6 Steps to Implement Your Small Business Restructuring Plan and Engage with Creditors

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Table of Contents

• 1. Company’s Solvency and its Eligibility to Implement a Restructuring Plan 
• 2. Obtain the Necessary Corporate Approvals
• 3. Appoint a Restructuring Practitioner
• 4. Preparing the Restructuring Plan Documents for Creditors
• 5. Communicating with your Creditors
• 6. Adoption of the Restructuring Plan
• Key Takeaways 
• Frequently Asked Questions

Under the Corporations Act, eligible Australian small businesses who are or are likely to become insolvent may have the opportunity to work with a small business restructuring practitioner to develop and propose a small business restructuring plan to creditors. If accepted, this plan will bind the company and most of its creditors. This article will help you understand the small business restructuring process and explain how to communicate effectively with your creditors.

1. Company’s Solvency and its Eligibility to Implement a Restructuring Plan 

You should consult your company’s lawyer and financial advisers to determine whether you are eligible to implement a Restructuring Plan. This necessitates assessing whether your company is likely to become insolvent. Broadly, a company is considered to be insolvent if it is unable to meet its financial obligations when they are due, but ultimately, this assessment must be made on a case-by-case basis taking into account your specific circumstances;  

Before appointing a Restructuring Practitioner, the company must have (or substantially complied with the requirement to have):

• paid the entitlements of employees that are due and payable; and
• given returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act).

Unless the two criteria above have been satisfied, the company cannot propose a Restructuring Plan. 

2. Obtain the Necessary Corporate Approvals

The company’s board of directors must pass resolutions acknowledging that it has obtained advice concerning its solvency position. As a result of that advice, the board has formed the view that the company is or is reasonably likely to become insolvent at some future time. Further, the company’s board of directors must approve the appointment of a Restructuring Practitioner to assist the company in developing a Restructuring Plan. 

You should also consider the company’s corporate governance documents to determine whether additional approvals are required to implement the Restructuring Plan and appoint a Restructuring Practitioner. 

Moreover, it is crucial to mention that restructuring and Restructuring Plans are considered ‘external administration’ under the Corporations Act. As a result, only a ‘registered liquidator’ can act as a Restructuring Practitioner. Your company’s governance documents may require additional approvals, such as shareholder resolutions or consents before the company can undertake an external administration event or appoint a Restructuring Practitioner. 

3. Appoint a Restructuring Practitioner

Assuming your company is eligible, appointing a Restructuring Practitioner is the next step. 

As previously mentioned, only a ‘registered liquidator’ licensed under the Australian Securities and Investments Commission (ASIC) can be appointed as a Restructuring Practitioner. Once a Restructuring Practitioner is appointed, it cannot be removed, and your company’s board of directors will be required to work with the Restructuring Practitioner to prepare the following documents for your creditors’ review:

• the Restructuring Plan;
• a restructuring proposal statement;
• the Restructuring Practitioner’s declaration stating reasonable grounds for your business’s eligibility for utilising the small business restructuring scheme and its ability to discharge its obligations; and
• a written request to each creditor to indicate whether or not they accept the Restructuring Plan.

Subsequently, the above documents must be put to creditors within 20 business days of your business appointing the Restructuring Practitioner. That period of time can only be extended by a court order or by the Restructuring Practitioner on request by the company for up to 10 business days.

4. Preparing the Restructuring Plan Documents for Creditors

Your Restructuring Plan should: 

• contain the statutorily prescribed terms;
• specify how creditors will be repaid from the company’s cash or assets as a proportion of the debt owed;
• disclose the remuneration payable to the Restructuring Practitioner;
•  if proposing an asset-based sale, provide details concerning the asset valuation method, the sale process and marketing plan, and the parties participating in the sale; 
•  specify the Restructuring Plan’s execution date; and
•  disclose any conditions that must be satisfied after creditors accept the proposal.

Moreover, the Restructuring proposal statement accompanying the Restructuring Plan should include a schedule of the debts and claims to be dealt with under the Restructuring Plan, as well as essential information about the effect of the Restructuring Plan on your creditors.

Your appointed Restructuring Practitioner should provide all creditors with a:

• recommendation as to whether the restructuring plan should be accepted; and 
• request that the restructuring proposal statement, including the schedule of debts and claims, be reviewed within 5 business days.
  

5. Communicating with your Creditors

At this stage, you should schedule meetings with your company’s board, Restructuring Practitioner, and major creditors at this stage. This will facilitate open and transparent communication between the parties.

Throughout the restructuring process, the Company can regularly meet with and seek feedback from the committee and provide updates on the Restructuring Plan. This strategy can help build trust and commitment between the company and its creditors when implemented effectively.

6. Adoption of the Restructuring Plan

Once the restructuring plan is presented to creditors, they have 15 business days to vote on accepting or rejecting it. If most creditors accept the proposal, your Restructuring Plan will be adopted and binding.

Further, creditors may contest the debt amount recorded against their name in the restructuring proposal statement. They should notify the Restructuring Practitioner within 5 business days of receiving the documents. The Restructuring Practitioner will assess the creditors’ claim and make a decision. If the creditor still disputes the decision, they can seek relief in court.

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Key Takeaways 

To avoid insolvency, a company must satisfy several steps and prerequisites to rely on the restructuring scheme. This process will require input from your company’s legal and financial advisors. 

Furthermore, a company’s ability to rely on the scheme largely depends on whether it can get its major creditors to ‘buy-in’ to the Restructuring Plan. It is, therefore, crucial that you communicate regularly and transparently with creditors throughout the restructuring process. If creditors perceive a lack of transparency, they may refuse to support the Restructuring Plan, which can lead to protracted disputes, further depleting your company’s resources. Thus, creating a collaborative dialogue with your creditors enhances the likelihood of a successful restructuring. 

If you have any questions regarding restructuring, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions