• business loans; 
• loans from related parties;
• ATO debt; and 
• any lease or hire arrangements.  

Employee entitlements are excluded from this calculation.

Additionally, questions have been raised as to whether debt forgiveness will be taken into account . This may allow companies to bring their total liabilities in under the $1 million threshold. However, the answer is not yet clear and will need to be considered on a case by case basis taking all specific circumstances into account. Your small business restructuring practitioner can provide assistance with determining the total value of liabilities. 

2. Company Has Not Been Subject to a Small Business Restructuring Plan in the Previous Seven Years

This criteria is much simpler and will be a straightforward yes or no answer. This criteria does, however, extend to include companies that have been subject to the small business simplified liquidation process, as well as companies that have been unsuccessful in an earlier small business restructuring attempt.  

3. Directors Have Not Been Involved in a Small Business Restructure in the Previous Seven Years

A company that has a director who is, or has been, a director of another company that has been subject to a small business restructuring plan or the simplified liquidation process within the past seven years will not be eligible. This criteria extends to a company’s former directors who held their position within the previous 12 month period.

In addition to the above prerequisites, b usinesses must meet the following additional criteria prior to directors proposing their restructuring plan to creditors.

1. All Tax Obligations Have Been Met

Companies must have any tax returns or BAS due lodged with the ATO prior to proposing their restructuring plan to creditors. I t is not necessary for these obligations to be met prior to engaging a small business restructuring practitioner. However, y ou should consider timeframes and take steps to ensure compliance will be achieved .

2. Employee Entitlements Have Been Paid Up to Date

Companies must pay e mployee entitlements that are ‘due and payable’ prior to proposing a restructuring plan to creditors. Again, y ou should consider the payment of employee entitlements early on. Further, steps should be taken to ensure compliance prior to engaging a small business restructuring practitioner. 

The debtor in possession restructuring regime for small businesses is new and has not yet been widely utilised. Are you concerned that your company may be insolvent or may become insolvent in the foreseeable future? In that case, small business restructuring may be an appropriate alternative to voluntary administration or liquidation. If you need help with insolvency or restructuring issues, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page. 

The new restructuring regime introduces a new ‘debtor in possession’ restructuring model for eligible small businesses as a possible alternative to voluntary administration.

The restructuring regime is only available to small businesses that can satisfy the prerequisite eligibility criteria and additional criteria. Therefore, you should read the above to determine of your business can use the process.

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Australia: Small Business Restructuring (SBR): A simplified safe harbour plan for SMEs

How an SBR can protect directors' exposure to an insolvent trading claim

A new safe harbour carve-out.

In early 2021, as part of the adoption of the small business restructuring (SBR) reforms, a new safe harbour carve-out was introduced to the Corporations Act 2001, making SBR an eligible safe harbour plan. 1

This article discusses the drawback of traditional safe harbour protection for SMEs and explains how an SBR can offer directors a safe harbour protection against a potential insolvent trading claim that is often not well-understood.

Safe harbour: A shield against insolvent trading claims

The safe harbour protection mechanism, which came into effect in September 2017, aims to encourage an entrepreneurial and innovative environment and provides protection to directors of financially distressed companies against insolvent trading claims.

Previously, to obtain a safe harbour protection, the directors will need to take actions that are "reasonably likely to lead to a better outcome for the company" which require them to:

• take steps to keep themselves informed about the company's financial position;
• take appropriate steps to prevent company officers' and employees' misconduct;
• ensure the company maintained appropriate financial records;
• obtain advice from an appropriately qualified entity; and
• document their course of action and ensure that the company pays all employee entitlements and keeps its tax lodgements up to date.

Traditional issues for SMEs seeking safe harbour protection

Notwithstanding the protection provided by law, small businesses had rarely considered safe harbour advice, due to a variety of reasons, including:

• large corporations possess greater resources to undergo restructuring such as more assets to sell, more flexibility in reducing costs, and implementing strategic changes;
• small businesses generally face difficulties in affording the expenses associated with restructuring, formal or informal, including obtaining safe harbour advice which can be relatively expensive;
• directors of small businesses may be personally responsible for the debts they guaranteed, such as leases for property and equipment, in addition to any claim of insolvent trading.

Thanks to the new safe harbour regulations, SMEs undergoing an SBR process now automatically have access to safe harbour provisions which limits the value/quantum of potential insolvent trading claims.

The SBR process

SBR has become a popular option for struggling businesses seeking to restructure their debts and avoid liquidation.

Compared to a voluntary administration , an SBR typically offers a more expedient and cost-effective means of debt restructuring for a company, while allowing its directors to retain control over the company's operations.

During an SBR process, the director works with an SBR practitioner to develop a restructuring plan that is likely to result in a better outcome for the company and its creditors than liquidation. Typically, the plan proposes a certain percentage of the outstanding debt to be paid to creditors as a compromise. With the SBR practitioner's endorsement, the restructuring plan is presented to the creditors, and if approved, all eligible creditors 2 will be bound by the plan.

Risks involved in SBR and limitation of safe harbour protection

Importantly, the SBR process does not guarantee success either in the short- or long-term. If the restructuring ends for any reason other than an approved restructuring plan being completed in accordance with its terms, it is likely that the company will end up in liquidation.

While directors seeking to restructure a company's debt via an SBR should not refrain from appointing an SBR practitioner out of fear of facing an insolvent trading claim 3 as explained in this article, one should note that this protection does not eliminate the risk of a claim altogether, it may limit the amount of any potential claim.

It is crucial for directors to seek professional advice and carefully consider all their options before deciding to engage an SBR practitioner.

1 Section 588GAAB of the Corporations Act 2001, provides that the duty to prevent insolvent trading does not apply to debt incurred by a company during the restructuring.

2 Some creditors may not be bound by a restructuring plan, for example, secured creditors can take enforcement action against security/property if it begins before appointment of RP (section 454D of the Act). Also, creditors that are related to the company do not get to participate in SBR process.

3 When a restructuring plan is sent to creditors the company is deemed insolvent (Section 455A of the Insolvency Reform Bill).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Home » Blog » Small Business Restructuring » What are the benefits of the Small Business Restructuring Process compared to Voluntary Administration?

What are the benefits of the Small Business Restructuring Process compared to Voluntary Administration?

