Small business restructuring: don’t let a crisis go to waste

After a couple of years where uptake was slow, the small business restructuring (SBR) regime, which came into effect 1 January 2021, has well and truly cemented itself as the favoured debt restructuring process for companies with less than $1 million in liabilities (other than employee entitlements). There are now more SBRs per month than voluntary administrations, and represent around 25 per cent of all new corporate insolvencies.

SBRs have a very specific purpose. They allow (if the majority in value of creditors who vote are in favour of the plan) unsecured creditor claims existing at the time the restructuring commences to be compromised for a fixed percentage of their claim, while also allowing the directors to continue to trade the company’s business in the ordinary course. All unsecured creditors are treated equally and must have their claims compromised under the restructuring plan, and must receive the same percentage of their admitted claim.  

The largest creditor by far, if not the only creditor, in many SBRs is the Australian Tax Office, which means the ATO is the creditor most affected (and their vote will generally determine whether a restructuring plan put forward is accepted). Anecdotal evidence from discussions with insolvency practitioners who are taking SBR appointments shows that the ATO has gradually increased over the past few years the minimum amount it expects to receive to somewhere around 25 per cent of its debt – this is not fixed, and the amount will depend upon the company’s circumstances, including the comparison to a hypothetical return in a liquidation.  

Undoubtedly, compromising the company’s ATO debt for a fraction of the debt payable over two or three years is a good outcome, but there is little point going through an SBR if the fundamental profitability of the business does not improve and the company is back in the same position a few years later. Remember, you can’t put the company through another SBR for another seven years!  

The report sent to creditors by a restructuring practitioner which attaches the restructuring plan will explain if, and why, the restructuring practitioner thinks the company will be able to meet the payment schedule under the plan. Often the restructuring practitioner will refer to some initiatives the directors have come up with to improve profitability; however, the fees charged by a restructuring practitioner generally only allow a high-level consideration of the company’s ability to meet the repayments under the plan on top of ongoing trading expenses, and nothing more. This is where a great opportunity is often missed – the opportunity, with the assistance of expert turnaround and performance improvement advice, to identify, and address during the restructuring plan period, the key drivers that led to its lack of profitability, and to implement other performance enhancing strategies.

We highly recommend that advisers recommending the SBR process also consider recommending the directors seek expert turnaround and performance improvement advice. That could be given by the small business restructuring practitioner if they have the requisite skills and experience, or by another turnaround expert. Paying for such advice is often an issue for small business, and spare cash will be at a premium during an SBR and in the initial stages of the restructuring plan, but the scope of the advice provided, and the fee structure agreed for such advice can be factored into the cash flow, and no doubt be linked to certain KPIs in profit improvement – that is common in turnaround engagements. And the cash flow will very likely improve as a result of the advice, providing a snowball effect. As they saying goes, ‘from acorns oaks trees grow’, but an acorn that is well watered and fertilised will grow faster than one that is planted in dry, barren earth.