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Posted by Revive Financial on Jul 3, 2023 10:14:00 AM

From the Straightforward Questions to the More Complex Ones

Are you a small business owner struggling with financial distress?

If so, the small business restructuring process (SBRP) may be the solution you need to take back control.

If you’ve considered the SBRP or are currently going through it, you probably have some specific questions about the process.

Here we try to answer some of the most straightforward ones. We also use our knowledge and experience to dive deeper into some that have a more complex and detailed response.

Q: What is the Small Business Restructuring Process (SBRP)?

A: The Small Business Restructuring Process (SBRP) is an insolvency reform implemented in Australia in January 2021.

The SBRP aims to provide a streamlined and more affordable approach for financially distressed small businesses to restructure their debts so they can continue operating and maintain control of their operations.

The SBRP is designed for businesses that meet specific eligibility criteria, including:

  • total liabilities under $1 million (including secured and related-party debt)
  • be current on tax lodgements
  • all employee entitlements paid (e.g. superannuation)
  • be a company (Pty Ltd entity)
  • not have undergone restructuring or been subject to a simplified liquidation process within the preceding seven years
  • none of the directors, including those who served within the past 12 months, have directed a company that went through the SBRP or simplified liquidation process in the previous seven years, unless exempt under regulations

Q: How Does the SBRP Work?

A: Here's how small business restructuring works

Determining Eligibility and Appointing a Small Business Restructuring Practitioner:

Upon establishing eligibility, the company's directors appoint an SBR Practitioner. This individual, typically a registered liquidator, is appointed to manage the restructuring process and has the authority to investigate the company’s affairs.

The appointment of the SBRP is reported to ASIC and the company’s creditors within 1 business day, after which unsecured and some secured creditors are prohibited from taking actions against the company, and any personal guarantees cannot be enforced.

Drafting the Small Business Restructuring Plan:

The SBR Practitioner collaborates with the company to draft a restructuring plan over the following 20 business days, during which the company can continue to operate as usual. This plan typically proposes a specific payment to unsecured creditors over a period not exceeding three years.

The SBR Plan must identify the property available to creditors, outline the SBR Practitioner's remuneration, and state the execution date. Alongside this plan, various documents are prepared by the restructuring practitioner. The plan is issued to creditors and ASIC.

Presenting the Small Business Restructuring Plan to Creditors:

The SBR Practitioner presents the plan to the creditors. Prior to this, the company must have paid all employee entitlements and met tax reporting obligations or be substantially complying with these requirements.

Acceptance or Rejection of the Plan by Creditors:

Creditors have 15 business days to vote on the plan, with votes submitted in written statements. If a creditor disputes the recorded amount of their claim, they must provide specific details of the dispute. The practitioner then has five business days to resolve the dispute.

Plan Implementation or Process Termination:

If the plan is approved by the majority of creditors (by value, exceeding 50% of voters), it becomes binding on all unsecured creditors, and the business continues to trade under the administration of the practitioner. If rejected, control of the company remains with the directors, who may need to consider other insolvency options.

The SBR Process concludes once all obligations under the plan are met and all admissible debts and claims have been addressed, or the process can be terminated by the company, the SBRP, by court order or automatically by the legislation for non-compliance or other reasons.

Q: What are the Possible Outcomes of the SBRP?

Here are some of the potential outcomes for businesses going through the SBRP:

  • Debt reduction - The restructuring plan can reduce the total debt owed to creditors. This can make it easier for a business to manage its debt load and improve its financial position.
  • Improved cash flow - A successful restructuring plan can also help improve a business's cash flow by reducing monthly debt payments or extending the repayment period.
  • Avoiding insolvency - The SBRP is designed to help small businesses avoid insolvency, which can be a costly and time-consuming process.
  • Continued trading - The SBRP allows businesses to continue trading while they restructure their debts, which can help preserve jobs and maintain business relationships.
  • Credit rating - A successful restructuring plan can help improve your business's credit rating, making it easier to access credit in the future.

It's important to note that the specific outcomes of the SBRP can vary depending on the circumstances of each case. Not all small businesses will successfully restructure their debts through the SBRP. In some cases, insolvency may be the best option.

Q: What’s the Minimum Debt Level for the Small Business Restructuring Process?

A: There’s no minimum debt level to be eligible for small business restructuring.

However, as a company director, you would want to see a reasonable debt reduction that outweighs the costs and any concerns you have about the potential impact on relationships or your business from going through the SBRP.

First, let’s look at the costs.

ASIC’s 2023 report on the use of SBRPs in practice found that the average cost of the SBRP was $22,055. In our experience, smaller straightforward SBRP engagements generally cost around $10,000.

So, with a $10,000 cost, how much debt would you need to save for the SBRP to be worthwhile for you?

Our view is you would want to see a $20,000 benefit, meaning you need to see a minimum debt saving of $30,000. This may vary depending on the specific circumstances of your business.

We’ve estimated what your situation may look like for this to work for you:

Description Amount 
(incl. GST)
$
Notes
ATO debt 50,000  
Other debts Nil
Assumed for simplicity in this example
 
Total debts in SBRP 50,000  
Upfront restructuring payment (estimate)  8,000
The restructuring practitioner is required to charge a fixed fee, which is usually an upfront payment. This varies depending on complexity and the approach of different insolvency firms. 
 

Contribution to creditors and restructuring plan costs (estimate)  11,100
Generally, we suggest 20c/$ as a target return for a SBRP, but this varies depending on what your company can afford and its other assets. A restructuring plan practitioner must charge a percentage fee for their role, which we’ve estimated at 11%, including GST. The range of the actual return may vary, generally between 10c/$ - 35c/$, and it may be paid by a lump sum, instalments for up to 3 years, or a combination of both.
 

Total funds required  19,100
This is the total amount required to meet the upfront costs and
, if your restructuring plan is accepted, the proposed contributions. 
 

Net debt saved   30,900
This is the amount of debt you would save after costs and contributions to creditors
 

Q: How is the $1 Million Limit Calculated?

A: A key eligibility criterion of the small business restructuring process is that a company’s debts must be under $1 million when the SBRP begins.

The SBRP begins on the date your company signs the paperwork (in the form of a director’s resolution) to appoint the restructuring practitioner.

Any invoices issued to your company by suppliers or debts incurred after the date the restructuring begins must be paid by you in the ordinary course of business. They aren’t included in the SBRP, and the restructuring practitioner doesn’t pay them.

Calculating whether your company has less than $1 million in total liabilities isn’t as straightforward as it sounds. The starting point is looking at your company’s balance sheet to see whether your total liabilities are under $1 million.

Depending on how your accounts are set up, being under $1 million may not mean automatic eligibility, and being over doesn’t mean you’re not eligible.

Firstly, superannuation and employee entitlements aren’t included. That’s because, although it’s preferable for super to be paid before the SBRP begins, there’s a four-week window in which it may be paid after it starts but before your proposed restructuring plan is put to creditors.

Next, although there’s some uncertainty on this point, the majority view (which has been confirmed by insolvency industry organisation ARITA) is that the $1 million calculation doesn’t include secured creditor debts to the value of the secured assets available to meet the debt.

Therefore, if there’s a bank loan secured over company assets with equal or greater value than the loan, or if a motor vehicle is subject to a finance agreement, then the value of the assets is deducted from the value of the secured debt to calculate the $1 million total liabilities.

Nature of debt owed by company  Amount of debt
$
Value of secured assets
$
Amount included for $1 million calculation
$
Notes
Superannuation 15,000 N/A Nil Not included, must be paid.
Trade creditors  220,000   220,000 Included
Shareholder loan  170,000   170,000
Included, though
, may be able to reduce balance beforehand.
 

Director loan  (50,000)   Nil
A negative liability is an asset, so not included.
 
ATO 350,000   350,000 Included
Bank loan  300,000 300,000 Nil
On
ly shortfall amount included, i.e. if assets worth less than debt.
 
 
Car finance   45,000 35,000 10,000
Only shortfall amount included
, i.e. if assets worth less than debt. 
 

Total 1,050,000 N/A 750,000  

Q: Can a Group of Companies With the Same Director use the SBRP?

A: Yes, but they must all begin within a 20-business day period.

As with many aspects of the small business restructuring law, this takes some work to understand.

Firstly, section 453C(1) of the Corporations Act details the test for a company’s eligibility for the SBRP. Relevantly, where a company’s director or a former director who ceased in the previous 12 months has used the SBRP process for one company, they can’t use it for another company.

However, there’s an exemption under section 453(2) and regulation 5.3B.03 allowing further SBRP appointments for companies of a current or former director, where those appointments all occur within 20 business days of each other.

Each SBRP is considered a separate appointment. Each company must satisfy the eligibility criteria under the Corporations Act, including total liabilities of less than $1 million, ATO lodgements up-to-date and superannuation and other employee entitlements paid.

Q: If a Director has $500,000 Equity in Their Home, Does That Affect SBR?

A: The starting point is no. The company and director are separate.

We then need to look at the theoretical scenario in liquidation and whether there are claims against the director, primarily for a Div 7a loan, that would enable a certain return to creditors (e.g., 50% or 100%). In that case, we may need to increase the SBRP return to be comparable to the liquidation.

That said, there are higher costs in liquidation and potential bankruptcy costs to factor in. As a result, often claims against directors may not be commercially worthwhile pursuing as the expected costs are greater than the potential benefit. So there’s still a benefit from the SBRP for directors and creditors.

Potential issues like this are considered during the company’s balance sheet review.

Q: Can a Business Already on an ATO Payment Plan use the SBRP?

A: Yes, an ATO payment plan isn’t an obstacle to proceeding with the SBRP. It’s actually beneficial as:

  • It shows good compliance, which shows the ATO that the company is a good taxpayer who will genuinely attempt to meet their ongoing ATO reporting and payment obligations if the ATO accepts their SBRP proposal.
  • If the company proposes to pay its SBRP contributions in monthly instalments, the payment plan instalments demonstrate the company’s ability to maintain a level of regular instalments.

Q: If a Business is on a Payment Plan for Outstanding SGC, are They Still Eligible, or Does This Need to be Paid First?

The eligibility requirement is that the company is in ‘substantial compliance’ with its superannuation payment obligations.

Therefore, the outstanding super ought to be paid in full before the SBRP proposal is formally submitted to creditors, which is within 4 weeks of the SBRP beginning.

So it’s preferable to have the SGC paid in full before going ahead with the SBRP. However, there may be room to accept the appointment beforehand if the arrangement will be paid out in the near future.

We’re happy to review the position and advise on an acceptable timeframe.

Q: What Effect Does the SBRP Have on Credit Rating?

A: When considering the potential risk an SBRP can have on your company’s credit rating, keep in mind that while the company has an ATO debt, it’s unlikely to obtain loans or credit facilities from any major bank. So although there may be some short-term negative effects, the SBRP will ultimately put the company—and its credit rating—in a stronger financial position.

This means the company, at the conclusion of the SBRP, will be more likely to obtain credit than it is now.

ASIC

While a company is under the SBRP restructuring period (generally 4-7 weeks), it’s noted with ASIC as in ‘external administration’. When the plan is accepted, this reverts to the normal ‘registered’ status.

The appointment is also posted on the ASIC Insolvency Notices website. This is publicly available information, however there’s generally limited awareness outside of included creditors.

Commercial credit reporting

Any supplier or other party dealing with the company that subscribes to credit reporting on the company will be notified of the appointment. In our experience, this notification has raised queries in only a small number of SBRP engagements.

If this creates an issue due to uncertainty around the process, we can provide a letter clarifying the position for the client and the supplier. This has resolved any issues. We’ve either been able to satisfy the supplier or they’ve arranged a new trading account or cash on delivery terms.

Your company’s commercial credit report will include the two SBR periods as external administrations, recording the start and end dates of:

  1. The 7-week restructuring period, and
  2. The plan period.

This could potentially raise queries or cause difficulties obtaining finance or loans for the term of your restructuring plan, which could range from one week up to more than 2 years.