Corporate insolvency in Australia underwent a seismic shift in 2021 with the introduction of the Small Business Restructuring Process (SBRP) under Part 5.3B of the Corporations Act. This new process aimed to provide a more cost-effective and simplified debt restructuring pathway for insolvent small businesses, compared to the existing Voluntary Administration (VA) regime under Part 5.3A. But what benefits does the SBRP hold over VA? Key benefits include the directors maintaining day-to-day control over the business during the process, lower professional costs, higher success rates, less detail in processes and simpler restructuring plans.

Benefit 1: Directors Maintain Control

One of the most prominent advantages of the SBRP over VA is that only the directors can choose to initiate the process. This stands in contrast to VA, where secured creditors can also instigate proceedings. 

Further, the SBRP is the first debtor-in-possession restructuring process in Australia. It means that during the SBRP process the directors maintain control of the business and they are expected to run it day-to-day (s453K). This means that the Restructuring Practitioner (RP) they appoint is a monitor of the process rather than an administrator of the business. The limits of the powers of directors are that the directors can’t enter into transaction out of the ordinary course of the company’s business without the approval of the Restructuring Practitioner (section 453L). 

On the contrary, under VA, the voluntary administrator assumes full control of the company, often continuing trade, but not guaranteeing it (s437). The directors lose their powers and are prevented from dealing with the company’s assets and affairs without the administrator’s consent. This loss of control can be disconcerting for many directors, making the SBRP a more appealing option. Voluntary administrators are paid on hourly rates so they don’t have any strong incentive to trade a business and take any risk.The SBRP is an acknowledgment of commercial reality, that even during a VA process the directors will need to continue to contribute to day-to-day management and offer support to the voluntary administrator. 

Benefit 2: Lower costs 

Financial considerations play a significant role in insolvency proceedings. For example, one of the main criticisms about the Chapter 11 process in the United States is its high costs. SBRP offers two advantages, first, the costs of the restructuring are fixed and therefore, unlike VA, cannot be revised upwards and second, the latest ASIC research shows that costs of SBRP are much lower than VA.

SBRP offers fixed costs as opposed to time billing under VA, making it a more reliable option. In VA, costs are typically calculated on a time cost basis, and they are usually higher due to administrators assuming control of the company and therefore doing more professional hours of work. SBRP, however, operates on a fixed fee agreed upon prior to the appointment of the RP by the directors. The initial cost estimate given to directors in a VA process is usually revised upwards.

The ASIC report 756 found that the median total cost of SBRPs (including completing the restructuring process) was $22,055. Whereas research undertaken by Mark Wellard in 2014 found that typical costs for VAs (including restructuring through a deed of company arrangement) were in the order of $60,000. However, the author’s view is that costs have increased significantly in the last decade in the VA process to take the median VA into six figures.

Benefit 3: Streamlined process 

The SBRP provides a streamlined process with minimal reporting to creditors. This gives the directors of an insolvent company a significant advantage because the creditors will be given basic information rather than an inquisitorial report. This will be likely to take the heat out of the process because they won’t be accused of potential insolvent trading and otherwise put through a grilling. 

The RP investigates and verifies the company’s business, property, affairs, and financial circumstances. However, unlike VA, there’s no requirement to report these findings through a detailed report to creditors. Rather than providing a recommendation to creditors, unlike VA, the RP of an SBRP is only required to make a formal declaration as to whether the company will likely be able to discharge obligations under the proposed plan. The role of the RP is to provide assurances to creditors regarding the process and if they are not comfortable or find anything improper they are expected to terminate the restructuring.  

Under the SBRP, creditors’ meetings are not required and creditors vote by submitting a written statement indicating whether the restructuring plan should be accepted. This contrasts with the VA process, which mandates at least two meetings, adding to the time and complexity of the process. This may take the steam out of the insolvency process because creditor meetings often break down into argument and accusation.  

Benefit 4: Simpler restructuring plans

The SBRP allows for simpler restructuring offers, limiting them to cash-only offers to creditors. It also prohibits directors from discriminating between creditors and it precludes the directors themselves from voting or receiving monies from the restructuring plan. These restrictions provide a straightforward and easy-to-understand mechanism for both creditors and the company. The creditors know that the company is insolvent and therefore they will not receive their full debt claims so they can decide whether to accept the compromise put by directors by way of cash payments. 

On the other hand, a VA process can become very complex because it involved a proposal put by directors that has few limits. Directors can often control the voting process through related party votes, they can discriminate between creditors and they can propose opaque arrangements that are impossible for creditors to discern. The reality is that the voluntary administrator has a relatively short period of time to get a grip on the company’s affairs and so their investigations may not have depth. Therefore an expectation that a voluntary administration will be thorough may be unwarranted and, as the company is insolvent, there the creditors will ultimately need to accept a large haircut on their debt claims nevertheless.

Benefit 5: ATO support for process 

Additionally, the Australian Taxation Office (ATO) has shown support for plans that provide better outcomes for creditors than a liquidation scenario. This backing from a significant creditor in most small business insolvencies is another key advantage of the SBRP. The ATO may also support VAs but the anecdotal evidence is that the ATO likes to support genuine businesses through a quick SBRP at much higher rate than VA. The ATO is developing its own policies about which SBRPs it chooses to support but the overall direction it has is to support real businesses that have a track record of tax compliance and up-to-date entitlement records and payments. 

Benefit 6: No Automatic Liquidation if process doesn’t succeed

In the SBRP, if creditors vote against the restructuring proposal, they do not get to vote for a liquidation, unlike VA. In VA, creditors decide the outcome for the company, including resolving to liquidate it if they vote against a restructuring through a deed of company arrangement. However, under the SBRP, if the simple majority in favour of a restructuring proposal (by dollar value) isn’t achieved, the restructure ends, and all creditor claims once again become due. There is no automatic roll-over into liquidation, although shareholders can resolve to wind up the company if they wish. 

Benefit 7: Better success rates 

The SBRP has shown promising signs of success since its inception, with a high proportion of businesses using the procedure successfully. This track record evidences the effectiveness of the SBRP and its higher success rate is a key benefit over the VA process. 

