Small business restructuring: An alternative to insolvency

SMEs are the lifeblood of economies worldwide, contributing to job creation and economic growth. The latest Australian Bureau of Statistics employment data tells us that 7 million people in Australia were employed by SMEs in 2019-20.

However, those businesses are often susceptible to financial hardships that can lead to insolvency,

Small business restructuring (SBR) can play a crucial role in preserving and revitalising these essential economic entities.

The imperative for rehabilitation

SMEs encounter financial difficulties for various reasons, including economic downturns, mismanagement or unforeseen crises. When these challenges arise, it is essential to have a framework that enables the business to rehabilitate and recover instead of immediately resorting to liquidation. This framework includes accountants as trusted advisers.

The SBR process offers an alternative to conventional insolvency procedures. It provides a streamlined and cost-effective process tailored to meet the unique needs of SMEs. Its core objective is to strike a balance between the interests of creditors and the revival of the business, ultimately promoting economic stability and preserving vital sources of employment.

Key aspects of SBR

1 Eligibility criteria

To be eligible, a business must:

• Be operated by a company
• Owe less than $1 million to its creditors (excluding employees)
• Not have previously been through SBR or used simplified liquidation in the past seven years

It must also be in a position to:

• Pay all outstanding employee entitlements (which is generally associated with unpaid superannuation)
• Lodge all outstanding documentation and returns with the ATO

2 Simplified and flexible process

The SBR legislation provides a simplified and streamlined legal process around the restructuring process. A restructuring practitioner (a registered liquidator) collaborates closely with the business owner and, often, the company’s accountant to develop a customised rehabilitation plan.

This often entails the formulation of a plan to deliver to creditors a ‘cents in the dollar’ return superior to that which would be recovered by them if the company went into liquidation.

3 Debt reduction and repayment

A central goal of SBR is to alleviate the debt burden on the struggling business.

Creditors to an approved plan generally write off a portion of the debt and accept reduced repayment amounts over an extended period, lasting no more than three years.

This flexibility enables the business to regain its financial footing.

4 Directors remain in control

Directors remain in control of the day-to-day operations of the company without interference by the appointed restructuring practitioner.

This is unlike, for example, the voluntary administration pathway in which the appointed administrator takes charge.

5 Protection from legal actions

Once the SBR process commences, the business typically enjoys protection from legal actions and creditor enforcement.

This moratorium period provides space for the business to implement the restructure plan without undue external pressures.

6 Creditor participation

Creditors are actively engaged in the development of the restructuring plan, and their consent is required for it to proceed.

Benefits of SBR

• Business continuity: The primary objective is to ensure the survival and continuity of the business, preserving jobs and economic value.
• Cost efficiency: Generally more cost-effective than traditional insolvency processes for both the business owner and creditors.
• Equitable treatment of creditors: Creditors have a say in the process and receive equitable treatment, even if it involves accepting reduced payments.
• Economic stability: When they prevent abrupt business closures, SBRs bolster the overall health of the local economy.

Challenges and considerations

While business rehabilitation offers numerous advantages, it is not without its challenges:

• Balancing stakeholder interests: The restructure plan must be acceptable to the business owner and creditors to ensure its success.
• Regulatory compliance: The regulatory requirements to qualify for and execute an SBR are intricate. The legislation requires the appointment of a restructuring practitioner to assist the directors and their accountants in navigating this process.
• Viability assessment: A comprehensive evaluation is crucial to avoid prolonging the inevitable or putting undue pressure on creditors.

The SBR process can support the revival and recovery of SMEs experiencing financial distress with a simplified, cost-effective process balancing the interests of business owners and creditors.

Adrian Hunter is a Partner at Brooke Bird – Turnaround, Advisory and Insolvency Specialists