Small Business Restructuring and Why Is It So Popular?
During the Coronavirus Pandemic the government correctly anticipated a spike in company insolvency and introduced new legislation to try to help. The aim was to save as many businesses as possible.
Small Business Restructuring (SBR) was created to save viable businesses that were struggling from the one-off financial hit. SBR was initially not widely used because creditors were being very accommodating. Creditors, including the ATO, are now looking for payment. As a result, SBR has become very popular as it allows a company to renegotiate its debts with its creditors usually with a significant “haircut”.
WHAT KINDS OF
Debt Haircuts Can Be Achieved Through SBR?
You’ll be surprised at the kinds of deals that creditors, including the ATO, are willing to accept through Small Business Restructuring. Recent SBR Plans achieved debt “haircuts” of between 65% to 91% of total debt. In dollar terms the “haircuts” have reduced total debts by $114,000 to $853,000. And the cost of an SBR to achieve those savings was between $5,500 and $33,000.
THE ATO AND THE
Government WANT small businesses to restructure!
Here is what the then Treasurer said when introducing Small Business Restructuring:
“As the economy continues to recover, it will be critical that distressed businesses have the necessary flexibility to either restructure or to wind down their operations in an orderly manner.”
“….these measures will reposition our insolvency system to reduce costs for small businesses, reduce the time they spend during the insolvency process, ensure greater economic dynamism, and ultimately help more small businesses get to the other side of the crisis.”
Let’s see what the ATO says about Small Business Restructuring:
“The ATO’s focus is on assisting eligible businesses to access Small Business Restructuring or Simplified Liquidation where possible and where appropriate. Where we have been a creditor we have supported most Restructuring Plans.”
SBR Better Than A Negotiation With The ATO?
At present the ATO appears more willing to renegotiate the debt amount during a SBR than through other means (like the standard payment plan or other attempts at negotiation).
|Likely negotiated Outcomes||Common SBR Outcomes|
|Payment Terms||An ATO Payment Arrangement will require payment in full, plus interest, within 2 years||Payment terms can be up to 3 years, but are often much shorter due to the reduced debt amount – a one off payment is common|
|Debt reduction (writeoff/haircut)||The ATO will rarely agree to a negotiated debt reduction||The ATO has approved SBRs with between 65% and 90% debt reduction|
SBR Better Than A Voluntary Administration?
Most people are familiar with the term Voluntary Administration (VA). SBR was developed to be a more suitable solution of VA for small business. So how are they different?
|Small Business Restructuring||Voluntary Administration|
|Directors retain control?||❌|
|Designed for small businesses?||❌|
|Company returned to directors if deal fails?||❌|
|Rough cost before Plan contribution||$15,000 – $25000||$60,000 – $150,000|
|Duration?||20 bus. days||35 bus. days|
|Level of investigation and reporting?||Low||High|
SOME EXAMPLES OF
Recent SBR Plans Approved
The aim of SBR is for a company to agree a Plan with its creditors. Here are some recent examples of Plans that have been approved using SBR.
|Type of company||Total Company Debts||Creditors agreed to reduce debts to||Cents in the dollar for creditors||Debt forgiven (haircut)|
|Civil Contractor||$902,500||$90,000||10 cents||$812,500|
WHY CHOOSE A
Small Business Restructuring Practitioner (SBRP) from Dissolve
OUR SBRPs EACH HAVE
OVER 33 YEARS INSOLVENCY EXPERIENCE
AN SME AS WELL!
BUT WE’VE HAD OVER 1,000
FORMAL INSOLVENCY APPOINTMENTS IN THE
LAST 15 YEARS
LEAD PARTNER – DISSOLVE
John has more than 30 years specialist experience in corporate recovery, restructuring and reorganisation. He was a Partner of one of the Big4 Accounting Firms.
PARTNER – DISSOLVE
Cliff is a corporate restructuring specialist with over 30 years of experience in Australia and internationally. He is the founder of Dissolve.
SENIOR CLIENT ADVISOR
After 15 years of being an advisor, Brad has developed an excellent understanding of the legal and practical issues facing a director of an insolvent company – it is rare for a director to throw a new situation at Brad.
Will a SBR Cost?
The cost can be covered by the value of the company’s assets if they are being put to sale, or the company’s ongoing turnover if it continues to trade. We’ll be happy to make an estimate of our fees during your free consultation period.
WHAT IS THE
Small Business Restructuring process like?
A Small Business restructuring is easy to initiate – we just need a Resolution by a majority of directors. We prepare all the documents so all you need to do is sign on the dotted line. We will lead the process and deal with the creditors.
A Small Business Restructuring gives your company twenty business days to work with a Small Business Restructuring Practitioner (that’s us) to formulate a deal, and then up to fifteen business days for the creditors to vote on that deal. This period is called the Restructuring Phase.
The SBRP then oversees the execution of the plan. This period is called the Plan Phase.
WHAT ARE THE
Prerequisites for Entering The SBR Process?
To be eligible for Small Business Restructuring, a company must be able to declare that:
- The company is insolvent or about to become insolvent
- The company’s total liabilities, i.e. creditors, do not exceed $1 million on the day it enters the process (exclusive of employee entitlements)
- None of its directors has been a director of another company that has gone through another Small Business Restructuring or a Simplified Liquidation process within the last 7 years
To be eligible to propose a plan (up to 20 business days into the process), the company must also be:
- Up to date with all tax lodgements and
- Able to pay all due and payable employee entitlements
If the company is behind on either point it needs to get them up to date before proposing a Plan.
Speak to an Small Business Restructuring Practitioner today.
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