Overall, the contribution of Voluntary Administration to wholly successful restructures may only be 1% of insolvent companies in Australia. This ‘back of the envelope’ calculation from statistics is as follows:

• 13% of insolvent companies appoint Voluntary Administration over liquidation (pre-COVID ASIC statistics);
• 29% of Voluntary Administrations entered into a deed of company arrangement as opposed to going into liquidation (Mark Wellard research paper)
• The author’s estimate of the percentage of successful deeds of company arrangement is 25% of all Deed of Company Arrangements entered into;
• The multiplier effect is 0.13*0.29*0.25= 0.01

Let that sink in — the percentage of insolvent companies that successfully restructure through Voluntary Administration could be as low as 1%. It is no surprise, given the poor success rates of VA, that lawyers and the wider public see it as “glorified liquidation”. 

Despite the low number of appointments over its first 18 months of operation (2021-mid 2022), the proportion of restructuring plans approved by creditors in SBRPs is remarkably high at 87% (source: ASIC research report 756). This high approval rate indicates that the SBRP has been effective in helping small businesses restructure their debts and reach agreements with their creditors.

In conclusion, while both the Small Business Restructuring Process and Voluntary Administration have their place within the Australian insolvency framework, it is clear that the SBRP offers several key advantages for small businesses. This simplified, less contentious, and more cost-effective process gives small businesses a better chance of recovery and survival, thus contributing to the overall health and diversity of the Australian economy.

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Small business restructuring: An attractive option for directors who want to maintain control

On 1 January 2021, the Federal Government introduced Small Business Restructuring (SBR), a new form of insolvency appointment to assist small businesses with resolving financial distress.

Importantly for directors, SBR is the first insolvency framework in Australia that leaves control of an underperforming company in the hands of its directors throughout the whole process, as opposed to other forms of external administration (e.g. liquidation). Previously reluctant directors, not wanting to consider the traditional forms of insolvency appointment (where they fear losing control of their businesses), may be very interested in the SBR framework where debts are dealt with while the director remains in control of the business throughout the process.

After a slow uptake in the first two years of the SBR regime, we see a sizeable increase in SBR appointments in 2023. The ATO's willingness to accept numerous proposals, including those with a projected return to the ATO of no more than 15 cents in the dollar, is the driving factor behind this. If that continues, SBR will represent a valuable lifeline to directors of some struggling small businesses.

The ASIC reported in January 2023 that from 1 January 2021 to 30 June 2022, the ATO was a creditor in 89% of companies that entered a restructuring plan and was a major creditor in 79%. The ASIC review noted 82 restructuring practitioner appointments during the review period. From those appointments, 78 proposals were sent to affected creditors, of which 72 transitioned to restructuring plans. The ten remaining appointments were either terminated because the company was not eligible, creditors rejected the proposed plan, or the directors ended the restructuring appointment. From an average of approximately four SBR appointments per month over the first 18 months of the SBR regime, we now see more than that number daily. It seems that the ATO’s current attitude towards the consideration of SBR proposals is having a huge impact with directors and their advisers now recognising the SBR regime as a viable and advantageous outcome, where the directors remain in control of the business throughout the whole process.  

In exchange for directors’ retaining control, the framework requires that the company appoint a SBR practitioner (i.e. a registered liquidator) who will act as a facilitator between the company and its creditors, aiding in the formulation of a restructuring proposal/plan that will be presented to and voted upon by the creditors. If accepted by most creditors, the proposal is binding, and the company continues to trade in compliance with the restructuring plan.

Before SBR, many small businesses would be forced to shut down instead of attempting some compromise of their debts to maximise their chances of survival, which in some cases is better for creditors, customers, employees, stakeholders, and the company.

When is a company eligible for the SBR scheme?

To be eligible, the following requirements must be satisfied:

• The company has total liabilities of less than $1 million, including secured creditors (being the net shortfall after taking into account the assets secured) and related party creditors, but excluding employee entitlements
• The company is either insolvent or likely to become insolvent
• The company is up to date with respect to all of its tax lodgements
• The company has paid the entitlements of employees that are due and payable
• No person who is a director of the company or who has been a director of the company within the 12 months before the appointment of the restructuring practitioner has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years, unless they are exempt under the regulations
• The company must not have undergone restructuring or been the subject of a simplified liquidation process within the preceding seven years.

For eligibility, it is important to note that all tax obligations do not need to be paid; rather that companies only need to have lodged tax returns. Additionally, only employee entitlements that are ‘due and payable’ are required to have been paid.

For a company that doesn’t currently meet all of the criteria (e.g. has unpaid superannuation, hasn’t lodged tax returns), it can organise its affairs (e.g. sell an asset and pay the outstanding superannuation, sell an asset to reduce its debts to under $1 million, lodge its tax returns) and then commence the SBR process.

SBR process

There are two phases to the SBR process:

• The appointment of the restructuring practitioner (assuming the required eligibility criteria are met)
• Entering into a restructuring plan (provided it is approved by creditors).

Directors of an eligible company commence the process by passing a resolution that the company is, or is likely to become, insolvent and that a SBR practitioner should be appointed.

The company then has 20 business days (which can be extended by an additional ten business days by the SBR practitioner) to prepare/propose a restructuring plan to be put to creditors. Once put to creditors, creditors have 15 business days to vote to accept or reject the plan.

A plan is accepted if it receives ‘yes’ votes from more than 50% of creditors by value who participate in the voting process (excluding related party creditors who are not eligible to vote on the plan).

When a company enters the restructuring process, a moratorium is applied to unsecured creditor claims (and some secured creditor claims) which protects the company during this process. Also, during this process the company’s directors remain in control of the company, continuing to manage its day-to-day affairs and making decisions that are in the ordinary course of the company’s business. If a transaction is outside the ordinary course of business, the SBR practitioner must approve the transaction.

If creditors do not ultimately accept the plan, the restructuring process ends, and creditors are no longer prevented from enforcing their rights.

Once a plan is accepted, payments are made to the company’s creditors on the terms set out in the plan. In a plan, all admissible debts and claims rank equally, meaning all creditors are paid the same ‘cents in the dollar’. Once a company pays its obligations under the approved plan, it is released from the debts or claims that were admissible under the plan. Suppose an approved plan fails before its completion, in that case the company remains liable for the liabilities owing prior to the plan commencing, less any repayments made under the plan before it failed.

