Reading time: 6 minutes

On 1 January 2021, the Federal Government’s restructuring regime for small businesses came into effect. The reform sees the introduction of a new ‘debtor in possession’ restructuring model for eligible small businesses as a possible alternative to voluntary administration. This article sets out:

  • what the restructuring process looks like; and
  • the eligibility criteria that small businesses must meet.

Small Business Restructuring Process

1. Pre Engagement

The first step is to consult with a small business restructuring practitioner. A restructuring practitioner will help determine if the company is eligible and help the director(s) to get their proverbial ‘ducks in a row’. Currently, only qualified liquidators can act as a restructuring practitioner.  

2. Engagement

A restructuring practitioner will provide their consent to act in writing. After this, company directors then pass a resolution to the effect that, in their opinion, the company is insolvent or likely to become insolvent in the future. Furthermore, that the restructuring practitioner is to be appointed to the company.  

3. Director Declaration

Within five business days of the restructuring practitioner’s appointment, each director must provide the restructuring practitioner with a declaration stating, in their opinion, whether:

  • there are reasonable grounds to believe that the company has entered into any voidable transactions; and
  • the company has met the eligibility criteria (set out below).

4. Developing a Restructuring Plan

Next, the company must, within 20 business days from the appointment of the restructuring practitioner, prepare and execute a restructuring plan. The restructuring plan must: 

  • be in the approved form; 
  • identify what and how they will deal with the company property;
  • provide for payment to the restructuring practitioner; and 
  • specify the execution date of the restructuring plan.

5. Restructuring Practitioner Declaration

Once a restructuring plan has been executed, the restructuring practitioner must sign a declaration stating whether: 

  • they believe the company meets the eligibility criteria; 
  • if the restructuring plan is made, the company is likely to be able to comply with their payment obligations under the restructuring plan; and 
  • all information required to be set out has been set out.

The declaration must also identify any creditors that are a related entity to the restructuring practitioner.

6. Putting the Proposal to Creditors

The restructuring practitioner sends the restructuring plan to as many creditors as possible, asking them to vote on the plan and to verify or dispute the company’s assessment of its admissible debt or claims. Additionally, the restructuring practitioner must lodge a copy of the restructuring plan with ASIC.

7. Voting

Creditors have 15 business days from the date the restructuring practitioner provides them with the restructuring plan, to vote on the plan and verify or dispute the company’s assessment of its admissible debt or claims. Furthermore, voting is determined by a simple majority vote (in value of debt) of those creditors who vote within the requisite 15 business days. If the majority of creditors (in value) vote to accept the restructuring plan, that plan will be made upon the expiry of the 15 business days.  

The restructuring plan then becomes binding on the company and its officers, members and creditors. Once made, only a Court Order can vary the restructuring plan.  

Eligibility Criteria

The new restructuring process is only available to small businesses that can satisfy the eligibility criteria. Prior to the engagement of the restructuring practitioner, the company must meet the following prerequisite criteria. 

1. Company Liabilities Do Not Exceed $1 Million

It is essential that directors fully consider the extent of the company’s liabilities. These may include, but are not limited to: 

  • any amounts owed to trade creditors; 
  • business loans; 
  • loans from related parties;
  • ATO debt; and 
  • any lease or hire arrangements.  

Employee entitlements are excluded from this calculation.

Additionally, questions have been raised as to whether debt forgiveness will be taken into account. This may allow companies to bring their total liabilities in under the $1 million threshold. However, the answer is not yet clear and will need to be considered on a case by case basis taking all specific circumstances into account. Your small business restructuring practitioner can provide assistance with determining the total value of liabilities. 

2. Company Has Not Been Subject to a Small Business Restructuring Plan in the Previous Seven Years

This criteria is much simpler and will be a straightforward yes or no answer. This criteria does, however, extend to include companies that have been subject to the small business simplified liquidation process, as well as companies that have been unsuccessful in an earlier small business restructuring attempt.  

3. Directors Have Not Been Involved in a Small Business Restructure in the Previous Seven Years

A company that has a director who is, or has been, a director of another company that has been subject to a small business restructuring plan or the simplified liquidation process within the past seven years will not be eligible. This criteria extends to a company’s former directors who held their position within the previous 12 month period.

Additional Criteria

In addition to the above prerequisites, businesses must meet the following additional criteria prior to directors proposing their restructuring plan to creditors.

1. All Tax Obligations Have Been Met

Companies must have any tax returns or BAS due lodged with the ATO prior to proposing their restructuring plan to creditors. It is not necessary for these obligations to be met prior to engaging a small business restructuring practitioner. However, you should consider timeframes and take steps to ensure compliance will be achieved.

2. Employee Entitlements Have Been Paid Up to Date

Companies must pay employee entitlements that are ‘due and payable’ prior to proposing a restructuring plan to creditors. Again, you should consider the payment of employee entitlements early on. Further, steps should be taken to ensure compliance prior to engaging a small business restructuring practitioner. 

Key Takeaways

The debtor in possession restructuring regime for small businesses is new and has not yet been widely utilised. Are you concerned that your company may be insolvent or may become insolvent in the foreseeable future? In that case, small business restructuring may be an appropriate alternative to voluntary administration or liquidation. If you need help with insolvency or restructuring issues, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What is the purpose of the new restructuring regime?

The new restructuring regime introduces a new ‘debtor in possession’ restructuring model for eligible small businesses as a possible alternative to voluntary administration.

Can my business use the new restructuring process?

The restructuring regime is only available to small businesses that can satisfy the prerequisite eligibility criteria and additional criteria. Therefore, you should read the above to determine of your business can use the process.


Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards