The New Restructuring Regime for Small Businesses

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. 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. And further, 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.  

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.  

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