SBR examples

As an example, the SBR process allows a local tradie who may have been materially financially impacted by a builder that has gone broke, owing the tradie significant money, an option to restructure their financial affairs and continue trading. Compare that to what may historically have been the flow-on effect of the builder’s demise, the liquidation also of the tradie’s company.

Similarly, a local restaurant still trying to get back on top of things (e.g. paying off a sizeable ATO debt) from the impact of COVID-19 could seek to avail itself of the SBR process, whereas previously liquidation was likely the final outcome.

Under both the above SBR examples, the tradie and the restaurateur can remain in control of their businesses throughout the process.

How BDO can help

At BDO we support businesses to manage their position and protect their interests proactively. Our Business Restructuring services cover all aspects of the issues faced by distressed and underperforming businesses.

BDO has a team of professionals experienced in handling both corporate and personal insolvency, including voluntary administration proceedings and court-appointed liquidations and receiverships.              

Learn more about the alternatives available to businesses under debt stress by contacting your local BDO team .

Small business restructuring in Australia: Two years on, is the new process working as intended?

Australia |  Publication |  March 2023

From 1 January 2021, Australia’s insolvency framework for small businesses changed. The purpose of the change was to assist small businesses, with debts under AUD $1 million, to survive – specifically, by providing these businesses with simpler, more flexible restructuring options outside the existing “one size fits all” voluntary administration and scheme of arrangement processes available under the Corporations Act 2001 (Cth). In many cases, those processes are too costly and time-consuming to be a realistic option for financially distressed, but viable, small businesses to pursue, often leading to a premature liquidation.

The new insolvency framework also introduced a simplified liquidation process for small businesses.

The adoption of bespoke restructuring and liquidation frameworks for small businesses is recommended by international bodies such as UNCITRAL, the World Bank and INSOL International.

Under the new Australian framework, there are two phases to a small business restructuring:

• the appointment of a registered liquidator as the restructuring practitioner (if eligibility criteria are met); and
• entering into a restructuring plan (if one is approved by creditors).

Importantly, under a small business restructuring, the directors remain in control of the insolvent company and do not cede control to the restructuring practitioner. This is different to other formal insolvency appointments in Australia.

Australia’s corporate regulator, the Australian Securities and Investments Commission ( ASIC ), released a report in January 2023 on small business restructurings. The report covers the period 1 January 2021 to 30 June 2022. ASIC’s key observations are:

• there were 82 restructuring practitioner appointments;
• 72 appointments transitioned to restructuring plans;
• New South Wales had the most number of appointments, followed by Victoria and Queensland;
• the main industry groups using restructuring practitioner appointments were accommodation and food services, construction and retail trade;
• the majority of restructuring plans were implemented. Where plans were implemented or were ongoing, the underlying business was still trading;
• the Australian Taxation Office ( ATO ) was a creditor in 89% of the 72 restructuring plans and, in most plans, the ATO’s debt represented 50-100% of total admissible creditor claims; and
• the average dividend paid to creditors under the restructuring plans was 15.2 cents in the dollar.

ASIC accepts that there has been a slow (and low) uptake of the small business restructuring process. Some of the reasons proffered are:

• complexity, despite the Australian Government’s pronouncement that the new process is intended to be simplified;
• the eligibility threshold of AUD $1 million being too low, meaning many small businesses cannot utilise the new process and must rely on the traditional insolvency framework;
• the process can be expensive (again, despite the aim for the new process to be simple and less costly);
• other eligibility criteria prevent small businesses from accessing the process, for example, the requirement to comply with certain tax law lodgement obligations; and
• the unintended consequences arising from the appointment of a restructuring practitioner, such as the voiding of licences required to operate a business (like a builder’s licence) and the voiding of insurance policies.

Australia is in the midst of an inquiry into corporate insolvency, which will examine the operation of the existing insolvency framework and options for reform. One of the areas that will be considered by the inquiry is small business restructurings.

It is expected that the AUD $1 million debt threshold will receive significant focus and potentially be raised given worsening economic conditions. We would argue that the other issues identified above to explain the slow uptake of the small business restructuring process should also form part of the inquiry’s review. Small businesses play a significant role in the Australian economy and any insolvency reforms that affect them should take that role seriously.

Indeed, flexible and efficient restructuring processes for small businesses (along with simplified liquidation processes for unviable entities) are ultimately a key enabler of innovation, entrepreneurialism and growth in any modern economy.

Practice area:

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Tax Implications of Small Business Restructuring

by Jeff Shute 31.10.23

The surge in Small Business Restructuring (SBR) appointments in Australia has been primarily driven by the Australian Taxation Office's (ATO) efforts to recover its expanded $60+ billion debt following the economic challenges posed by COVID-19. 

The ATO is increasingly employing its firmer debt recovery actions, including director penalty notices (DPN), to compel directors to address tax debts by appointing a liquidator to wind down the company or appointing external administrators, including SBR Practitioners for eligible businesses, to allow business to continue trading and provide a better return. 

Notably, creditors, particularly the ATO, have, in some cases, agreed to write off up to 90% of the debt.

This article provides insights into the various tax considerations associated with an SBR appointment.

Outstanding Tax Lodgements

Before a restructuring plan can be put to creditors, the ATO generally requires:

• All Activity Statements, including Business Activity Statements (BAS) and Instalment Activity Statements (IAS) to be lodged up to and including the date of the SBR appointment. This will include an Activity Statement covering the partial period from the end of the last reporting period to the date of the SBR appointment.
• All prior years Income Tax Returns (ITR) to be lodged include a ITR for the current financial year up to the SBR appointment date.

Following the SBR appointment, the ATO establishes a new account for the Company, known as a Client Activity Centre (CAC or Branch number), to differentiate between pre and post SBR appointment debts, so as future obligations of the company following the appointment can be met.

Implications of Related Party Debt Forgiveness

In contrast to a Deed of Company Arrangement (DOCA), there is no ability for related party creditors to subordinate their debt to allow for a higher return to unrelated creditors within the SBR. 

As an alternative, related parties may consider forgiving their debt owed by the company prior to commencing the SBR process and appointing a Restructuring Practitioner in order to maximise the returns under the Restructuring Plan. 

This may, however, trigger a deemed dividend under Division 7A for the related entity forgiving the debt, and appropriate advice should be obtained prior to forgiving the debt.

