Small business restructuring is a formal insolvency process for small businesses. It provides an efficient, cost-effective pathway to remove the company’s financial stress. A key element of the process is that directors remain in control of the company and can continue to trade the business. Control is not handed over to an insolvency practitioner.

The objective of small business restructuring is to develop a financial plan that pays creditors an amount, usually expressed as cents in the dollar, in full and final settlement of the debts owed. The financial plan is sent to creditors to vote on. The plan is approved if a majority in value of the responding creditors vote in favour. The plan will then bind all the company’s creditors, including those that voted against the plan.

The restructure process generally takes 35 business days. The first 20 business days is used to develop the plan and send it to creditors. The remaining time deals with the voting process.

Not all companies can use the process. Eligibility requirements are considered first at the beginning when the company’s liabilities are measured and, excluding employee entitlements and superannuation, must be less than $1 million. Eligibility is considered again at the time the financial plan is sent to creditors. At that point, employee entitlements and superannuation must be paid up and all ATO lodgements must be up to date. Note that the latter requirement refers to filing returns, not payment of amounts that may be due.

Once the plan is approved, getting the funds in and paying them out to creditors is the responsibility of the restructuring practitioner. The restructuring practitioner is a financial professional who has been present since the beginning of the restructuring process. They provide advice on the financial plan, deals with creditor communications, declares whether the financial plan is achievable, and administers the plan if approved.

The financial plan’s parameters are very broad, requiring only that it must involve cash payments to creditors and can take as long as three years to carry out. A typical plan may involve undertaking a refinancing, an asset contribution by directors, and / or future profits from the business. Once performed, the corresponding debts will have been extinguished.

To discourage serial use of the new laws, amounting to what could be phoenix behaviour, a company and its directors can use small business restructuring once every seven (7) years. That means that if your plan fails to win approval or you decide to abandon the process, you cannot make a second attempt for a long time. Hence the importance of careful planning in advance. A key aspect of that careful planning is ensuring the company’s financial records are up to date.

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Avior Consulting is highly experienced in administering, designing and advising on restructuring plans. Contact us to find out more.

Watch our video below about the key points of the new small business restructuring laws. They offer a potential solution for small businesses feeling the pinch after the government’s stimulus measures are removed.