Personal credit reporting

While as a director your company’s credit file shouldn’t directly impact your personal credit file, it will raise queries if you apply for finance. We have not seen any existing personal loans or finance impacted by an SBRP.

If you’re applying for personal finance, the presence of an ATO debt in your company may cause difficulties. As noted above, because the SBR process is intended to improve the financial position of your company, this ought to make it better placed to support any home loan or finance application in the future.

At Revive Financial we partner with lenders who are willing to provide a business or home loan to support your company under restructuring, or to pay out your SBRP contribution.

Just get it touch if you’d like us to make an introduction for you.

Q: Can the SBRP Impact a Director Personally?

A: No, there isn’t a direct impact on the director personally.

The small business restructuring process is limited to an arrangement between the company and the unsecured creditors at the date the appointment begins.

The intention is to limit and avoid any potential impact on the director personally by continuing with an unmanageable level of company debt.

Q: Are AMEX and Credit Cards Captured Under the Restructure? 

A: Yes and no.

AMEX is a personally guaranteed debt. So while they participate in the SBRP (if owed a debt at the commencement date) and receive a return as an unsecured creditor, arrangements need to be made to pay down their debt separately by instalments outside the SBRP.

Q: Can you Keep Working While the SBRP is Being Executed?

A: Yes. This is a key benefit of the SBRP and means you can keep employees working.

Unlike traditional insolvency appointments such as voluntary administration, the director retains complete control of the company’s ongoing affairs, trading activities and assets. Restructuring practitioners generally sit off to the side to run the SBRP process with the included creditors.

Q: How do I Account for a Successful SBRP?

A: If this question is relevant to you, you’ve probably just successfully emerged from the SBRP – congratulations!

We’re not tax professionals, so the following information is general guidance-don’t rely on it.

Your accountant must satisfy themselves whether they believe the below accounting treatment is correct. However, having checked with the tax gurus, we believe the following is the appropriate accounting treatment for a successful SBRP.

The debt you write off in the SBRP needs to go somewhere. It will be partly replaced by the liability to pay an amount of funds as proposed in the SBRP, and the balance written off goes to ‘Extraordinary Income’.

Although it’s income, it would be counterproductive if you had to pay tax on this. Extraordinary income is non-assessable, non-exempt (NANE) income. That means it needs to be included in your tax return but not in calculating your assessable (taxable) income.

The simple example below demonstrates a common outcome where a company experiences an 85% reduction of their ATO debt under an SBRP. They pay 15% of their debt to the SBRP.

  Dr Cr
ATO debt 400,000  
Liability to SBRP   60,000
Exempt income (NANE)   340,000

Paying the liability with cash reduces cash or creates a loan account to a third party, e.g., you, as director, if they paid the contribution.

Once the restructuring practitioner has finalised the SBRP Restructuring Plan, they should provide copies of their invoices to you to claim the GST paid and a tax deduction for the balance.

Ensure you receive invoices for both their initial appointment as restructuring practitioner and restructuring plan practitioner.

SBRP Simplified

Small business restructuring can be a helpful option for eligible small businesses in Australia facing financial difficulties.

However, it's important to note that the SBRP can be a complex process, and not all small businesses will be eligible or successful in restructuring their debts through it.

We hope these FAQs have helped make things clearer. But it's always best to seek professional advice from a qualified restructuring practitioner to determine the best course of action for your specific situation.

At the end of the day, the most important thing is to take action. Whether through the SBRP, another debt restructuring process, or even insolvency, taking proactive steps to manage your debts can help ensure the long-term success of your business.

If you’re experiencing financial problems and considering the small business restructuring process, see how we can help with our Instant Online Assessment. Alternatively, you can get it touch with our team of specialists today on 1800 861 247 for support, advice and to discuss your options.

Topics: Business Debt, small business restructuring, restructuring process, Recent Articles, advice, business process, small business consulting, FAQs, turnaround consulting, financial restructuring services

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