What is the tax treatment for the debt  compromised/written off from a successful SBR

Once the funds that were required to be contributed to the Restructuring Practitioner under the Plan have been distributed in accordance with the Plan, the company is released from all admissible debts or claims that existed as at the date of the commencement of the SBR process. It is understood that the debt written off under the restructuring plan is classified as non-assessable non-exempt (NANE) income, and therefore, it is not included in the income tax return, resulting in no tax liability on the forgiven amounts.

For the creditor forgiving the portion of debt not paid through the SBR, debt forgiveness rules may apply, typically leading to a revenue loss (or, in some instances, a capital loss).

Treatment of Carried-Forward Tax Losses Post-Restructuring Plan

Upon completion of the restructuring plan, where the debts have been written off, commercial debt forgiveness rules may be applicable. In such cases, the net-forgiven amount must be used to reduce various tax balances in the specified order, including:

• net capital losses
• certain undeducted revenue or capital expenditures
• cost bases of certain Capital Gains Tax (CGT) assets.

However, if both the company under SBR and the creditor are under common ownership, the company's net forgiven amount can be reduced to the extent that the related party creditor agrees to forgo their revenue deduction or capital loss resulting from the debt forgiveness.

It's important to note that the commercial debt forgiveness rules do not extend to tax-related debt. Hence, a company's carried-forward tax losses (or any other 'tax balances') remain unaffected when tax-related debt owed to the ATO is partially reduced upon the completion of the restructuring plan.

SBR and permanent discharge of tax debt

A significant advantage of undertaking a SBR is the formal and permanent discharge of tax debt under an approved restructuring plan. There is a moratorium on creditor claims as at the date of the commencement of the SBR, meaning interest and penalties on ATO debt are frozen, and remain frozen until the Restructuring plan ends.

In contrast, an informal agreement with the ATO may result in the debt being considered as 'not economical to pursue' and collection activity may resume at any future point in time, at which time interest and penalties will be applied.  

It's essential to recognize that the ATO may choose to resume debt recovery efforts if public interest considerations support such action, especially in cases involving a history of non-compliance by taxpayers.

Please bear in mind that the information provided here is for general reference only, and each company's circumstances are unique. Tailored tax advice is recommended, addressing the specific situation. In the appropriate circumstances, it is advisable to seek formal taxation advice that outlines the proposed strategy and intended actions.

For more technical information on small business restructuring, you can explore our other recent articles on our website , or contact  any one of our Directors.

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Restructuring and the restructuring plan

Important considerations before entering restructuring

• Directors need to pass a resolution that the company is insolvent or is likely to become insolvent at some future time.
• The company must meet certain eligibility criteria.
• Restructuring and restructuring plans are types of ‘external administration’ under the Corporations Act 2001 .
• ASIC must note on the Company Register that the company has appointed a restructuring practitioner and the company has entered ‘external administration’. This information will be publicly available.
• When a company enters a restructuring plan, ASIC notes on the Company Register that the company status has reverted to ‘registered’. This information will be publicly available.

The information in these FAQs is a summary only, providing basic information about the small business restructuring process. It does not cover all the relevant law regarding this topic, and is not a substitute for professional advice.

You should also note that because these FAQs avoid using legal language where possible, they may include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your circumstances should be considered when determining how the law applies to you.

If you need help to understand the small business restructuring process, you should consider engaging a suitably qualified adviser, such as a financial counsellor, accountant, lawyer or registered liquidator.

Navigate to:

• Restructuring
• Appointing a restructuring practitioner
• What is the role of the directors during a restructuring?
• Who has control of the company during a restructuring?
• What effect does the appointment of a restructuring practitioner have on creditors?
• What notice of the restructuring must be provided in public documents?
• How long does the restructuring proposal period last?
• Can the restructuring proposal period be extended?
• How does a restructuring come to an end?
• The restructuring plan
• What effect does a restructuring plan have on creditors?
• What is the role of the restructuring plan practitioner?
• What fees are paid to the restructuring practitioner for the restructuring plan?
• How is a restructuring plan terminated?

1. Restructuring

What is a restructuring for companies operating small businesses experiencing financial difficulties.

The restructuring process allows eligible companies to:

• retain control of the business, property, and affairs of the company while it develops a plan to restructure the company’s affairs with the assistance of a restructuring practitioner
• enter into a restructuring plan with creditors.

What are the eligibility criteria for restructuring?

To be eligible for a restructuring, on the day on which the restructuring practitioner is appointed:

• total liabilities of the company must not exceed $1 million
• no person who is a director of the company, or who has been a director of the company within the 12 months before the appointment of the restructuring practitioner, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years, unless they are exempt under the regulations
• the company must not have undergone restructuring or been the subject of a simplified liquidation process within the preceding seven years.

The exemptions prescribed by the regulations are:

• the other company is, or has been, under restructuring - the restructuring practitioner for that company was appointed no more than 20 business days before the day on which the restructuring of the company for which the eligibility criteria are to be met began
• the other company is, or has been the subject of a simplified liquidation process – the other company began to follow the simplified liquidation process no more than 20 business days before the day on which the restructuring of the company for which the eligibility criteria are to be met began.

Who is an affected creditor?

An affected creditor is a creditor who is:

• in relation to a proposal to vary or terminate a company’s restructuring plan – a creditor of the company who is a party (as creditor) to the plan
• in relation to a proposal by a company to make a restructuring plan – a person who would be a party to the restructuring plan, if it were made.

Who is an excluded creditor?

The following are excluded as creditors of the company under a restructuring:

• the restructuring practitioner for the company
• a creditor who was a related creditor of the company at the time the restructuring began
• a creditor who was, on becoming an affected creditor, a related entity of the restructuring practitioner.

What is an admissible debt or claim?

A debt or claim that would be admissible to proof against the company under section 553(1), if:

• the company were wound up
• if the company is under restructuring – the beginning of the restructuring
• if the company has made a restructuring plan – the beginning of the restructuring that ended when the plan was made.

It does not include employee entitlements or debts/claims that would be admissible under section 553(1A). Section 553(1A) provides for circumstances where a debt or claim is admissible against a company even though the circumstances giving rise to that debt or claim occur on or after the relevant date.

2. Appointing a restructuring practitioner

Important considerations before appointing a restructuring practitioner.

Before appointing a restructuring practitioner, directors should consider whether, at the time a restructuring plan is to be proposed to creditors, the company will have (or substantially complied with the requirement to have):

• paid the entitlements of employees that are due and payable
• given returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act 1997 ).

Unless the two criteria above have been satisfied the company cannot propose a restructuring plan.

The above criteria exclude employee entitlements that are not currently due to be paid. Additionally, tax debts do not need to be paid – only the required returns given.

Appointment process

The directors of a company appoint a restructuring practitioner in writing. The company directors can do this, if:

• the company meets the eligibility criteria for restructuring on the day the appointment is made
• in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time
• a restructuring practitioner for the company should be appointed.

The directors of a company must not appoint a restructuring practitioner if:

• the company is already under restructuring
• the company has made a restructuring plan that has not yet been terminated
• the company is under administration
• the company has executed a deed of company arrangement that has not yet terminated
• a person holds an appointment as liquidator, provisional liquidator or administrator of the company.

Who can act as a restructuring practitioner?

Only a person registered with ASIC as a ‘registered liquidator’ can act as a restructuring practitioner of a company or for a restructuring plan.

Can the appointment of a restructuring practitioner be revoked?

Can more than one person be appointed as a restructuring practitioner to a company.

Yes, two or more restructuring practitioners may be appointed to act. This is often referred to as a ‘joint and several’ appointment.

Can creditors vote to appoint a different restructuring practitioner?

What fees are paid to the restructuring practitioner.

The directors of the company determine the remuneration of the restructuring practitioner.

The determination must be made:

• by resolution of the board
• on or before the day on which the restructuring practitioner is appointed.

The determination may only specify:

• an amount of remuneration
• a method for working out an amount of remuneration that, in the event the board consents in writing to beginning or proceeding with proceedings relating to the restructuring of the company, the restructuring practitioner would be entitled to receive for necessary work properly performed in relation to the proceedings.

What is the role of the restructuring practitioner?

The restructuring practitioner does not take control of the day-to-day affairs of the company.

The role of the restructuring practitioner is to:

• provide advice to the company about the restructuring
• assist the company to prepare a restructuring plan
• the eligibility criteria are met and that, if a restructuring plan is made, the company is likely to be able to discharge the obligations created by the plan as and when they become due and payable
• all the information required to be set out in the restructuring proposal statement has been set out in that statement
• identifying any matter about which the restructuring practitioner could not form a belief on reasonable grounds that either the eligibility criteria are met, the company will be able to discharge its obligations created by the plan or that the restructuring proposal statement includes all required information, and setting out the reasons for their conclusion
• specifying the name of any affected creditor that is a related entity of the restructuring practitioner and the nature of the relationship.
• perform other functions, duties and powers given to the restructuring practitioner under the Corporations Act 2001 , including whether to terminate the restructuring, give consent to transactions or dealings outside the ordinary course of business and resolve disputes over the amount of a creditor’s debt or claim disclosed in the restructuring proposal statement.

The restructuring practitioner acts as the company’s agent.

3. What is the role of the directors during a restructuring?

During the restructuring period, the directors remain in control of the company and may enter into a transaction or dealing with company assets if it is in the ordinary course of the company’s business.

The consent of the restructuring practitioner is required before the directors can enter into a transaction or dealing with company assets that is outside of the ordinary course of the company’s business.

The following circumstances are deemed not to be in the ordinary course of the company’s business:

• a transaction or dealing for the purpose of satisfying an admissible debt or claim
• if the transaction or dealing relates to the sale or transfer of the whole or a part of the business
• a transaction or dealing that relates to the payment of a dividend.

Directors of a company must develop and propose a restructuring plan and a restructuring proposal statement , and then execute the restructuring plan during the proposal period. The company’s restructuring proposal statement also includes a Schedule of Debts and Claims compiled by the directors.

The directors must also attend on, and assist, the restructuring practitioner and give them such information about the company’s business, property, affairs and financial circumstances as reasonably required by the restructuring practitioner.

4. Who has control of the company during a restructuring?

The directors of the company have control of the company’s business, property and affairs.

The restructuring practitioner acts as the company’s agent. 

5. What effect does the appointment of a restructuring practitioner have on creditors?

Unsecured creditors.

While the company is in restructuring, unsecured creditors  cannot begin, continue or enforce their claims against the company without the restructuring practitioner’s consent or the court’s permission.

On winding up applications

During a restructuring, the court is to adjourn the hearing of an application to wind up the company if the court is satisfied that it is in the interests of the company for it to continue under a restructuring rather than be wound up.

If the court is satisfied that it is in the interests of the company’s creditors for the company to continue under restructuring, the court is also not to appoint a provisional liquidator to the company.

On third parties including secured creditors

Third parties (such as creditors) cannot exercise their property rights (including enforcing any security interests) without the restructuring practitioner’s written consent or with leave of the court.

This is generally the case for a secured party in relation to the property, or possessory security interests in the property of the company, an owner or lessor of property used or occupied by or in possession of the company (including a secured party under the  Personal Property Securities Act 2009 (PPSA) in relation to PPSA security interests in goods arising from the lease of goods).

The law relating to third party and secured creditor rights depends on the circumstances of the security or right and may require additional consideration by directors before they appoint a restructuring practitioner.

On personal guarantees

A creditor cannot enforce any personal guarantees held against a director or their spouse or relative in relation to a liability of the company, except with the leave of the court and, if leave of the court is obtained, in accordance with the terms (if any) the court may impose.

This moratorium on taking action against guarantors stops once the restructuring plan is entered into or the restructuring otherwise ends.

6. What notice of the restructuring must be provided in public documents?

Every public document and every negotiable instrument must set out the phrase (‘restructuring practitioner appointed’) after the company’s name where it first appears. Not doing so, is an offence of strict liability.

On appointment of a restructuring practitioner, the Company Register status will change from REGD (Registered) to EXAD (External Administration). This information will be available to the public on ASIC Connect or through free searches of the Company Register. The information may impact creditors, suppliers, insurers or other parties’ dealings with the company during restructuring.

7. How long does the restructuring proposal period last?

The restructuring proposal period generally lasts for 20 business days beginning on the day the restructuring begins, unless it is ended earlier or is extended.

8. Can the restructuring proposal period be extended?

Yes, the restructuring practitioner may extend the proposal period by no more than 10 business days at the request of the company or the court may, on application of the company, extend the proposal period. The restructuring practitioner may only extend the proposal period once.

