Small Business Restructuring Plan

There was a lot of publicity in the media recently that the Federal Government was introducing new insolvency law reforms effective from 1 January 2021. The reforms are designed to assist small business overcome the impact of the COVID-19 pandemic. These reforms are now in place.

One of those reforms is the Small Business Restructure (“SBR”). The SBR is a process that allows for small businesses to restructure and take advantage of the protections and assistance provided by this new process and within a set time frame submit a plan for consideration by its creditors. It is only available to companies and there are eligibility criteria which are outlined below. (PLEASE NOTE – in this article I use the word business noting it refers to a company carrying on a business)

Much of the process is mirrored along the lines of a  Voluntary Administration, however in a SBR instead of the Administrator taking control the director/s remain in control and take guidance and advice from a Small Business Restructuring Practitioner (“RP”).  Like an administrator this person will be a  Registered Liquidator.

The SBR gives Directors breathing space to restructure the company and affords them the following assistance:-

  • Unsecured creditors cannot begin, continue, or enforce their claims against the company without consent of the RP or the courts
  • On a current winding up application the court is to adjourn the hearing of a winding up if it is satisfied that it is in the interests of the company and its creditors to continue with the restructure
  • Secured Creditors cannot exercise their property rights without the RP’s written consent or with leave of the court
  • A creditor cannot enforce personal guarantees against a Director or their spouse or relative in relation to a liability of the company, except with leave of the court.

This means that for the 20 business days (plus a further 15 business days that creditors are given to vote) these moratoriums would give the benefit of:

  • Not allowing financiers of assets repossessing those assets. Thus allowing the assets to continue to be used in the business. However, as a secured creditor, the company would likely need to pay the monthly instalments to the financier due during the period of the SBR.
  • Creditors with retention of title cannot take back goods supplied (except for perishable goods)
  • Landlords cannot take action to force the company from leased premises even if there are rental arrears leading up to the SBR. The arrears would be an unsecured claim in the SBR.
  • Unsecured claims would be frozen as at the date of the start of the SBR, and these claims would be satisfied as outlined in the plan put forward by the Directors and approved by the RP and creditors (e.g., a dividend as a percentage of total claims is paid in full satisfaction of these pre SBR claims as approved by creditors)

Now that such a product exists to assist small business restructure their affairs, the reasons why you might restructure needs to be discussed. If you are going to restructure why are you doing it, what questions do we need to consider, will a restructure see the business sustained into the future or will it just stall an inevitable failure?

I highlight some examples of issues to be considered, they are not exhaustive but relevant to the decision as to whether a restructure is worthwhile. Combined these all help make the decision as to whether the business is viable now and into the future.

As part of the process in deciding to undertake a SBR and appointing a RP the Director/s must make a declaration that the business is insolvent or likely to become insolvent? Be sure on the reasons as to what the problem is, if it is either insolvent or likely to become insolvent can this be corrected by a restructure? Examples of correctable problems might include a dispute internally or externally that has crippled the business, the failure of a major customer etc might have led the company to become insolvent on a temporary basis or will lead to it becoming insolvent if a restructure is not undertaken, is it a funding issue? If the company is insolvent because it is not viable then a SBR is not the answer, a close down should be considered?

Even if the company is eligible you need to know why you are restructuring and will it be worthwhile and lead to the company’s rescue. There is little point in restructuring the company if nothing will change or if the business can never be viable. You would likely seek the input of your accountant and the proposed RP in making an informed decision about the SBR. The issues that are needed to be addressed before making a restructure plan are the following: –

Profitability

The first one sounds simple, is the business profitable? If it isn’t at present will the SBR lead to it becoming profitable either immediately or within a determined measurable time frame.  If it cannot become profitable why restructure?

Cashflow & funding

How is the business currently funded, how does its cashflow work, is it adequate, will applying additional funding help turn around the business or be lost? What impact will the SBR have on funding, perhaps suppliers already owed money prior to the SBR will insist on purchases being Cash on Delivery (“COD”) rather than on normal trade terms. Whilst unsecured creditors cannot demand the repayment of their pre SBR debts perhaps they will change supply terms during the restructure. If a bank has provided funding via an overdraft secured by the company’s assets, whilst the secured creditor cannot act on its securities, will they allow the business to continue to draw on its overdraft? Noting also they could choose to appoint a Receiver and Manager (though unlikely in a small company on a costs/benefits basis). These reactions will not only determine if the restructure is viable, but also whether the funding model needs to be changed. If changes need to be made, based on information from stakeholders can the proposed restructure still work.

Support from stakeholders

Do you have support from vital stakeholders such as employees, suppliers, secured creditors etc. How your relationship has been during a likely stressful period prior to the SBR will probably impact on the support you get from each of these stakeholders. An example might be promises made to suppliers about payment of their accounts prior to the SBR that have not been kept, is your bank happy to support your current level of debt or increase it to aid the successful implementation of the SBR. Do we need to find alternative funding?

Planning

If there is currently not a business plan in place what can we do to show creditors and other stakeholders that what we are trying to achieve in the SBR is realistic and achievable. How can we prove to ourselves and other stakeholders that the restructure will work?

There are three elements to a SBR, the first is the appointment of the RP to give the protections needed to restructure, the second is the submission of the restructure plan to creditors for their vote, the third is the plan if approved by creditors.  For the plan to be approved a majority in value of the creditors voting  will need to be achieved.

The main eligibility criteria are as follows: –

On the day, the RP is appointed.

The company’s total liabilities must not exceed $1 million (Including Related Party Creditors)

Before the Restructuring Plan is proposed to creditors all employee entitlements that are due and payable must be paid and returns, notices, statements, applications, or other documents as required by Taxation Laws (within the meaning of the Income Tax Assessment Act 1997) must be lodged.

It does not include employee entitlements that are not currently due to be paid nor do tax liabilities need to be paid – only the required returns lodged.

Certain creditors are excluded: –

A creditor who was a related creditor of the company at the time the SBR began (Directors/Shareholders Related entities etc), however these are included in the amount of $1 million when applying the criteria for eligibility.

What debts are admitted?

A debt or claim by a creditor that would be admissible as proof against the company as if it were being wound up in a liquidation. This does not however include employee entitlements not yet due, that are normally admissible in a winding up nor contingent liabilities (future obligations under a contract or lease). The amount admitted would be the debt owed to the creditor at the date the RP is appointed.

So, if you decide to enter a SBR you would need to have identified the company’s issues, determined the business is viable or can become viable and examined how the business might be funded during the SBR and afterwards if the plan is approved by creditors. This is a good product, but Directors need to be well informed and confident that what they are proposing will work. Openness and working closely with the company’s advisors and the RP will be vital in order to bench test the proposal and support it.

If you would like to discuss the process and its benefits and the commitment required to see it succeed, please do not hesitate to contact Jones Partners to discuss further.