Small Business Restructure

And what is debt restructure or simplified liquidation? 

 

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Is small business restructure the same as debt restructure?

What is simplified restructuring?

 

So many similar names and terms used, it can sometimes get confusing. A small business restructure is also called simplified restructuring and sometimes referred to as debt restructure. This is a process for formal negotiation with business creditors where an offer is made in full and final settlement of the debt owed.

Sometimes debt restructuring can also refer to changing the financing structure of a business. This could include refinancing existing debts on new terms, consolidating a number of small debts into a larger facility or other changes to loan conditions, interest rates or fees.

When we refer to debt restructuring here we mean a formal negotiation with creditors.

Who can do a small business restructure?

 

Any business with total debts under $1m can do a small business restructure subject to certain conditions. This includes all debts – secured debts to the bank, trade creditors, the ATO etc.

 

The eligibility criteria are as follows:

  • All ATO reporting must be up to date.

  • All employee entitlements, including superannuation, must be paid.

  • A director, or anyone that has been a director in the past 12 months, must not have used this or the simplified liquidation process in the last 7 years.

  • The director must sign a declaration that there have been no voidable transactions other than preference payments. Examples of voidable transactions are the transfer of assets for less than market value and certain director related transactions.
     

What is a Small Business Restructuring Practitioner?

 

A Small Business Restructuring Practitioner (SBRP) is an independent professional that is appointed by the director to assist with the restructuring of the company’s debt. Only the director can appoint a SBRP – creditors cannot.

At this time only registered liquidators can be SBRPs, however there are processes in place for CPAs, CAs and IPAs with relevant industry and insolvency experience to apply to be a SBRP.

The business restricting model is referred to as a “debtor-in-possession” model. This means the director can operate in the normal course of business. The company can continue to trade. However, for transactions outside the normal course of business, the SBRP may need to approve. The SBRP can approve the sale of assets, or of the business, if they believe it is genuinely in the best interests of creditors.

The SBRP is not a liquidator and does not pursue certain claims that may be available to a liquidator in an insolvency scenario.

How do you do a small business restructure?

 

The process starts with the appointment of a Small Business Restructuring Practitioner (SBRP). The director signs a declaration of eligibility. ASIC records are then updated and creditors are prevented from initiating or progressing any recovery action.

 

The director has 20 business days to prepare the restructuring plan. The proposal is then put to creditors who have the right to vote on it. Creditors have 15 business days to vote to approve or reject the plan.
 

What is debt restructuring plan?

 

The SBRP will work with the director to prepare a restructuring plan. This would be a proposal to present to creditors for the satisfaction of their debts. This may be payment in full over an extended period of time, a lump sum offer to be shared amongst creditors, the proceeds from the sale of an asset, a share of the proceeds from a legal claim if successful etc. The offer can be tailored in each case and could be a combination of some of the options available. The maximum term for payment of the offer is 3 years.

 

The SBRP does not have to assess the offer made to creditors other than to ensure that the payment/s can be met. They are not required to determine whether the offer is in the best interests of creditors, or whether they may get more of their money back if they pursued legal action.

 

As mentioned earlier, the director has 20 business days to formulate the plan and present it to creditors. Creditors then have 15 business days to accept of reject the offer. Only those creditors who exercise their right to vote can influence the outcome. If the creditor does not vote, they are still bound to the outcome regardless of how much they are owed.

 

If the proposal is accepted by more than 50% of creditors who exercise their right to vote the offer is accepted and the company can continue to trade on.
 

What issues do I need to consider if I am thinking of doing a business debt restructure?

 

You need to consider any ongoing relationship with creditors. Will they continue to supply goods and services while the offer is being prepared? If they are not paid in full, what does that mean for the relationship going forward? Will the creditor want to continue doing business with you? Are there alternate sources of supply?

 

Importantly, related parties cannot vote on the proposal. This means any debts owed to companies with the same directors and/or shareholders are not eligible to vote. The offer would need to be supported by unrelated parties.

 

During the business debt restructure period, the business can continue to trade as normal under the control of the director. The SBRP is not responsible for any debts that may be incurred during this period.

The business debt restructure process does not impact the position of secured creditors. If the creditor has security over the business, or a business asset, they can enforce their rights at their discretion. The process also has no impact on the position of any personal guarantors. The guarantee is a separate obligation to pay. If a creditor does not receive payment in full from the company they can pursue the guarantor for any amount that remains owing. 

 

The business debt restructure does not address any personal asset protection needs that the director or related parties may have. For example, a director may remain liable for business debts under personal guarantees or have liability under a Director’s Penalty Notice (DPN), meaning that personal assets may be at risk.