9. How does a restructuring come to an end?

The restructuring of a company ends if:

• the directors of the company make a declaration that the restructuring is to end on a specified day for any reason
• the company fails to propose a restructuring plan within 20 business days beginning on the day the restructuring begins or any period extended by the restructuring practitioner at the request of the company or the court on application of the company
• the company’s proposal to make a restructuring plan lapses because it is not accepted by creditors or the restructuring practitioner cancels the proposal to make a restructuring plan
• the company does not meet the eligibility criteria for restructuring
• it would not be in the interests of creditors to make a restructuring plan
• it would be in the interests of creditors for the restructuring to end
• it would be in the interests of creditors for the company to be wound up
• the court orders the restructuring is to end
• a voluntary administrator, liquidator or provisional liquidator is appointed
• if the company is a general insurer (within the meaning of the Insurance Act 1973 ) – management of the general insurer vests in a judicial manager of the company appointed by the Federal Court under Part VB of the Insurance Act
• if the company is a life company (within the meaning of the Life Insurance Act 1995 ) – management of the life company vests in a judicial manager of the life company appointed by the Federal Court under Part 8 of the Life Insurance Act.

10. The restructuring plan

Who prepares the restructuring plan.

The directors of the company prepare the restructuring plan in the approved form  with the assistance of the restructuring practitioner.

What is in the restructuring plan?

The restructuring plan  must:

• identify the company property to be dealt with
• specify how that property is to be dealt with
• provide for the remuneration of the restructuring practitioner for the plan
• specify the date on which the restructuring plan was executed.

The restructuring plan may also:

• authorise the restructuring practitioner for the plan to deal with the identified property in a way specified in the plan
• provide for any matter relating to the company’s affairs
• be expressed to be conditional on the occurrence of a specified event within a specified period. The specified period cannot be longer than 10 business days after the day the proposal to make the restructuring plan is accepted.

The restructuring plan must not:

• provide for the transfer of property (other than money) to a creditor
• provide for the company to make payments under the plan in respect of an admissible claim, after three years beginning on the day the plan is accepted.

Are creditors treated equally under a restructuring plan?

All admissible debts and claims rank equally under a restructuring plan. No creditor, or class of creditor, receives priority in repayment of their debts or claims.

Prerequisites to the making of a plan

Before a restructuring plan proposal is sent by the restructuring practitioner to creditors, the company must have (or have substantially complied with the requirement to have):

• paid the entitlements of employees that are due and payable, and
• given returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act).

This excludes employee entitlements that are not currently due to be paid. Further, tax debts do not need to be paid – only the required returns, etc., given.

How is a restructuring plan proposed?

A company under restructuring proposes a restructuring plan if:

• the company prepares a restructuring plan and restructuring proposal statement that complies with the requirements of the law
• the company executes the restructuring plan during the proposal period (generally, this is the period of 20 business days beginning on the day the restructuring begins)
• the restructuring practitioner prepares and signs a declaration
• the restructuring practitioner gives a copy of the restructuring plan , restructuring plan standard terms , restructuring proposal statement  and the restructuring practitioner’s declaration to creditors as soon as practicable after the company executes the restructuring plan
• given returns, notices, statements, applications or other documents as required by the taxation laws (within the meaning of the Income Tax Assessment Act).

The restructuring plan is proposed on the date the restructuring practitioner gives the required documents to creditors.

Deciding whether to accept a plan

A decision about whether a restructuring plan should be accepted is made by affected creditors who are given the following documents by a restructuring practitioner:

• the company’s restructuring plan
• 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, whether the company is likely to be able to discharge the plan obligations, and statements about the practitioner’s belief about the completeness of information set out in the company’s restructuring proposal statement

These documents must be accompanied by a request from the restructuring practitioner to an affected creditor to:

• give a written statement to the restructuring practitioner about whether or not the restructuring plan should be accepted
• if the affected creditor agrees with the assessment of the creditor’s admissible debts or claims – verify the creditor’s admissible debts or claims as set out in the restructuring proposal statement
• if the affected creditor does not agree with the assessment of the creditor’s admissible debts or claims set out in the restructuring proposal statement – notify the restructuring practitioner under reg 5.3B.22 of the Corporations Regulations 2001 .

The practitioner must tell affected creditors who to return their statements (above) to, and that the statements need to be returned, usually before the end of 15 business days beginning on the day the restructuring practitioner gives the documents at 1–4 above (acceptance period). The acceptance period of 15 business days may be longer in circumstances where affected creditors disagree with the schedule of debts and claims in the restructuring proposal statement.

A plan is accepted if, at the end of 15 business days (or any longer acceptance period), the majority in value of affected creditors who returned statements to the restructuring practitioner stated that the plan should be accepted. Regulation 5.3B.25 of the Corporations Regulations provides for calculation of the value of an affected creditor.

The restructuring plan is then taken to have been made on the day after the end of the acceptance period or on the day that a specified event (according to the plan) has occurred.

Who is the restructuring practitioner of the plan?

The restructuring practitioner(s) of the company will be the restructuring practitioner(s) of the restructuring plan unless the company, by resolution of the board, appoints another registered liquidator(s) to be the restructuring practitioner(s) for the plan.

What notice of the restructuring plan must be provided in public documents?

Once the creditors accept the restructuring plan, there is no statutory requirement to add additional words after the company name in any document.

On acceptance of the restructuring plan and appointment of a restructuring plan practitioner, the Company Register status will change from EXAD (External Administration) to REGD (Registered). This information will be available to the public on ASIC Connect or through free searches of the Company Register.

11. What effect does a restructuring plan have on creditors?

Who is bound by the plan if it is accepted.

A plan that is made is binding on:

• the company
• the company’s officers and members
• the restructuring practitioner for the plan
• subject to specific provisions about secured creditors (see below) - a creditor of the company to the extent that the creditor has an admissible debt or claim in relation to the plan

A plan is binding on a secured creditor (including an owner or lessor of PPSA retention of title property of the company):

• if the value of the creditor’s security interest is less than the value of the creditor’s admissible debts or claims—only to the extent of the difference between the values, and
• if the value of the creditor’s security interest is equal to or more than the value of the creditor’s admissible debts or claims – only to the extent that the creditor consents to be bound by the plan.

