As a result of the COVID-19 pandemic and associated economic downturn, the Australian Government made changes to the insolvency framework with the aim of helping more small businesses restructure and survive that difficult period. The Small Business Restructuring (SBR) process is one of two new formal insolvency appointments introduced by the Federal Government in 2021. With the help of a registered liquidator (called a small business restructuring practitioner – SBRP), a company can put forward a plan to its creditors to restructure its existing debts, while allowing the directors to remain in control of the business, property, and affairs of the company during the restructuring period.
Qualifying for the Small Business Restructuring (SBR) Process
To be eligible for the SBR process, your business must meet the following key requirements:
- Be operated by a company (Pty Ltd entity).
- Have less than $1 million in liabilities (provable debts per Section 553 of Corporations Act and excluding employee entitlements).
- All outstanding employee entitlements, including superannuation, must have been paid (noting that this does not include entitlements not yet due for payment, such as accrued annual or long service leave).
- All tax lodgements for the company must be up to date (BAS and income tax returns).
- The company must be insolvent or likely to become insolvent at some future time*.
- The company and its directors (including former directors in the last 12 months) cannot have utilised either a simplified liquidation or the small business restructuring process in the last 7 years.
- The company must not already be subject to an insolvency administration.
*insolvent means unable to pay its debt as and when they fall due and payable.
To avoid defaulting during the restructuring process, the company must continue to substantially comply with all the tax lodgements and payment of employee entitlements, including superannuation.
What debts are included in the plan?
The restructuring plan includes all unsecured debt (including shortfalls to secured creditors and participating secured creditors debts), which was incurred prior to the company entering SBR. However, the plan does not include employee entitlements (including those not yet payable, for example, wages, leave, or redundancy entitlements). If you incur new debt after the company enters the SBRP, this must be paid off outside the plan.
Effects on Creditors
Secured creditors and unsecured creditors
When a company enters into restructuring, a moratorium is applied on unsecured creditor claims and some secured creditor claims. This means unsecured and some secured creditors are prohibited from taking any enforcement action against the company without the RP’s consent or the court’s permission. That is, any legal action, enforcement of their claims and security interests (other than perishable property) against the company, is disallowed.
On personal guarantee
A creditor cannot enforce any personal guarantees held against the director their spouse, or their relatives in relation to a liability of the company.
On winding up application
If a legal proceeding has progressed to the point where an application has been made to have the company wound up, the action must pause during the SBR. The court is to adjourn the hearing of the winding up application if the court is satisfied it is in the interests of creditors to continue under restructuring rather than being wound up.
RN LEGAL has assisted many small business’ with debt restructuring, including ATO debt whilst retaining control of their business and its assets. RN LEGAL works in conjunction with restructuring practitioners and Accountants. If you or someone you know needs assistance with debt restructuring, please contact RN LEGAL on [02] 9191 9292 or mail@rnlegal.org.