Small Business Restructuring in Tasmania & interstate

Discover the lifeline your small business needs with Small Business Restructuring – a pathway for small businesses to combat debt, keep the doors open and survive long term.

Small Business Restructuring allows eligible small businesses in financial difficulty a one-off opportunity (every 7 years) to restructure their debt, take control of cash flow and reach a legally binding agreement with creditors, including the Australian Taxation Office (ATO).

The many benefits of Small Business Restructuring include: directors stay in control of the business; the company can continue to trade; the process is fast with creditors required to vote within 35 business days and debt is permanently written off.

We have achieved permanent debt write off (including the ATO) of up to 92 cents in the dollar.

Contact us today for a free and confidential consultation to see if your business qualifies – it’s an opportunity you can’t afford to miss out on.

What is Small Business Restructuring?

In January 2021, as a result of the impact and forecasted economic impact of the COVID-19 pandemic on businesses coupled with the expected spike in insolvency numbers, the Australian Government introduced a new insolvency regime called Small Business Restructuring to provide a pathway to save as many businesses as possible.

Small Business Restructuring allows eligible companies to restructure their debts and operations under the guidance of a Restructuring Practitioner, who will assist in developing a restructuring plan that maximises the business’s chances of trading viably in the future.

During the restructure, director/s remain in control of the business, property and affairs of the company. 

Small Business Restructuring is simpler, affordable and faster than any other form of external administration and is the “go-to” solution for businesses facing financial challenges. The regime has had a high approval rate indicating that the process has been successful in helping businesses restructure their debts.

We are of the view it is very well suited to small businesses and will continue to be increased in scope as more people become aware of the financial benefits. 

The process of Small Business Restructuring 

Step

What happens

Appointment of Restructuring Practitioner 

A company’s director/s control the appointment of a Restructuring Practitioner.

The director/s can do this if: 

• the company meets the eligibility criteria for restructuring on the day the appointment is made;
• the board resolves the company is insolvent or likely to become insolvent; and
• that a Restructuring Practitioner should be appointed.

Small Business Restructuring begins on the appointment of the Restructuring Practitioner.  

Restructuring Plan

Within 20 business days* of the Restructuring Practitioners appointment the director/s must develop and issue a plan and proposal statement.

*the Restructuring Practitioner may extend the proposal period by a further 10 business days at the request of the company or by the court (this extension can only occur once). 

Voting on the plan 

Creditors have 15 business days to vote on whether they will accept or reject the plan.

A plan is accepted if the majority in value of creditors that vote state that the plan should be accepted (i.e. by more than 50% in value). 

Acceptance of the plan

The restructuring plan is taken to have been made on the day after the acceptance period or on the day that a specified event (according to the plan) has occurred. 

End of Plan – Completion or Termination

An accepted plan comes to an end when:

• the company has met all terms of the plan; or
• terms of the plan have not been complied with resulting in termination of the plan. 

What are the eligibility criteria for a Small Business Restructuring?

For a business to be eligible for a Small Business Restructuring, the following criteria must be met:

• be a company incorporated under the Corporations Act 2001;
• unsecured creditors must be less than $1 million (excluding employee entitlements);
• is insolvent or likely to become insolvent;
• no director (current or in previous 12 months) or company has undergone a restructuring or simplified liquidation in the last 7 years;
• employee entitlements due and payable are up to date (i.e. superannuation and wages); and
• tax lodgements with the ATO are up to date (need to be lodged but not paid).

What happens if there are employee entitlements owing?

It is often the case that the company has outstanding superannuation owing to employees and this should not be seen as an automatic exclusion from utilising the Small Business Restructuring process. There are options available, which may include obtaining third party lending in order to address this qualifying hurdle and access the benefits of the Small Business Restructuring regime.

When should the director/s not appoint a Restructuring Practitioner?

