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From Distress To Success - A Small Business Debt Restructure

This month we are going to look at the Small Business Restructuring (SBR) process by reviewing a case study of a recent client. A SBR is a formal negotiation with unsecured creditors and is growing in popularity with a significant increase in the number of proposals put forward in recent months. This process gives companies facing financial distress another option and is another tool in the toolkit we can use to help our clients.


What is Small Business Restructuring?


The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) (Act) commenced on 1 January 2021. This new law established the framework for a debt restructuring process aimed at small businesses and saw the introduction of a new category of the insolvency professional known as a Small Business Restructuring Practitioner (SBRP).


One of our team has nicknamed this process the “Aldi DOCA”, meaning that it shares many similarities with the Voluntary Administration – Deed of Company Arrangement (DOCA) process. The intent is to make a formal negotiation with creditors simpler and cheaper, giving smaller companies the same opportunities as larger companies that can meet the professional fees of a DOCA offer. While similar to a DOCA, there are some important differences and may not be the right tool in all instances. As always, it depends on the client’s goals and what will deliver the best outcome possible in that client’s unique circumstances. Let’s have a look at the case of a client we have assisted with a SBR.


Background


Our client, Brent, was the director of a number of café businesses, all operating out of the same company structure. The businesses had been badly affected by the COVID pandemic and had accrued debts while impacted by social distancing requirements. Brent had battled on and wanted to pay all his debts when he could. The company was up to date with all tax lodgements and had paid all superannuation obligations. Brent entered into a short term payment plan with the ATO but was struggling to maintain the payments while meeting his current tax obligations. While times were tough, Brent wanted to continue trading and was confident he would eventually get on top of things.


What happened next?


The company’s ATO payment plan came up for renewal. Brent had found it increasingly difficult to renegotiate extensions to his payment plans. The ATO sought an increase in the payments and Brent could simply not meet these requirements. While he was in arrears with other creditors, they had remained supportive, having done business with Brent for many years, and they enjoyed a good relationship with him.


After numerous phone calls and the provision of extensive information, the ATO declined the payment plan proposal. Soon after, Brent received a Director’s Penalty Notice (DPN). As he had reported all obligations on time, Brent had the opportunity to achieve remission and get out of his personal liability for the company debt. However, he only had 21 days from the date of the notice to achieve this, so he needed to act decisively. Brent’s accountant immediately contacted de Jonge Read to make an appointment to discuss the options.


Time to Act


Brent had several options to achieve the remission of his personal liability. He made it clear that he wanted to pay all his creditors as much as possible and did not really want to liquidate the company. While a business restructure as a commercial necessity was an option, this is not what Brent wanted to do. Based on his goals and given the number of creditors and the amounts owed we recommended a SBR proposal be put to creditors. A Small Business Restructuring Practitioner (SBRP) appointment would deal with Brent’s personal liability.


Importantly, the SBR process is a debtor-in-possession model. This means that Brent could remain in control and continue to trade the business as normal. This meant there was minimal disruption to his business, his staff or his customers. The appointment of a SBRP placed a stay on all enforcement proceedings, meaning the ATO and other creditors could not initiate any further action against the company or any personal guarantors until the SBR process was complete.


The first step was then to engage with a SBRP. Liquidators perform this role and our firm has strong relationships with a number of these firms. The SBRP is required by law to charge a flat fee for the process rather than an hourly rate. By demonstrating to the SBRP that we would bring our project management skills to ensure the process was smooth and efficient we were able to negotiate a very reasonable fee with the SBRP, and in this way alone added significant value for our client.


From the date of the appointment, Brent had 20 business days to formulate an offer to unsecured creditors. We assisted Brent with this and liaised with the SBRP during these deliberations. The SBRP is not required to conduct an assessment of the return to creditors if the company was liquidated and does not make a recommendation on the proposal. However, some sophisticated creditors, such as the ATO, may request an assessment of the return in liquidation. In some cases it may be necessary to make on offer on this basis to gain critical creditor support.


An offer under a SBR can be a lump sum payment, payment over a period of time, the proceeds from the sale of an asset or a successful claim against a third party or a combination of all of these as long as the payment term is no longer than three years. In Brent’s case, he was able to raise some cash personally to make an initial payment and proposed to make monthly payments over the next 12 months.


While not the role of the SBR, communication with creditors during this process is critical. Brent enjoyed good relationships with most creditors, and we worked with him to discuss the offer with creditors to seek their support for the proposal. We then assisted in ensuring the supportive creditors had the required evidence of their debts and received the required voting documents.


What was the outcome?


After the offer is sent to creditors they have 15 business days to respond. They return a document indicating whether they are voting yes or no. Only those creditors that respond can influence the outcome, but all unsecured creditors are bound by the result. The vote is a simple dollar majority. If 50.01% of creditors that exercise their right to vote approve it is successful.


As is common, in Brent’s case, very few creditors exercised their right to vote. All the supportive creditors had ensured they were eligible to vote in favour of the proposal and submitted their forms. In this case, the ATO also voted in favour of the proposal. Even if that had not been the case, the proposal would still have succeeded as the supportive votes outweighed the total ATO debt.


Ultimately Brent was able to settle the company’s total unsecured debts of $700,000 for an initial payment of $50,000 and 12 monthly payments of $12,500 representing a settlement at just under 30 cents on the dollar. Additionally, he has remitted a potential personal liability under a DPN of $150,000. He remained in control of his business throughout the process, all staff remained employed, and his customers enjoyed their coffee as if nothing had happened.


Brent was delighted with the outcome. We were able to guide Brent through this new process and add significant value by reducing the work of the SBRP and negotiating an appropriate fee. By structuring a commercial offer and communicating with creditors to gain their support we assisted Brent to deal with his personal liability and achieve all of his goals.


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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 | info@djra.com.au

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