Australia’s insolvency framework for small businesses underwent significant changes on January 1, 2021. The purpose of these reforms was to assist financially distressed small businesses (with debts under AUD $1 million) in surviving by providing simpler, more flexible restructuring options.

Let’s explore the benefits of this new process and the trends shaping small business restructuring in Australia.

Benefits of Small Business Restructuring

1. Maintaining Control: Directors retain day-to-day control over the business during the restructuring process.
2. Lower Professional Costs: Compared to traditional insolvency processes, small business restructuring is more cost-effective.
3. Higher Success Rates: The simplified process increases the likelihood of successful debt restructuring.
4. Less Detail in Processes: The streamlined approach reduces administrative burden and costs.
5. Simpler Restructuring Plans: With a focus is on practical solutions that work for the business.

Key Trends in Small Business Restructuring

1. Industry-Specific Usage: Accommodation and food services, construction, and retail trade are the main industry groups utilizing restructuring practitioner appointments.
2. Australian Taxation Office (ATO) Involvement: The ATO is a creditor in 89% of restructuring plans, often representing a significant portion of total admissible creditor claims.
3. Average Dividends Paid: Creditors receive an average dividend of 15.2 cents in the dollar under restructuring plans. However, more recently the likely dividends are around 20 to 25 cents in the dollar.
4. Low Uptake: Despite the benefits, there was initially a slow adoption due to perceived complexity and eligibility thresholds. However, in March 2024, 158 companies appointed a Restructuring Practitioner. This is the highest number of SBRs conducted in any one month since the commencement of the new SBR legislation in 2021. We suspect that the material increase in the use of SBRs is, in no small way, in response to the recent increased activity by the ATO pursuing in excess of $50B of outstanding collectable tax debt, two-thirds of which is owed by small businesses.

Preparing for Small Business Restructuring

1. Understand Eligibility: Ensure your business meets the AUD $1 million debt threshold.
2. Seek Professional Advice: Consult with Rodgers Reidy’s specialist SBR advisors to assess the best approach.
3. Collaborate with Creditors: Rodgers Reidy will engage with your creditors, especially the ATO, to negotiate favourable terms.
4. Develop a Restructuring Plan: Rodgers Reidy will tailor a practical and viable plan that aligns with your business needs.

Conclusion

Small business restructuring provides a lifeline for financially distressed companies, allowing them to restructure debt while retaining control.

For any distressed small business with an otherwise viable business model, an SBR should be the restructuring tool of choice to relieve historical debt problems. SBR can save your small business at less cost and interruption while the directors retain control.

Feel free to contact your local Rodgers Reidy office to discuss whether this option is right for you or your clients.