When a small business faces uncertainty, the business owner needs to take action, which can be intimidating. At times like this, it is essential to plan a path to business recovery and pay attention to the challenges that are standing in the way.
Restructuring the small business may be one option to ensure its success in the future. However, there are other reasons why a business restructuring becomes necessary.
Financial distress, operational inefficiencies, market changes, regulatory changes, new market entry, technological advancements, ownership or leadership changes are some of the reasons why a business might need restructuring.
Irrespective of the reason a small business may need a restructuring plan, there are some things that must be kept in mind. Here in this blog, we have gathered all the essential information about small business restructuring you will require in Australia.
What Is Small Business Restructuring?
A small business restructuring is a process that lets eligible companies or businesses reorganise their operations, along with debts, with the help of a restructuring practitioner. The main aim behind this is to achieve a sustainable outcome and avoid insolvency.
The following are the key elements of a small business restructuring process:
- This process allows the directors of eligible businesses or companies to retain control of the property and assets of the company and the business while the restructuring plan is being developed.
- SBRP also allows these directors to work with a restructuring practitioner in order to develop a restructuring plan. It also lets them make a deal with the creditors once the plan is ready (given that the creditors agree to it).
Signs You May Need To Restructure Your Small Business
Are you wondering if you need to restructure your small business? The following signs can help you figure this out:
Cash flow problems
When a business is struggling to pay the bills timely or is experiencing a decline in its sales, these are the signs that the business is facing cash flow issues. In such a case, the business may need to restructure its operations.
Lack of profitability
When a small business is consistently operating at a loss, the restructuring process may become essential to improve the financial position and the ongoing viability of the business.
Loss of Key customers
If the business is experiencing a decline in its customer base or losing its key customers, it may be a sign that its operations need restructuring.
Increasing debt
Some businesses take on more debt to cover their expenses. This may also be a sign that the business is demanding a restructure to address the underlying issues.
Legal action or creditor pressure
If the business is dealing with pressure from creditors or facing legal action to pay its debts, then it is time to reach out to a restructuring advisor.
Eligibility Criteria For Small Business Restructuring
The small business restructuring process or SBRP is available to incorporated businesses, or Pty Limited Companies, that have creditors of less than $1 million.
A company needs to declare the following in order to be eligible for small business restructuring:
- The total liabilities of the company, i.e., the creditors, don’t exceed $1 million when it enters the process (this is exclusive of employee entitlements).
- The company is about to or has become insolvent.
- None of the directors of the company has become directors of any other company that already has gone through a Simplified Liquidation process or small business restructuring process within the last 7 years.
- The business is up to date with the tax lodgements, along with all employee entitlements (exclusive of entitlements, leave and other entitlements that aren’t due to be paid currently. In case the business is behind on the lodgements, getting them up to date is necessary before proposing a plan.
Small Business Restructuring Process
There are three phases to the SBRP (small business restructuring process). These are:
Pre-Appointment
The entire small business restructuring process starts when the company appoints a small business restructuring practitioner to guide the company directors through the process.
A restructuring practitioner is going to assess the company to confirm its eligibility to process with SBRP (small business restructuring process). Along with this, the restructuring practitioner will also confirm if restructuring is the right solution for the company.
The Restructuring Phase
Company directors are given 20 business days to put forward a restructuring plan. They need to work with the appointed restructuring practitioner for this.
The restructuring plan can involve proposing significant changes to the structure since there isn’t any set formula for what will be included in it.
The creditors will be provided with the plan through the restructuring practitioner. Following this, the creditors are asked to vote on the business plan within 15 business days. They can either agree or disagree with the proposed restructuring plan. The restructuring plan can only commence when the majority of creditors accept it, i.e. over 50% of the votes are “yes”.
But what if creditors do not accept the restructuring plan? In that case, the company is allowed to proceed with a voluntary administration, new simplified liquidation process or other actions.
During this period, the company can continue to trade but under the control of company directors.
The Plan Phase
In many cases, the director of a company undergoing restructuring will make a single payment into a fund. The restructuring practitioner, who is overseeing the process, will then distribute this money to the company’s creditors. Essentially, it’s a way to centralise and manage the funds available for repaying creditors during the restructuring process.
The plan’s period can’t exceed 3 years. Similarly, the company can continue to trade during such a period only under the control of its directors.
The directors of the company can commence a small business restructuring process after appointing a restructuring practitioner by making Resolutions. In simpler terms, it means that there’s no involvement of the Court or creditor in the decision.
The company needs to sign a document that settles the following:
- The company is either insolvent already or is likely to become insolvent in the future.
- The company needs to appoint a small business restructuring Practitioner.
- It should state the fixed fee of the restructuring practitioner for the proposal period.
Role of the Restructuring Practitioner
The restructuring practitioner has the responsibility of overseeing the restructuring process as well as developing the restructuring plan. Such practitioners advise the company and company directors. Along with this, they give assistance in communication with creditors.
They also administer the agreed plan and then distribute funds to the creditors. Once the terms are satisfied, the restructuring process is considered complete.
What If The Restructuring Plan Isn’t Accepted By Creditors?
