Now that the Small Business Restructure (“SBR”) process is up and running, learn more about the process from our experience in conducting one of the first SBRs.

On 10 December 2020, Parliament passed the Federal Government’s insolvency reform package to assist small businesses.  The reforms commenced on 1 January 2021 and coincided with the end of the temporary insolvent trading “safe harbour” and statutory demand measures introduced in March 2020 in light of the economic fallout caused by COVID-19.

In short, the new small business restructuring (“SBR”) process allows eligible companies to retain control of their business, property and affairs while they develop a plan to restructure their affairs, with the assistance of a Small Business Restructuring Practitioner (“SBRP”), and to enter into a restructuring plan with creditors.

The Government has promoted the restructuring process as a means for small businesses to survive, resulting in better outcomes for businesses, creditors, employees and the economy.

Furthermore, Australia’s Treasurer described the reforms as the most significant change to Australia’s insolvency laws in almost three decades, stating that the reforms are directed to reduce access costs for small businesses, reducing the time small businesses spend in an insolvency process, ensuring greater economic dynamism and helping small businesses to survive and avoid insolvency.

To be eligible for a restructuring, on the day that the SBRP is appointed:

1.    the company’s liabilities must be less than $1 million, including related-party debts, however excluding employee entitlements.  A secured creditor’s debt is included to the extent of any unsecured portion.  The Treasurer has said that the $1 million cap on liabilities will cover approximately 76% of businesses subject to insolvency;

2.    the company must not have undergone restructuring or has been the subject of a simplified liquidation process within the preceding 7 years; and

3.    no person who is a director of the company or who has been the director of the company within the 12 months before the appointment of the SBRP, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the preceding 7 years, unless they are exempt under the regulations.

The director(s) of the company appoint a SBRP in writing.  Prior to doing this, the company’s board must have resolved that the company is insolvent, or likely to become insolvent at some future time, so as to warrant the appointment of the SBRP.

Once the company has entered into the restructuring process, the company will stay in control of the process and may undertake transactions that are in the ordinary course of business.  Furthermore, the company will be assisted by the SBRP to develop a debt restructuring plan and a restructuring proposal statement (which includes a list of creditors and the amounts they are owed) to put to the creditors for a vote.

The company must put the restructuring plan and the restructuring proposal statement to its creditors within 20 business days of entering the process.  However, the SBRP may extend this period by up to 10 business days (or further by Court order) where an extension is reasonable in the circumstances.

At the time the restructuring plan is put to the company’s creditors, there are further qualifying criteria that must be met at that time:

1.    the company must have paid all its employee entitlement (including superannuation) that are due for payment; and

2.    the company must be up-to-date with its tax lodgements.

Once the plan is signed, the SBRP must give a signed declaration that:

• the company meets the eligibility criteria;
• if the plan is accepted, that the company is likely to be able to comply with the plan’s terms;
• the company’s restructuring proposal statement includes all required information; and
• details any creditors who are related to the SBRP.

Creditors can object to the amount that they have been listed to vote for.  There is a formal process to deal with such objections.

Creditors are given 15 business days to vote on the restructuring plan.  This period may be extended if there is a dispute relating to a creditor’s debt.

Only ‘eligible’ creditors are entitled to vote.  Contingent creditors and creditors who are related to the company or to the SBRP are not entitled to vote.

Secured creditors, unless they otherwise agree, are not bound by or compromised by the plan and do not vote.  But they can vote in respect of any unsecured portion of their debt or in respect of their whole debt if they surrender their security.

The restructuring plan is accepted if a majority (in value) of eligible creditors vote in favour of accepting the plan.

During the restructuring period, a moratorium is applied to unsecured creditor claims, and some secured creditor claims. Furthermore, ispo facto clauses (which are triggered during some insolvency-related events) are stayed for some contracts.

The SBR reforms are still in their infancy.

However, Oracle Insolvency Services are pleased to have recently been appointed to conduct one of the first SBRs.  That company, which operates a restaurant business, continues to trade during the SBR under the control of its director and has submitted its restructuring plan.

COVID-19 has been crippling for small businesses, so a greater take-up of these reforms will hopefully lead to their survival and encourage a dynamic approach to insolvency services.