The COVID-19 pandemic had a profound impact on the world of business. As commerce slowed, many businesses went under, and small businesses were the most vulnerable.
Seeing the danger in this, the Australian Government released a number of measures designed to support smaller brands throughout the period. Not every company could be saved, so the Government also introduced two new insolvency processes.
These simplified insolvency measures were designed to make it easier for small businesses to access the support they need to restructure their operations.
The Small Business Restructuring process was one of these measures. It’s a simplified restructuring framework that allows small businesses with minimal liabilities to restructure and potentially save the company.
In this article, we’ll look at Small Business Restructuring in detail and learn more about the process attached to it.
What Is Small Business Restructuring?
Small Business Restructuring (SBR) is a simplified restructuring process that’s available to small businesses in financial distress. With SBR, small businesses can access the help of an insolvency specialist and make a plan of action that could save the business from liquidation.
Small Business Restructuring is open to businesses that are insolvent (or that will become insolvent). There are also several other eligibility criteria. The business must:
- Have total debts and liabilities of up to $1 million
- Be up to date on all tax lodgements (e.g. income tax)
- Be up to date with employee entitlements (e.g. superannuation and leave)
The company directors also cannot have used Small Business Restructuring or Simple Liquidation in the past 7 years.
Ultimately, the goal of SBR is to develop a restructuring plan that will allow the directors to make changes to the company in order to cut costs and repay its debts to creditors. This increases the chances of the business’s survival and is preferable to winding up the company immediately.
The Small Business Restructuring Process
It might seem a bit overwhelming but small business restructuring is an emotional process. It takes a toll on your mental well-being. But when carried out effectively, restructuring can be helpful. Australia’s Small Business Restructuring framework consists of four major steps:
The process begins with the directors of the company assessing its financial position.
As a director in Australia, you are responsible for carrying on business in the best interest of the shareholders. This means it’s your job to stay abreast of the company’s situation and avoid making decisions that run counter to its financial well-being.
During pre-appointment, directors will gather financial information and assess whether the business is insolvent, or that it’s likely to become insolvent.
If so, the directors assess that company’s eligibility for Small Business Restructuring and appoint a Restructuring Practitioner (RP). The RP is a registered liquidator and an expert in managing insolvent companies.
Under SBR, the directors of the company retain control when the RP is appointed.
The goal of SBR is to develop a restructuring proposal that will allow the company to satisfy its debts, usually by restructuring the company (e.g. selling assets, changing processes, and reducing waste).
This proposal must be presented to creditors within 20 business days of the appointment. The 20-day period begins as soon as the directors appoint a Restructuring Practitioner in writing.
During the proposal period, the company will continue to trade as normal under the director’s control. The RP will need to authorize any transactions that fall outside the normal course of business.
At this point, the company will also need to ensure that it meets the other requirements of SBR, such as filing tax lodgements and paying employee entitlements. If the RP is satisfied that the company is eligible for SBR, they will work with the directors to develop a plan of action.
This Restructuring Plan must include a list of all debts and liabilities. The liquidator will then develop a plan that may include:
- Selling assets
- Reducing waste
- Changing company processes
- Consolidating debt
- Laying off staff
The plan is then presented to creditors, who can either accept or reject the proposal. The plan is adopted if the majority of creditors (in value) accept the proposal.
If the plan is accepted, then it becomes binding to the company and all its creditors, company officers, and members. The plan can then be implemented by the RP.
Restructuring plans typically involve selling assets and collecting money that will be used to repay debts to creditors over a period of up to 3 years. This money is collected in a trust by the RP and is distributed to creditors in accordance with the details of the plan.
Finally, the plan will be terminated once all the terms have been satisfied.
In many cases, creditors will compromise and reduce the debts they are owed in order to receive a payout. While the creditor loses some of their money, they receive far more money than if the business were to proceed straight to liquidation.
Once the terms of the plan have been met and creditors have been repaid, the plan is terminated, control of the company returns to the creditors and it continues to trade as normal.
If the terms of the plan aren’t satisfied, it may be terminated early. The company will not be released from remaining debts. Instead, the directors will meet and determine whether or not they need to appoint an Administrator or wind the business up in Liquidation.
Small business restructuring mostly depends on how fast a company can act. Not only does it let you address challenges immediately, but it also increases your chances of success. Furthermore, it also helps you to work with cash-saving measures and reduce disturbances within your team or organization.
By taking early measures, you can mitigate the risks of putting your business in a risky position. With this, we come to the end of this comprehensive guide. But if you think it guided you well, don’t hesitate to share your thoughts in the comment box below. Keep following us for more informative content. Thank you!