Small business restructurings – the good and the not-so-good
Insights3 Mar 2025
By Scott Butler
Small business restructurings (SBR), which allow companies with less than $1 million in liabilities (other than employee entitlements) to restructure their unsecured debts, are increasing in popularity. SBRs now amount to about 25 per cent of all monthly company insolvencies, and outnumber voluntary administrations.
In this article, from knowledge gained in advising small business restructuring practitioners, and from wider industry commentary, we discuss some of the good, and not so good, aspects of the SBR regime.
The good
- Directors maintain control of the company and can continue to trade its business in the ordinary course.
- The SBR process generally does not lead to cancellation of builders’ licences like voluntary administration and liquidation. SBRs are a great tool for restructuring the balance sheets of subcontractors with liabilities under $1 million.
- 75 to 80 per cent of the company’s unsecured debts can generally be compromised, and the remaining 20 to 25 per cent paid over two to three years.
- For the ATO to vote in favour, they will consider various matters, which ensure some rigour is put around the proposal, companies are less likely to put up plans they cannot meet, and previous bad director behaviour is not rewarded. Some of the matters the ATO considers are:
- the commercial terms in comparison to a hypothetical return in a liquidation (although the return to the ATO does not have to be as good as in a liquidation if the ATO can see other benefits, such as employees retaining their employment);
- the company’s ability to make the payments under the plan on time and in full;
- the company’s tax compliance history and that of related parties or entities (such as completing lodgements on time);
- whether the directors have borrowed money from the company to fund lifestyle expenses, which they have not repaid, while at the same time accruing tax debts (although, if this borrowing is in lieu of a wage or salary, the ATO may be more inclined to overlook it); and
- potential breaches of the Corporations Act.
- The ATO will often vote in favour of an SBR, even though they previously rejected a payment plan under which their debt would have been paid in full.
- The company must have paid all employee entitlements that are payable, including Superannuation Guarantee Charges (SGC), prior to sending the restructuring plan to creditors, which is good for employees. The company must also have lodged all tax documents, including SGC statements.
The not so good
- As we observed in our recent article, directors are wasting the golden opportunity an SBR affords to (with the help of some advice) restructure business operations to improve future performance and profitability.
- There is no flexibility to exclude certain unsecured creditors from the process, meaning all trade creditors must be included, even those that the business wishes to keep whole and continue to trade with. This leads to either the company making sure they are paid in full before the appointment of the restructuring practitioner, or the director agreeing, on the side, to make them whole. The latter (which we don’t endorse, but can understand given the inflexibility of the process) is inconsistent with the idea that all creditors with unsecured claims at the start of SBR process are to be treated equally in the restructuring, and could be a basis for a court to set aside the restructuring plan upon the application of a creditor who was not afforded this benefit.
- The exception, which allows a director, or directors, to put more than one company into an SBR or simplified liquidation process as long as it is within 20 business days of the other (or others), only relates to ‘related bodies corporate (and not ‘related entities’). ‘Related bodies corporate’ is limited to holding companies and other subsidiaries of that holding company. This means that companies with the same directors, but different shareholders, may not be able to be put into SBR at the same time. That said, it may be possible, before commencing the SBR process, to change the shareholding of the other entities so that they become related bodies corporates.
- A restructuring plan cannot be amended once sent to creditors. This means that if a creditor gives feedback they would agree to the plan if amended in some way, that amendment can only be effected by obtaining a court order after the acceptance period. In practice, this requires the restructuring practitioner to notify creditors before the acceptance period ends that they will seek a court order amending the plan if creditors vote in favour of it.
- Directors are still liable for ‘locked down’ director penalties and under personal guarantees.
- Except in limited circumstances, the 15 business day period for creditors to vote whether to accept the plan (the ‘acceptance period’) cannot be extended by the restructuring practitioner, meaning that a plan may not be approved if a tardy creditor doesn’t vote in time. An exception to this is where one or more affected creditors dispute the schedule of debts and claims in the restructuring proposal statement, and the restructuring practitioner gives notice to creditors that he or she recommends the debts and claims be varied, and is of the opinion that the variation is significant – in which case the acceptance period ends on the latter of the original 15 business days or five business days after such notice. Alternatively, the acceptance period can be extended by order of the court.
We have advised several companies on legal issues that have arisen during SBRs. Please get in contact if you need any assistance.
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