Do you qualify for the Small Business Restructuring process?

Do you qualify for the Small Business Restructuring process?

Small businesses in financial distress are now able to access a simplified debt restructuring process if they are eligible.

The process, which was introduced by the Australian Government as part of changes to insolvency laws, essentially allows directors of small businesses facing insolvency to retain control of their company while restructuring the company’s debts.

Directors work with a Small Business Restructuring Practitioner to develop a debt plan for creditors, which is then executed in the normal course of business.

As registered liquidators (a requirement for acting as a Small Business Restructuring Practitioner), we are assisting small and medium sized business owners across the country to determine if:

1. their business is insolvent or likely to become insolvent

2. their business is eligible for the new restructuring process

3. the restructuring process is the right course of action for their business (and if not, to map out and consider alternatives)

To help remove any confusion around the 5 key eligibility requirements and what they mean, we have simplified them here…

Your business is eligible for the simplified debt restructuring process if:

1. It is incorporated with less than $1m in liabilities

In Australia, this means any incorporated entity that operates under the rules of the Corporations Act, such as a limited (Ltd) or proprietary limited (Pty Ltd) company. It can also include corporate trustees of Trusts.   
It does not include unincorporated entities that operate businesses, such as sole traders or partnerships. 

“Liabilities” includes all unsecured creditors at the date of appointment of the restructuring practitioner, with claims capable of being admissible under s553 but excluding employee entitlements.

2. Be either insolvent or likely to become insolvent at some future time

Your business is insolvent if it cannot pay its debts as and when they fall due.

Signs of insolvency or impending insolvency could include:

• not having enough cash to pay debts
• no way to raise extra funds
• inability to pay the tax debt
• difficulty paying wages and entitlements

Sometimes it is difficult to find the tipping point between day-to-day cash flow problems and insolvency. A good rule of thumb is to ask:  
Is this temporary, and can I see a clear path out of this difficult period? Or has the pressure been ongoing for some time and now I can’t see a clear way out? 

Having repayment arrangements with creditors is one thing, but having them with all creditors and keeping up with all of those payments is another.  If you can’t pay all of your debts on time, and this is an ongoing problem, you should seek help or you do run the risk of insolvent trading.

3. Be substantially compliant with the payment of employee entitlements and tax lodgements

This is not the same as payment obligations like general expenses or the unsecured debts you are struggling to pay.

To meet this eligibility requirement, your business must (at the time the plan is proposed – so approximately 20 business days after appointing a restructuring practitioner):

• be up to date with paying employee wages, superannuation, and other entitlements
• be up to date with all tax lodgements, such as tax returns and activity statements

Tax debts do not need to be up to date for you to be eligible for the simplified debt restructuring process.

4. The insolvent company and any of its directors (current or in the previous 12 months) have not engaged in the small business restructuring process or undertaken a simplified liquidation in the last 7 years

This means you are not eligible if the insolvent company or any current director, or former director from within the past 12 months, was a director in another company that also went through the small business restructuring process or a simplified liquidation in the last 7 years.

The only exemption to this is where the other company is related to this company and the restructuring practitioner for that company was appointed no more than 20 business days before restructuring for this company began.

This time frame also applies if the other company engaged in the new simplified liquidation process.

5. Not be under other restructuring or administration including a Deed of Company Arrangement or liquidation

If your company is already working with an administrator or liquidator to resolve debt issues, you might not be eligible. You may wish to speak with them to confirm any prior arrangements and determine whether or not the simplified debt restructuring process is still open to you.

Only a registered liquidator can assist with the simplified debt restructuring process

Another key requirement to access the simplified debt restructuring process is that you work with a registered liquidator. Only registered liquidators can act as Small Business Restructuring Practitioners.

There is a new “class” of registered liquidators who are only allowed to act as Small Business Restructuring Practitioners. However, they may not act as voluntary administrators or liquidators.

Working with a fully registered liquidator gives you options as to how the liquidator could best support your company in resolving its debt. For example, once you understand the difference between simplified debt restructuring and voluntary administration, you may decide that the latter makes more sense for you and your business.

At RSM, our registered liquidators are fully qualified and have extensive experience in assisting businesses through every aspect of their restructuring and recovery journey.

Our goal is to get to the heart of your current situation so we can present you with options and then work with you to develop a viable roadmap for the future.

For a confidential and free initial consultation with a registered liquidator, contact your local RSM office today.