On January 1, 2021, the Federal Government launched a new simplified restructuring process designed to assist small businesses in financial distress. Inspired by elements of the US Chapter 11 bankruptcy system, the Small Business Restructuring (SBR) process aimed to help struggling businesses reorganise their debts while staying in control.
Initially, there was some hesitation about the SBR process, but awareness has grown significantly, especially as the ATO continues its debt recovery efforts. The system provides a cost-effective way for small businesses to restructure and get back on track. Unlike voluntary administration, small business restructuring allows directors to stay in charge, offering them the flexibility they need to survive.
The upsides and downsides
From business advisers and directors who’ve experienced the process, the feedback has been both positive and cautionary. Here’s a snapshot of the key advantages and challenges of the Small Business Restructuring process:
Advantages:
- Easier for clients to engage earlier with qualified professionals
- Directors remain in control of day-to-day operations
- Support from the ATO, with a clear path for debt restructuring
- Opportunity for significant cash flow improvements
- Quick, simple, and minimally disruptive
Challenges:
- Impact on post-restructure trade credit relationships
- $1m debt ceiling, including related party claims
- Potential effects on insurance arrangements
- Mixed response from trade suppliers on embracing the process
A broad industry adoption
Since its introduction, our team has guided scores of businesses through the SBR process across multiple industries, including:
- Building and Construction
- Hospitality
- Manufacturing
- Education
- Retailing
- Building trades, plumbing etc.
- Financial Services
- Arts and media
“We’ve seen some impressive outcomes,” says Trent Devine, an SBR Practitioner. “On average, these businesses saw a significant reduction in legacy debts, preserving jobs and ensuring the company could continue trading. Without this intervention, many would have been forced to close, leading to little or no return for creditors.”
Key benefits of small business restructuring
An SBR process can offer significant advantages for businesses facing financial strain. Not only does it provide an opportunity for creditors to receive a better return than in liquidation, but it also enables businesses to address historical debt and preserve relationships with key suppliers.
Additional benefits include:
- Improved ATO engagement: Clearer communication channels with the tax office
- Early intervention: Address financial distress at the first signs of trouble
- Simplicity: The process is less complex and faster than traditional restructuring methods
- Control: Directors retain full control over the company’s operations under the oversight of a Small Business Restructuring practitioner
- Legal protection: Early action shields directors from personal liability for insolvent trading
- Lower costs: The process is more affordable for small businesses
Eligibility for SBR
Before opting for the SBR process, businesses must meet certain criteria to be eligible. These include:
- Total liabilities under $1 million
- All statutory tax lodgements must be up to date
- All employee entitlements, including superannuation, must be paid.
“If your business meets these requirements, SBR could be a valuable solution to help address debt and keep operations running smoothly,” says Devine.
A positive outlook, with caution
In terms of overall success, our team gives the SBR regime a passing grade. Thanks to the backing of the ATO, the system has proven to be an effective tool for businesses needing to recover from financial distress. However, caution is needed when it comes to the broader community of creditors. While the ATO is supportive, other creditors may not be fully on board with the process yet. Directors should seek expert advice to assess their individual situation and avoid potential pitfalls before making a decision.
Looking ahead
If you or a client are considering Small Business Restructuring and want to explore the next steps, feel free to get in touch by booking your 30min free SBR consult here.