Blog
Aug 14

Comparing SBRs and Pre-Pack Administrations

The Small Business Restructuring (SBR) process and pre-pack administrations are two distinct approaches to addressing financial distress in businesses. Understanding their differences can help determine whether SBR serves as a viable alternative to pre-packs in Australia.

Small Business Restructuring

Overview

Introduced in 2021, the SBR process is designed for small businesses with liabilities under $1 million. It allows directors to retain control while developing a restructuring plan with the assistance of a Small Business Restructuring Practitioner (SBRP).

Process

  1. The process begins with an eligibility check to ensure that businesses have liabilities below $1 million and are current with employee entitlements and tax lodgements.
  2. A SBRP is appointed to assist in developing the restructuring plan.
  3. Directors, with the SBRP’s help, create a restructuring plan for creditor approval.
  4. Creditors vote on the plan. If approved, it is implemented under the SBRP’s supervision.
  5. The business continues operating according to the restructuring plan.

Advantages

  • Directors retain control of the business.
  • Simpler and less expensive than voluntary administration.
  • Tailored for small businesses with manageable levels of debt.

Pre-Pack Administrations

Overview

Pre-pack administrations involve negotiating the sale of a business’s assets before formal insolvency proceedings begin, with the sale completing immediately upon the appointment of an administrator.

Process

  1. Directors negotiate the sale of assets to a potential buyer.
  2. Sale terms are finalised before entering administration.
  3. The business enters administration, and the sale is executed.
  4. The business or its assets are transferred to the new owner, and proceeds are distributed to creditors.

Advantages:

  • Minimises business disruption by expediting the process.
  • Preserves business value by selling it as a going concern.
  • Often results in job preservation under new ownership.
  • Legal advice from a specialist insolvency lawyer is essential including an understanding of issues around directors’ duties and obligations, fair value and Part 5.7B Corporations Act 2001.

SBR vs. Pre-Packs: Key Differences

SBR Pre-Packs
Control Directors maintain control throughout the restructuring. Control generally passes to an administrator post-sale.
Scope Designed for small businesses with liabilities under $1 million. Applicable to businesses of various sizes, depending on negotiations.
Process Focuses on restructuring with creditor approval. Centres on pre-arranged asset sales executed upon administration.
Transparency and creditor involvement Requires creditor approval, ensuring transparency.

Practitioners must ensure that pre-packs are executed with full transparency. This involves providing comprehensive disclosures to creditors regarding the nature of the pre-pack, the negotiation process, and the benefits it offers to the creditors.

While both SBR and pre-packs aim to address financial distress and preserve business value, they cater to different needs. SBR is a structured, transparent option for small businesses, allowing directors to retain control. Pre-packs offer a rapid sale process suited to businesses of various sizes but come with transparency and regulatory challenges.

For tailored advice on navigating these options, consult with an experienced insolvency professional. David Levi is a Registered Liquidator. Reach out via DM or call him on 0418 602 466 for a confidential discussion.