The fact that a restructuring plan has been made does not prevent a secured creditor from realising or otherwise dealing with the security interest, unless:

• the secured creditor accepted the proposal to make the plan and the plan prevents the secured creditor from doing so
• the court so orders.

The fact that a restructuring plan has been made does not affect a right that an owner or lessor of property (other than an owner or lessor of PPSA retention of title property of the company) has in relation to that property, unless:

• the owner or lessor accepted the proposal to make the plan and the plan affects that right
• the court so orders.

Effect on rights of a person bound by the plan

Until a restructuring plan terminates, a person bound by the plan cannot:

• make an application for an order to wind up the company based on an admissible debt or claim
• proceed with such an application made before the plan became binding on the person
• begin or proceed with a proceeding against the company or in relation to any of its property to recover an admissible debt or claim
• begin or proceed with an enforcement process in relation to property of the company to recover an admissible debt or claim

except, in the case of 3 and 4 above,

• with the leave of the court and
• in accordance with such terms (if any) as the court imposes.

Effect on creditors if the terms of the plan are fully satisfied

If all of the following conditions are satisfied:

• the company’s obligations under the plan have been fulfilled
• the obligations of any other party to the plan have been fulfilled
• all admissible debts or claims have been dealt with in accordance with the plan.

the restructuring plan terminates on the day on which all of the conditions are satisfied, the company is released from all admissible debts or claims and the company is entitled to any property that was not required by the plan to be distributed to creditors.

Effect on creditors if the terms of the plan are not fully satisfied

If a company’s restructuring plan terminates other than because the conditions above are met, any admissible debt or claim that has not been dealt with in accordance with the plan is taken to be due and payable on the business day after the day on which the termination occurs.

12. What is the role of the restructuring plan practitioner?

The role of the restructuring practitioner for the company’s restructuring plan is:

• to receive money from, and hold money on trust for, the company
• to pay the money to creditors in accordance with the plan
• realise property of the company that is available to pay creditors in accordance with the plan
• distribute the proceeds of the realisation of the property among the creditors in accordance with the plan
• to answer questions about the performance or exercise of any of the restructuring practitioner’s functions and powers as restructuring practitioner for the plan
• to do anything incidental to the performance or exercise of those functions and powers
• to do anything else that is necessary or convenient for the purpose of administering the plan.

13. What fees are paid to the restructuring practitioner for the restructuring plan?

The restructuring plan approved by creditors specifies the remuneration that the restructuring practitioner is entitled to receive.

The restructuring plan may specify the restructuring practitioner’s remuneration only by specifying:

• an amount of remuneration as a specified percentage of payments made to creditors in accordance with the plan
• a method for working out an amount of remuneration that, in the event the board consents in writing to beginning or proceeding with proceedings relating to the plan, the restructuring practitioner would be entitled to receive for necessary work properly performed in relation to the proceedings.

14. How is a restructuring plan terminated?

A company’s restructuring plan terminates (whichever happens first):

• on the day on which the company’s obligations under the plan, and the obligations of any other party to the plan, have been fulfilled and all admissible debts or claims have been dealt with in accordance with the plan
• if the court terminates the plan – on the day the court determines and specifies in the order
• if the plan is expressed to be subject to the occurrence of a specified event within a specified period (the specified period cannot be longer than 10 business days after the day on which the plan is accepted) and that event does not occur – on the next business day after the end of that specified period
• if there has been a contravention of the plan by a person bound by the plan that has not been rectified within 30 business days of the contravention occurring – on the next business after the end of that 30-day period
• on the day a voluntary administrator, liquidator or provisional liquidator is appointed.

More information

• Flowchart 14: Restructuring practitioner of a company
• Flowchart 15: Restructuring practitioner of a restructuring plan for a company

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Labor market woes: US small businesses scale back hiring plans

The national federation of independent business found that small businesses scaled back their hiring plans last month.

Tight labor markets are easing a bit for small businesses: Ben Walter

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U.S. small businesses' hiring plans fell last month to the lowest level since the early stages of the COVID pandemic even as the labor market remains tight, according to the latest jobs report from the National Federation of Independent Business (NFIB).

The NFIB's report found that just 11% of small businesses surveyed in March planned to create new jobs in the next three months, down one point from February and the lowest level since May 2020. The decline brings the index below its historic average of 11.8% and the NFIB noted in its report that, "Job creation plans are now below what would be typical in a strong growth economy."

More than half of small business owners, 56%, reported hiring or trying to hire in March – a metric that was unchanged from February and prompted the NFIB to note that "employment activity remains solid, although waning from peak levels." 

"Job openings on Main Street are now in line with the levels before the pandemic," NFIB Chief Economist Bill Dunkelberg said in a press release. "Even with the slowdown in openings, the small business labor market remains tight, and owners continue to compete to retain and recruit employees."

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The National Federation of Independent Business found that small businesses scaled back their hiring plans last month. (REUTERS/Brian Snyder / Reuters Photos)

The competitive labor market prompted a net 38% of small businesses to report raising compensation, an increase of three percentage points from February which was the lowest reading since May 2021.

Nearly one-third of small business owners, or 31%, have job openings for skilled workers while 14% have openings for unskilled labor.

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A majority of small business owners reported finding few or no qualified candidates. (Photographer: Daniel Acker/Bloomberg via Getty Images / Getty Images)

The industry with the highest percentage of small businesses reporting job openings was transportation with 77%, up from 53% a year ago. It was followed by services and construction, which each had 44% of small businesses report job openings.

Construction job openings were down nine points from last month and 29 percentage points from a year ago, and almost half of small businesses in the sector reported having a job opening they can't fill.

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Small businesses' three-month hiring plans dipped to their lowest level since May 2020. (iStock / iStock)

Of those small businesses hiring or trying to hire, an overwhelming 86% of owners reported finding few or no qualified job applicants.

The NFIB's report comes after the ADP National Employment Report released earlier this week showed U.S. companies hiring more than expected in March despite high interest rates and uncertainty over when inflation will subside enough for the Federal Reserve to cut rates.

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The reports come ahead of Friday's jobs report from the Bureau of Labor Statistics, which will give Fed policymakers a fresh data point to consider as they weigh potential interest rate cuts this year.

Reuters contributed to this report.