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Oct 01

Small Business Restructuring | SBR for Dummies from A to Z | Reorganisation, restructure micro and small business | Australia

Overview

For micro and small businesses (less than $1 million in total debts). SBR is a quick, inexpensive and straightforward formal restructure method. SBR allows directors to remain in control through restructure. SBR is initiated by the directors it provides an ordinary moratorium on creditors’ claims. The company can continue to trade. Australian Taxation Office often votes in favour of an SBR proposal – in more than 90% of SBRs nationally.

We accept SBR appointments. We act as small business restructuring practitioners (SBRP).  Contact David Levi 0418 602 466.

Background

On 24 September 2020, the Australian Federal Government announced significant insolvency law reforms affecting small businesses that find themselves in financial distress. The legislation enacting the reforms, the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth), commenced on 1 January 2021, following the conclusion of the temporary relief measures which protected distressed companies in response to the economic downturn caused by COVID-19.

Amongst other things, the reforms inserted a new Part 5.3B into the Corporations Act which created a new small business restructuring process which is available to incorporated businesses with liabilities of less than $1,000,000. The process closely follows the structure and many of the key aspects of voluntary administration under Part 5.3A of the Corporations Act, but is intended to be simpler, more flexible and more efficient than voluntary administration and aims to maximise small businesses’ chances of survival. To date, the take up of the small business restructuring process has been limited (particularly in comparison to VA when it was introduced in 1993).

Initiation

Small business restructuring commences on the day a SBRP is appointed. A SBRP must be an independent registered liquidator and may be appointed by way of written instrument by a company with total liabilities of not more than $1,000,000, where the board resolves that the company:

(a) is, or is likely to become, insolvent; and

(b) to make such appointment.

Supervision and control

The company retains control of the company’s business, property and affairs while it is under small business restructuring.

The safe harbour provisions of the Corporations Act have been amended to ensure that certain director actions undertaken while the company is under restructuring are not in breach of insolvent trading laws (consistent with liability for insolvent trading not applying to companies under voluntary administration.

The court can make any order that it thinks appropriate about how Part 5.3B of the Corporations Act is to operate in relation to a particular company or restructuring plan on the application of the company or its creditors, the SBRP, ASIC or any other
interested person.

The SBRP acts as the company’s agent when performing its functions or duties or exercising its powers as the SBRP. The role and functions of the SBRP includes:

  • providing advice to the company on matters relating to restructuring;
  • assisting the company to prepare a restructuring plan;
  • investigating the company’s business, property, affairs and financial circumstances;
  • making a declaration to creditors in relation to a restructuring plan proposed to the creditors;
  • deciding whether to terminate the restructuring;
  • resolving disagreements in relation to the creditors’ admissible debts or claims included with the company’s restructuring plan;
  • receiving money from, and holding money on trust for, the company; and
  • if requested to do so by the company’s directors, realising the company’s available property and distributing the proceeds among the creditors in accordance with the restructuring plan.

The appointment of an SBRP, once made, cannot be revoked, although an SBRP may be replaced in the event of a vacancy in the appointment (such as where the SBRP resigns). The court also has the power to appoint a SBRP where a company is under restructuring but no SBRP is acting.

Stages and timing

The debt restructuring process operates as follows:

  1. Initial contact with SBRP: The directors of the company approach an SBRP (who must be independent) to discuss the company’s eligibility for the small business restructuring process and the SBRP’s fees for helping the company to develop a debt restructuring plan (this must be a flat fee).
  2. Appointment of SBRP: The directors of the company pass a board resolution to appoint the SBRP.
  3. Notice to creditors: A notice of commencement of the debt restructuring process is provided to creditors and ASIC within one business day of the appointment.
  4. Development of a debt restructuring plan: The directors and the SBRP work together over a 20 business day period (unless extended by the SBRP by not more than 10 business days or by the court) to develop a debt restructuring plan. The debt restructuring plan must be accompanied by a restructuring proposal including a schedule of debts and claims. The SBRP also develops a remuneration proposal to cover the administration of the debt restructuring plan once in place (which will operate as a percentage fee of disbursements made under the plan).
  5. Payment of employee entitlements: The company must pay any employee entitlements which are due and payable before the debt restructuring plan is circulated to creditors.
  6. Circulation and certification of the debt restructuring plan: Within 2 business days of the company making the plan, the SBRP circulates the debt restructuring plan and supporting documents to creditors, gives notice to ASIC, certifies whether or not the company can meet the proposed repayments under the plan and whether the company has properly disclosed its affairs.
  7. Creditors vote on the debt restructuring plan: The creditors have 15 business days to vote on the debt restructuring plan, with all creditors voting as one class. Related party creditors are not entitled to vote. If more than 50% of creditors by value vote in favour of the debt restructuring plan, the debt restructuring plan is approved. Voting is not required to take place at a creditors’ meeting and generally occurs electronically.
  8. Outcomes for the company: If the plan is approved, the company continues to trade in the ordinary course of business and the SBRP administers the debt restructuring plan according to its terms. If the plan is not approved, the debt restructuring process ends and the company may elect to either:
    • i. enter voluntary administration;
    • ii access the new simplified liquidation pathway; or
    • iii enter the existing liquidation process.