The director/s should not appoint a Restructuring Practitioner if:

• the company is already under restructuring;
• the company has already made a restructuring plan that has not yet been terminated;
• the company is under Administration;
• the company has executed a Deed of Company Arrangement that has not yet been terminated; or
• a Liquidator, Provisional Liquidator or Administrator has been appointed.

What effect does a Small Business Restructuring have on the director/s?

During the restructure, the director/s remain in control of the company and may enter into a transaction or deal with the company’s assets if it is in the ordinary course of the company’s business.

The director/s are required to obtain the Restructuring Practitioners consent in order to enter into any transaction or dealing that is not in the ordinary course of the company’s business.

What is not considered in the ordinary course of the company’s business?

Certain transactions are deemed to be outside the ordinary course of business, these are:

• satisfying a debt or claim that would otherwise be dealt with under the restructuring plan;
• sale or transfer of the whole or part of the business; or
• payment of a dividend.

If a transaction is outside the ordinary course of business, the Restructuring Practitioner must approve the transaction.

What does a director need to declare?

Within 5 business days after the restructuring commences, the director/s have to provide the Restructuring Practitioner with a signed declaration stating:

• whether the company has entered into any voidable transactions; and
• the director’s believe (on reasonable grounds) that the company meets the eligibility criteria to propose a Small Business Restructuring and the reasons behind it.

What notice must be provided in public documents?

During the restructuring (and until creditors accept the restructuring plan), on every public document and negotiable instrument the phrase (‘restructuring practitioner appointed’) must be set out after the company’s name first appears. Failure to do so is an offence of strict liability.

On the appointment of a Restructuring Practitioner, the Company Register status will change from REGD (Registered) to EXAD (External Administration) and will revert back to REGD (Registered) on acceptance of the restructuring plan and appointment of a Restructuring Plan Practitioner.

This information will be available to the public on ASIC Connect or through free searches of the Company Register and may impact the company’s dealings with creditors, suppliers, insurers or other parties during the restructuring.

What does a Restructuring Practitioner do?

Who can be appointed as a Restructuring Practitioner?

A Restructuring Practitioner must be a Registered Liquidator with the Australian Securities and Investments Commission (ASIC). Both Barry Hamilton and Kiara Calvert are Registered Liquidators and full members of the Australian Restructuring and Insolvency Turnaround Association (ARITA), which imposes high standards on its members.

What is the role of a Restructuring Practitioner?

During the restructure, the director/s remain in control of the company and the Restructuring Practitioner does not take control of the day to day affairs of the company and is not personally liable for the company’s debts/actions. The Restructuring Practitioner acts as the company’s agent.

The role of the Restructuring Practitioner is to:

• determine the company’s eligibility to enter into a Small Business Restructuring;
• provide advice to the company about the restructuring;
• assist the company in developing a restructuring plan that maximises the business’s chances of trading viably in the future;
• circulate the restructuring plan and restructuring proposal statement to creditors;
• make a declaration to creditors about the restructuring plan proposed by the company (i.e. that the company is eligible for restructuring and that the company is likely to be able to meet its obligations under the plan); and
• perform other functions, duties and powers given to the Restructuring Practitioner under the Corporations Act 2001.

Powers and Duties of a Restructuring Practitioner

During the restructure, the duties and powers of a Restructuring Practitioner are set out in the Corporations Act 2001, including determining whether the restructuring should be terminated, authorising transactions or dealings outside the ordinary course of business and resolving disputes over the amount of a creditor’s claim disclosed in the restructuring proposal statement.

Can the appointment of a Restructuring Practitioner be revoked?

No the appointment cannot be revoked.

Can creditors vote to replace a Restructuring Practitioner

No the Restructuring Practitioner cannot be replaced once appointed.

What fees are paid to a Restructuring Practitioner

There are two types of fees that are paid during a Small Business Restructuring:

i)               Restructuring

The director/s of the company determine the remuneration of the Restructuring Practitioner to assist with preparation and issuing of the restructuring plan to creditors. The remuneration is a fixed fee, which is resolved by the board prior to the Restructuring Practitioners appointment.

ii)              Restructuring plan

Once the restructuring plan is approved by creditors, the Restructuring Practitioner is entitled to receive remuneration, which is a specified percentage of payments to creditors in accordance with the plan.