The restructuring process ends if the restructuring plan isn’t accepted. Although the directors still stay in control of the company, creditors can no longer be prevented from enforcing their rights, such as taking legal action.
Besides this, once the company comes out of a small business restructuring, its director isn’t protected from personal liabilities for insolvent trading anymore. So, in such a situation, directors often find themselves considering placing the company into liquidation or voluntary administration.
Restructuring Plan – What Is It Exactly?
So far, we have discussed that the restructuring heavily depends on the acceptance of the restructuring plan. But what exactly is a restructuring plan?
In simple terms, a restructuring plan is an agreement between the company and its creditors. It outlines the proposed changes to the operations of the business and payment terms of creditors. Since there are no set requirements for such a plan, it can be flexible.
Typically, a restructuring involves a one-off contribution from the director (or somebody else) that has been paid to creditors by the restructuring practitioner. However, in this plan, contributions from future profits over a period or the sales of some assets can be included.
There are specific requirements that have to be met before a restructuring plan can be put to the company’s creditors.
- First, employee entitlements that are due have to be paid. Usually, these are wages, payment for leave already taken and superannuation. Untaken annual leaves aren’t included in these.
- Tax lodgments also need to be up to date, which include business activity statements and income tax returns. Although tax debts don’t need to be paid up to date, the returns have to be lodged.
When it comes to the source of funds, it could be the director or any related party, banking refinancing or future profits. There isn’t set requirement from where the money to pay in the plan comes from.
Role Of The Directors During A Small Business Restructuring
During a small business restructuring, directors have a very active role to play. Throughout the restructuring process, the directors remain in charge of the company and trade the business.
In case the directors enter a transaction that is not in the ordinary course of the business of the company, consent of the restructuring practitioner is necessary. The restructuring practitioner also advises the directors on the proposed plan.
Directors may need to give an explanation to some creditors as to why it is beneficial for them to agree to the Restructuring Plan.
What Does A Director Need To Declare?
Within 5 business days (or even longer if approved by the restructuring practitioner) after the restructuring starts, the directors have to provide the practitioner with a signed declaration stating the following:
- The company is eligible.
- The company has entered into a voidable transaction.
- Company directors believe (on reasonable grounds) that the company actually meets the eligibility criteria and the reason behind it.
The transactions besides the ordinary course of business are the types of transactions that may be voidable in a liquidation. Forgiving related-party debts or material asset transfers are such transactions. The directors may need advice in such cases when there is any confusion.
Small Business Restructuring Practitioner
A small business restructuring practitioner is a new class of insolvency practitioners responsible for overseeing the small business restructuring process. To hold this role, they need to be officially registered with ASIC as a “registered liquidator.”
A small business restructuring practitioner must be “independent”. In other words, it means that someone who is connected to the company can’t be appointed as its small business restructuring practitioner.
A connected individual may be someone who:
- is a director, secretary, senior manager or employee of the company
- is a creditor of the company for more than $5,000
- owe more than $5,000 as debt to the company
- is an auditor of the company
To know if a small business restructuring is registered or not, you should visit the ASIC website. This website keeps a list of Registered Liquidators. You can find this list under “Search Our Registers” and then “Professional Registers”.
Roles Of A Small Business Restructuring Practitioner
Such a practitioner is responsible for assisting in debt restructuring while the company’s directors remain in charge of the business. During the restructuring process, the practitioner may help you with the following:
- Circulating the Restructuring Plan and the restructuring proposal statement to creditors.
- Assisting the company in preparing the restructuring plan and restructuring proposal statement.
- Managing the paying out of payments to the creditors of the company as per the terms specified in the plan.
- Confirming to creditors that they believe the company qualifies for restructuring and has the capability to meet its obligations under the plan.
Although the majority of the time, there is one small business restructuring practitioner, two or more small business restructuring practitioners may be appointed to act. This is often referred to as a “joint and several” appointment.
Effects Of Appointing Small Business Restructuring Practitioner On Creditors
The main purpose of a small business restructuring is to help a company deal with its creditors and change their rights. They could help in the reduction of the amount owing, changing the terms of payment or both.
Due to this, the small business restructuring process has a huge effect on creditors. Since creditors have different classes, the effect is different for them.
Can An Approved Restructuring Plan Be Terminated?
This is one of the most frequently asked ones.
Yes, a restructuring plan may be terminated under the following conditions:
- A creditor obtains a court order.
- There is a breach that remains un-remedied for 30 business days.
- The plan is conditional on a certain event occurring within 10 business days once the plan is made and the event doesn’t take place within that period (or a condition precedent).
- If a liquidator, administrator or provisional liquidator is appointed to the company.
Along with this, it is worth noting that an approved restructuring plan can be varied later, but it might not be commercially viable in a lot of cases as it requires a court order.
Need Help?
We understand that restructuring a business comes with a lot of complications that may make you feel overwhelmed. So, we are here to offer our expert advice. Clear Tax Accountants, a team of professional accountants, has helped numerous small businesses have the right structure for their business.
So, if you need some professional help, reach out to us today!
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