For many SMEs, the financial fallout of COVID-19 continues, with ATO and other debt still causing sleepless nights. However, new significant insolvency reforms to support small businesses, deliver further hope that surviving and thriving is possible.
Coming into effect from 1 January 2021, the small business restructuring process replaces the current COVID-19 stimulus measures, which ended on 31 December. Providing a new option to negotiate with creditors, it gives eligible businesses the opportunity to restructure their existing debts while continuing to trade.
While the details aren’t fully ironed out at this stage, here’s a run-down of the process as we understand it based on the draft regulations.
STEP 1: Determining Small Business Restructuring Eligibility
The first step in the small business restructuring process is to determine whether you or your client are eligible. To be eligible, you must:
- Be a small business (<20 employees) facing insolvency
- Be an incorporated business (Pty Ltd entity)
- Have total liabilities (including secured and related-party debt) under $1 million
- Not already be subject to an insolvency administration
While not essential at this stage, to avoid defaulting during the restructuring process, the company must be substantially complying with obligations to lodge returns with the ATO. Employee entitlements, including superannuation, must also be paid.
STEP 2: Appointing a Small Business Restructuring Practitioner
If eligible, directors must decide to formally appoint a small business restructuring practitioner (SBRP). The practitioner’s role is to help determine whether the company should be terminated or restructured and to manage and administer the process. They also have authority to investigate the company’s affairs.
Once an appointment is made, ASIC and the company’s creditors must be notified within 1 business day. At this point, unsecured and some secured creditors are prohibited from taking actions against the company, and any personal guarantees cannot be enforced.
STEP 3: Drafting the Small Business Restructuring Plan
Following the appointment, the company and practitioner have 20 business days to work on a plan to restructure the business’s debts and provide supporting documentation for creditors. During this period, the company can continue to trade as normal.
A small business restructuring plan typically includes a proposal to pay a specified amount to unsecured creditors (over a period of no more than five years) and must:
- Be in the approved form
- Identify the property that is being dealt with and how it will be dealt with
- Provide remuneration for the SBRP appointment
- State the date on which it was executed
As part of the business restructuring plan, the practitioner must prepare a business restructuring statement. They must also prepare and sign a certification certificate.
ASIC must be notified of the plan within five business days.
STEP 4: Presenting the Small Business Restructuring Plan to Creditors
The SBRP must serve the affected creditors all documents, including the plan, statement and signed certificate, as soon as possible after the plan is finalised.
Before this happens, the company and practitioner must ensure:
- All employee entitlements have been paid; and
- All tax reporting obligations are up to date; or
- The company is substantially complying with the above
STEP 5: Acceptance or Rejection of the Plan by Creditors
Once the creditors have received the plan, they have 15 business days to vote on the plan. Acceptance or rejection must be submitted in a written statement.
If a creditor disputes the recorded amount of their claim: The creditor must provide specifics of the dispute, such as a statement of account and invoices. The practitioner then has five business days to resolve it.
If the majority in value of creditors accept it (over 50% of voters): The plan will be approved, binding all unsecured creditors, the business will continue to trade and the practitioner will administer the plan.
If not approved: The restructuring process ends and control of the company remains with the directors. The company may then attempt to continue trading or, more likely, be placed into voluntary administration or liquidation.
If successful, the process comes to an end once the company’s and any other party’s obligations under the plan have been fulfilled, and once all admissible debts and claims have been dealt with. It can also be terminated by the company or SBRP, or ordered by the court if the plan is non-compliant – or for other reasons.
Small Business Restructuring Could Save Your Company
Admitting your small business is in trouble and taking action isn’t a sign of weakness. The sooner you act, the better your chances of survival. The small business restructuring process offers a more simplified, lower-cost opportunity to restructure while allowing the business owner to remain in control.