Creditors will be made aware of and must consent to the proposed remuneration, when voting on the plan.

Small Business Restructuring Plan

What is a restructuring plan?

A restructuring plan is an agreement between the company and its creditors, which outlines the proposed changes to the operations of the business and payment terms of creditors. There are no set requirements as to what will be included in the restructuring plan and can be very flexible. 

Often a restructuring plan creates a pool of monies which is then applied in full and final settlement of all unsecured creditors. This typically involves a one-off contribution from the director (or another party) which is paid to creditors by the Restructuring Practitioner. However, in this restructuring plan, contributions from future profits over a period, the sales of some assets or bank refinancing can be included.

Who prepares the restructuring plan?

The Restructuring Practitioner will assist the director/s in developing a restructuring plan that maximises the business’s chances of trading viably in the future.

Are there restrictions on the restructuring plan directors can put forward?

All restructuring plans must include several prescribed terms and conditions. For example, admissible debts and claims must rank equally and receive a pro rata return based on the funds available (including related parties). No creditor, or class of creditor receives priority in repayment of their debts or claims or can be excluded from receiving a return.  

Additionally, the restructuring plan must not provide for the transfer of property (other than money) to a creditor.

The restructuring plan may also be conditional on the occurrence of a specified event occurring within a specified period, i.e. sale of property/asset within a maximum period of 10 days after the restructuring plan is accepted by creditors.

The restructuring plan must not exceed three years.

If the restructuring plan is accepted who is the Restructuring Practitioner of the plan?

The Restructuring Practitioner of the company will be the Restructuring Practitioner of the restructuring plan unless the board resolves to appoint another registered liquidator to be the Restructuring Practitioner for the plan.

What happens once a restructuring plan is approved?

If the restructuring plan is accepted by creditors:

• the Restructuring Practitioner will distribute the funds to the company’s creditors in accordance with the terms set out in the restructuring plan;
• all admissible debts and claims rank equally and are paid the same cents in the dollar and on the same date; and
• once a company meets all its obligations under the restructuring plan, the company is released from all debts or claims that were admissible under the restructuring plan and the company is entitled to any property that was not required by the plan to be distributed to creditors. 

What is the role of the Restructuring Practitioner for the company’s restructuring plan?

The role of the Restructuring Practitioner is to administer the plan and distribute the proceeds to creditors in accordance with the terms of the plan. If requested by the director/s this may include realising any property of the company and then distributing those proceeds to creditors.

Who is bound by the restructuring plan if it is accepted?

If a restructuring plan is accepted, all creditors of the company that have an admissible debt or claim will be bound by the restructuring plan, irrespective of whether they voted on the plan. 

Secured creditors will only be bound by a restructuring plan to the extent they agree to be bound. Once the plan is accepted, secured creditors can deal with secured assets and any shortfall a secured creditor sustains will be covered by the restructuring plan.

What happens if the company fails to meet the obligations under an approved plan?

If the company fails to meet the obligations under an approved plan (i.e. failing to make payments under the plan), it will be liable for any debts incurred prior to the plan commencing, less any payments made under the plan.

When does the restructuring plan come to an end?

A restructuring plan can end in a number of ways, including:

• the terms of the restructuring plan are completed;
• a creditor obtains a court order;
• if the restructuring plan is conditional on a specified event occurring within 10 business days after the proposal is accepted, and that event does not occur within that period;
• there is a contravention of the plan, which is not remedied in 30 business days; or
• a Voluntary Administrator, Liquidator or Provisional Liquidator is appointed to the company.

Can a restructuring plan be varied once accepted by creditors?

Once accepted by creditors, there is no ability to amend the restructuring plan only by court order, which may not be commercially feasible. 

What are the taxation consequences of debt written off?

