Understanding Small Business Restructuring

Jul 26, 2023 | Small Business Liquidation

Small business restructuring is an insolvency framework introduced in Australia in 2021, to help smaller businesses handle the impacts of COVID-19 on the economy. This unique framework is the first in Australia allowing the directors of struggling companies to maintain control over their business, rather than relinquishing control to a liquidator.

The small business restructuring framework is designed to tap into the unique insights and understanding small business owners have about their businesses. This allows them to craft restructuring plans likely to be more suitable and adaptable to their specific industry, payment timeframes, and other unique factors. The ultimate goal is to enable small businesses to continue trading while obtaining affordable professional advice when dealing with insolvency or potential insolvency.

Criteria for the Small Business Restructuring Process

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The small business restructuring process is a lifeline for businesses facing financial difficulties. However, not all businesses are eligible to participate in this process. There are specific criteria a business must meet to be eligible for the small business restructuring process.

Total Liabilities of Less Than $1 Million

The total liabilities of the business must be less than $1 million. This includes all debts and obligations the business owes. This criterion ensures the process is targeted towards small businesses most in need of support.

Insolvency or Likelihood of Insolvency

The business must be insolvent, or likely to become insolvent in the near future. Insolvency is a state where a business is unable to pay its debts as they fall due. This criterion is crucial as the small business restructuring process is designed to help businesses in financial distress.

Fulfilment of All Tax Lodgements

All required tax lodgements must have been fulfilled. This means the business must be up-to-date with all its tax obligations. This includes lodging all necessary tax returns and reports with the Australian Taxation Office.

Payment of All Employee Entitlements

Employee entitlements currently due and payable must have been paid. This includes wages, superannuation, and leave entitlements. This criterion ensures businesses meet their obligations to their employees before entering the restructuring process.

No Previous Engagement With Simplified Liquidation or the Small Business Restructuring Process

The directors of the business (either current or in the previous 12 months) must not have engaged with simplified liquidation or the small business restructuring process within the past seven years. This criterion is designed to prevent misuse of the process.

No Other Restructuring or Administration

The business must not be under other restructuring or administration. This includes a deed of company arrangement or liquidation. This criterion ensures the business is not simultaneously undergoing multiple insolvency processes.

The Benefits of Small Business Restructuring

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Engaging in the small business restructuring process offers several benefits for small businesses. The most significant advantage is the directors retain control of the company. Following the appointment of a restructuring practitioner, the company has 20 days to review its business, assess outstanding debts and work with the registered practitioner to produce a plan to enable the business to continue to trade.

If the plan is accepted by the creditors, any creditors, whether unsecured or secured, may not begin proceedings against the directors or company while the agreement remains in place. This offers the directors and the company the chance to refocus and reorganise without the constant threat of litigation by its creditors.

What Is the Small Business Restructuring Process?

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The small business restructuring process is a systematic approach involving several stages. Each stage is designed to ensure the restructuring plan is feasible, beneficial for the company, and agreeable to the creditors.

Pre-appointment

During the pre-appointment stage, company directors meet to assess the company’s financial situation. They determine whether the company is already insolvent or at risk of becoming insolvent in the near future.

If the company meets the eligibility criteria for small business restructuring, a Restructuring Practitioner (RP) is nominated by the directors. The RP is a licensed insolvency practitioner who will guide the company through the restructuring process. The RP’s role includes providing advice, helping to develop the restructuring plan, and liaising with creditors.

Proposal

During this stage, the directors, with the assistance of the RP, have 20 business days to develop a small business restructuring plan for the creditors.

The restructuring plan is a comprehensive document outlining how the company intends to address its financial difficulties. It includes details about the company’s assets, how these assets will be dealt with, the remuneration of the RP, and the proposed date of execution of the plan.

Implementation

If the restructuring plan is accepted by more than 50% of the creditors, the directors of the company can continue trading while the RP administers the plan.

During this stage, the company operates under the terms of the restructuring plan. The RP oversees the implementation of the plan, ensuring the company adheres to the agreed-upon terms. Creditors are usually unable to take or continue legal recovery action against the company during this phase, providing the company with a stable environment to focus on its recovery.

Termination

The restructuring plan is terminated when all conditions are met. At this point, the company is released from its remaining debts and can continue to trade as normal.

If the plan is not accepted by more than 50% of the creditors, the company may need to consider other options, such as liquidation or voluntary administration. However, if the plan is successfully implemented, the company can emerge from the process financially healthier and better equipped to navigate future challenges.

The Aftermath of Small Business Restructuring

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Small business restructuring is a comprehensive process designed to help businesses navigate through financial difficulties and emerge stronger. But what may happen after the restructuring process is equally important:

Successful Completion of the Restructuring Plan

If all conditions of the restructuring plan have been met, the company is released from its remaining debts and can continue to trade as normal. This is the ideal outcome of the restructuring process. It means the company has successfully navigated its financial difficulties and is now on a stable footing to continue its operations. The company can now focus on growth and profitability, without the burden of past debts.

Rejection of the Restructuring Plan

If the restructuring plan is not accepted by more than 50% of creditors, the company may face further challenges. Creditors can proceed with actions against the company, with the potential of the company entering voluntary administration or going into liquidation, depending on the circumstances.

This is a less desirable outcome, but it’s important to remember, even in this scenario, there are still options available. The company can seek further advice on how to proceed and explore other avenues for resolving its financial difficulties.

Continuation of Trading Under Creditor Protection

The company can continue trading, and the directors can focus on implementing the restructuring plan and improving the company’s financial position.

The Importance of Professional Advice

The small business restructuring process, while potentially complex, can be navigated with the help of professional advice and guidance. It’s important for businesses to seek advice as early as possible when facing financial difficulties. This can help them understand their options, make informed decisions, and ultimately improve their chances of successfully navigating the restructuring process.

Why Choose Corporate Lifeline for Small Business Restructuring?

Corporate Lifeline is a leading provider of small business restructuring services across Australia. We understand there’s no one-size-fits-all solution to an underperforming or distressed business. We offer timely intervention and prevention strategies and experience has demonstrated seeking assistance early is always better than delayed reactions.

Being proactive requires a recognition of the signs of businesses encountering financial problems and the desire and willingness to seek expert financial assistance early enough to be able to develop a solution. Our experienced team can draw on a comprehensive and varied range of business solutions to help.

Qualified Small Business Restructuring Practitioners

The small business restructuring process is owned and regulated by the Australian Securities & Investments Commission (ASIC). We are qualified to act as Small Business Restructuring Practitioners (SBRPs) for an eligible company. The SBRPs can help determine if a company is eligible, support the company to assess its financial situation, assist in the development of a business restructuring plan, certify the small business restructuring plan to creditors, and oversee the plan when it is implemented.

Comprehensive Services for All Financial Phases

At Corporate Lifeline, we have an array of services to cater to any phase your business is in financially. Whether you’re starting out, facing financial difficulties, or looking to grow, we have the expertise and resources to guide you through every step of the process.

Get the Help You Need Today

If you find yourself in a situation where you need financial advice for your business, let Corporate Lifeline help you. We offer a free guide to resolving your financial difficulties and returning to normal, successful trading. Speak to an expert today and find out how we can help you navigate the small business restructuring process and get your business back on track.

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