Moratorium

There is an automatic stay throughout the restructuring similar process to that applying in voluntary administration (discussed in the “Moratorium” part of the “Administration” section above). Consistent with the voluntary administration process, a secured creditor with security over the whole, or substantially the whole, of the property of the company may take enforcement action (including appointing a receiver) within the ‘decision period’ (being 13 business days from the notice of appointment of the SBRP).

Operation of business and business and asset sales

During the restructuring period, the directors remain in control of the company and can enter into transactions or deal with the company’s assets in the usual way if it is in the ordinary course of the company’s business to do so.

Where it is not within the ordinary course of the company’s business, subject to limited types of payments, the directors of a company under a restructuring must not enter into, or purport to enter into, a transaction or dealing affecting the property of the company unless they first obtain the consent of the SBRP (which consent can only be given if the SBRP reasonably believes that the transaction or dealing would be in the creditors’ interest) or a court order.

A transaction or dealing is not within the ordinary course of the company’s business if it: (i) is for the purpose of satisfying an admissible debt or claim; (ii) relates to the transfer or sale of the whole or part of the company’s business; or (iii) relates to the payment of a dividend. A transaction in contravention of the prohibition will be void unless the court orders otherwise. Where a payment is made, a transaction is entered into or any other thing is done in good faith by the SBRP, the company with the consent of the SBRP or by the company in accordance with a court order, each will be valid and effectual at law and not liable to be set aside in a subsequent liquidation of the company.

In the course of undertaking his or her functions in respect of a plan the SBRP can, if requested to do so by the company’s directors, sell the company’s available property to pay creditors in accordance with a restructuring plan. A SBRP cannot, however, dispose of property that is subject to a security interest or property that is owned by, or leased to the company by, someone else. This prohibition does not apply if the disposal occurs:

  1. in the ordinary course of business for that company;
  2. with the written consent of the secured party, owner or lessor; or
  3. with the leave of the court (the court will only make such an order if it is satisfied that arrangements have been made to adequately protect the interests of the secured party, owner or lessor).

The SBRP is not subject to any liability to any person in respect of anything done, or omitted to be done, in good faith and without negligence in the exercise or performance, (or the purported exercise or performance) of its powers, functions or duties relating to the restructuring plan. The SBRP is entitled to be indemnified out of the company’s property for any debts or liabilities incurred, or damages or losses sustained in those circumstances.

Set off

There is no mandatory set off that applies as a result of a company being under restructuring. However, rights of set off are one of the categories of contractual rights that are excluded from the ipso facto stay.

Effect on stakeholders

Members are not able to transfer shares while a company is under a restructuring unless:

  1. the court authorises the transfer;
  2. the SBRP has given an unconditional consent to the transfer; or
  3. the SBRP has given a conditional consent to the transfer where those conditions have been satisfied. Consent can only be given if the SBRP reasonably believes that the transfer is in the best interests of the company’s creditors as a whole. See also “Moratorium” above regarding the impact of the restructuring on creditors, and “Ipso facto stay” above regarding the impact on contractual rights.

If approved, the plan binds the company, its officers and members, the SBRP and all unsecured creditors and secured creditors to the extent their debt exceeds the realisable value of their security interest.

End of procedure

An eligible company will be under restructuring while its restructuring plan is being developed in consultation with the SBRP. The restructuring ends once the plan is in the place. The restructuring of a company also ends if:

  • on a specified day if the company has made a declaration that the restructuring of the company is to end on that day for any reason;
  • the company fails to propose a restructuring plan within the proposal period;
  • the company’s proposal to make a restructuring plan lapses;
  • the SBRP terminates the restructuring by written notice to the company and its creditors if the SBRP reasonably believes that: (i) the company does not meet the eligibility requirements of small business restructuring; (ii) it would not be in the creditors’ interests to make a restructuring plan; or (iii) it would be in the creditors’ interests for the restructuring to end or for the company to be wound up;
  • the Court so orders; or
  • an administrator or liquidator is appointed.

A company’s restructuring plan terminates (whichever happens first):

  • on the day on which the company’s obligations under the plan, and the obligations of any other party to the plan, have been fulfilled and all admissible debts or claims have been dealt with in accordance with the plan;
  • on the day the court terminates the plan;
  • if the plan is expressed to be subject to the occurrence of a specified event within a specified period and that event does not occur – on the next business day after the end of that specified period;
  • if there has been a contravention of the plan by a person bound by the plan that has not been rectified within 30 business days of the contravention occurring – on the next business after the end of that 30 day period;
  • on the day a voluntary administrator, liquidator or provisional liquidator is appointed.