After the distribution occurs, it is our view that the debt written off under the restructuring plan is treated as Non Assessable Non-Exempt (NANE) income.

What happens if a restructuring plan is not accepted by creditors?

The restructuring plan must be supported by a majority in value that vote on the restructuring plan to be accepted (i.e. more than 50% in value).  

If the restructuring plan is not accepted, the restructuring process ends. Director/s remain in control of the company and the company does not automatically enter some other form of external administration, i.e. Liquidation.

Creditors are no longer prevented from enforcing their rights, for example taking legal action to recover their debt and director/s are no longer protected from personal liability for insolvent trading and for this reason director/s may consider placing the company into Liquidation or Voluntary Administration. In this case, the Restructuring Practitioner would not be able to act as an Administrator or Liquidator as this would represent a conflict of interest.  

Creditors

What is the effect of the appointment on creditors?

UNTIL PLAN IS ACCEPTED OR REJECTED

On the appointment of a Restructuring Practitioner, there is a moratorium on creditors’ claims, which applies until the plan is accepted or rejected:

• Unsecured creditors cannot begin, continue or enforce their claims against the company without the Restructuring Practitioner’s consent or the court’s permission;
• Owners of property (except perishable property) used/leased/occupied by the company cannot recover their property;
• Secured creditors cannot enforce their security interest in company’s assets in some circumstances;
• A creditor holding a personal guarantee cannot act under the personal guarantee without the Court’s consent; and
• Ipso facto clauses are stayed unless the Restructuring Practitioner gives consent/Court authorises. Ipso facto clauses are where one party may terminate/modify the operation of a contract upon the occurrence of a specified insolvency related event (such as the appointment of an Administrator, Receiver or Liquidator against another party).  

ONCE PLAN IS ACCEPTED AND IMPLEMENTED

• Secured creditors can deal with secured assets unless they accept the plan and the plan prevents them, or the Court orders;
• Admissible creditors are bound by the plan and cannot wind the company up, or take action to recover an admissible debt except with the leave of the Court; and
• Owners/lessors can deal with property unless they accepted the proposal and the plan affects that right, or the Court orders.

What role do creditors have in a Small Business Restructuring?

Creditors play an important role in a Small Business Restructuring by voting on the restructuring plan.

Only affected creditors are entitled to vote on the restructuring plan.

Who is an affected creditor?

An affected creditor is a creditor who would be a party to the restructuring plan, if it were made.

Who is an excluded creditor?

Related creditors, who are creditors that are related entities of the company under restructuring, the Restructuring Practitioner for the company and related entities of the Restructuring Practitioner are all excluded creditors and are not entitled to vote on the restructuring plan.

What is an admissible debt or claim?

A debt or claim that would be admissible to proof against the company if the company were wound up.

What debts are included in a Restructuring Plan?

All unsecured debts which were incurred prior to the company entering into a Small Business Restructuring are included in the plan.

Employee entitlements (not currently due and payable such as leave or redundancy entitlements) and any debts incurred after the company enters into a Small Business Restructuring are excluded.

What happens to employee entitlements in a Small Business Restructuring?

Under the restructuring process, before a plan can be issued to creditors all employee entitlements that are due and payable must be paid, i.e. superannuation.

Employee entitlements (not currently due and payable such as leave and redundancy entitlements) do not get included in the restructuring plan.  

How are related creditors impacted?

Related party creditors are not entitled to vote on the restructuring plan, but they will receive a distribution under the restructuring plan.

Related party creditors are those linked to the company, its directors or its shareholders.

Are secured creditors treated differently in a Small Business Restructuring?

Secured creditors are subject to a short moratorium period and will only be bound by a restructuring plan to the extent they agree to be bound. Once the plan is accepted, secured creditors can deal with secured assets and any shortfall a secured creditor sustains will be covered by the restructuring plan.

Can creditors pursue Personal Guarantees?

