The popularity of the Small Business Restructure (SBR) is continuing its upward trajectory at an exponential rate. In fact, so far this year, de Jonge Read’s involvement with SBRs has outnumbered Voluntary Administrations (VA) by 3:1. Indeed, if it wasn’t for the $1m debt threshold to be eligible for an SBR, the ratio would even higher.
As for the eligibility for an SBR, the following criteria must be met:
- The business must be operated as a company.
- The company has no more than $1 million in total liabilities for unsecured debts, including potential shortfall on secured debts.
- Before a plan is offered to creditors, the company must have:
- paid all employee entitlements that are due and payable (including superannuation); and
- its tax lodgements up to date.
- Neither the company nor any director that held office in the last 12 months has utilised an SBR or simplified liquidation in the 7 years preceding the appointment of the SBRP.
Our client, a Queensland-based company, carries on business in the building sector, predominantly in the area of formwork. It mainly provided labour hire and formwork in its own right. A number of factors had a negative impact on our client’s financial position. Those were:
- That old chestnut – COVID
- Border closures affecting projects in NSW
- Increasing material costs
- 3 major building clients were placed into liquidation; and finally
- Particularly heavy rain from January to April 2024, led to project delays and cancellations.
As with most SBRs we have been involved with, the Australian Taxation Office (ATO) was the major creditor. The director came to us with a letter from the ATO to the company subtly headed, “YOU HAVE NOT PAID YOUR DEBT.” The letter (A.K.A the RED letter) demanded $707,000 within 14 days.
The long-term viability of the business was good, and work was beginning to pick up. Our strategist worked with the director and the company accountant and assisted with creating a repayment proposal to creditors, arranging for the allocated staff entitlements, and ensuring that superannuation payments were met.
The proposed restructuring plan offering 15.5 cents in the dollar return to the creditors within 7 months. A cash flow projection (which is a must) showed that the company could make the payments, pay for the SBR process, and keep its head above water.
Although not a requirement, with sophisticated creditors such as the ATO, it is important to show a comparison to a possible return in a liquidation. In our client’s case, the return to creditors in a liquidation would be nil. Clearly, the $127,410 offer presented is a greater return to creditors than if the company is placed into liquidation.
Furthermore, the fact that the payment plan was for a period of only 7 months as opposed to the maximum term of 3 years was a key factor in gaining creditor support. The shorter the period, the more appealing the offer. The longer the period, the higher the risk of default. Other key factors for the ATO were the business’s viability going forward and the ongoing employment of 18 employees.
Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Contact us now on p. 1300 765 080 | ua.mo1728399506c.arj1728399506d@ofn1728399506i1728399506
Did you know?
Phoenixing is another name of business restructure. Read more about business restructures and when this can be an option for you.