Creditors are subject to a short moratorium period until a plan is accepted/rejected and during this time a creditor cannot pursue a personal guarantee without the Court’s consent. Once the plan has been accepted/rejected the creditor can pursue the director for the shortfall of any debt that has been included in the Small Business Restructuring. 

Recovery Action by the ATO

Following an upsurge in the ATO’s firmer or stronger recovery action, and better understanding of the process and benefits among key stakeholders has led to an increase in the number of Small Business Restructuring appointments as the regime is being used as a procedure to compromise tax debt.

Director Penalty Notices (DPN)

If all company lodgements are up to date, the ATO will issue a Non-Lockdown DPN, whereby the director/s will have 21 days available to take one of the four options available to avoid personal liability under a DPN:

• pay the amount in full;
• appoint a Voluntary Administrator;
• put the company into Liquidation; or
• appoint a Small Business Restructuring Practitioner

If lodgements are not up to date (or reported more than 3 months after the due date) the ATO will issue a Lockdown DPN to company director/s. In this case, the penalty permanently locks down on the director/s and the only option available for director/s is to pay the debt in full. Placing the company into Voluntary Administration, Liquidation or Small Business Restructuring will not extinguish this personal liability.

The ATO can (and will issue) a Lockdown DPN to company director/s even after a company is placed into a Liquidation, Voluntary Administration or Small Business Restructuring.

Therefore, it is vital that director/s ensure their lodgements are up to date, even if they can’t pay, because it gives director/s more options available if they are issued with a DPN.

If director/s receive a DPN and fail to take any action, the ATO may commence action against the company to recover the director penalty amounts, and usually take steps to wind up the company. 

If director/s do have an outstanding director penalty liability, they should be proactive in seeking professional advice as there is not time limit on when the ATO can take recovery action – the director penalty liability never goes away. 

Creditors Statutory Demand for Payment of Debt

The ATO may issue a Creditors Statutory Demand for payment of debt within 21 days.  During this time director/s may resolve the issue by taking one of the following actions:

• pay the debt in full;
• negotiate with the ATO to withdraw the demand and come to alternative payment arrangements;
• if there is a genuine dispute surrounding the debt, the director/s may apply to the court to have the Statutory Demand set aside; or
• appoint an insolvency practitioner to act as Voluntary Administrator, Liquidator or Restructuring Practitioner of the Company.

Once a Statutory Demand has been issued, time is of the essence and it is important that director/s seek immediate assistance from their accountant or a qualified insolvency practitioner to resolve the issue.

If the director/s fail to respond to a Statutory Demand within 21 days, the ATO may commence proceedings to have the company wound up and a Liquidator appointed to manage the company’s affairs. 

Winding up Application

A company may appoint a Small Business Restructuring Practitioner after receiving a winding-up notice. However, both the Small Business Restructuring Practitioner and the company must present a compelling case to the court justifying why the Small Business Restructure process should proceed. If the court is convinced that continuing under the Small Business Restructure process serves the company's best interests, it will typically issue an order to adjourn the winding-up application.

Is the ATO supportive of a Small Business Restructuring?

In a majority of cases the ATO is the major creditor and has the controlling vote on whether the restructuring plan will be accepted by creditors.

The ATO has openly advised to the insolvency profession that:

• its focus is on assisting eligible businesses to access restructuring where possible and appropriate;
• it will generally support a restructuring plan provided it has no adverse features and it will provide the Commonwealth with a greater proportion of the admissible debt within a reasonable period than would be received under liquidation;
• where it is the dominant creditor, it is open to providing feedback on draft restructuring plans before they are finalised; and
• where the ATO has been a creditor, it has supported most restructuring plans.

Since the introduction of the regime the high acceptance rate indicates that the ATO has been supportive of the Small Business Restructures (even in cases where the ATO has previously refused payment plans or requests for debt reduction) which has provided a substantial and permanent write off of tax debt. 

Contact us today for a free and confidential consultation to discuss if a Small Business Restructuring is the right solution for your business.