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Small business restructuring appointments have seen a substantial increase in 2023 after a slow initial uptake.
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Small business restructuring scheme gains momentum: BDO
22 August 2023
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11 minute read
A greater number of underperforming small businesses are deciding to undertake small business restructuring (SBR) plans with the ATO increasingly willing to accept proposals made as part of restructures, according to accounting firm BDO.
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BDO North Queensland office managing partner, advisory, Todd Kelly said that a slow uptake in the first two years after the introduction of SBR, there has been a sizeable increase in SBR appointments in 2023.
“The ATO’s willingness to accept numerous proposals, including those with a projected return to the ATO of no more than 15 cents in the dollar, is the driving factor behind this. If that continues, SBR will represent a valuable lifeline to directors of some struggling small businesses,” said Mr Kelly in a recent article.
ASIC reported in January this year that from 1 January 2021 to 30 June 2022, the ATO was a creditor in 89 per cent of companies that entered a restructuring plan and was a major creditor in 79 per cent.
The ASIC review noted 82 restructuring practitioner appointments during the review period. From those appointments, 78 proposals were sent to affected creditors, of which 72 transitioned to restructuring plans.
The 10 remaining appointments were either terminated because the company was not eligible, creditors rejected the proposed plan, or the directors ended the restructuring appointment.
“From an average of approximately four SBR appointments per month over the first 18 months of the SBR regime, we now see more than that number daily,” said Mr Kelly.
“It seems that the ATO’s current attitude towards the consideration of SBR proposals is having a huge impact with directors and their advisers now recognising the SBR regime as a viable and advantageous outcome, where the directors remain in control of the business throughout the whole process.”
Mr Kelly said the SBR is the first insolvency framework in Australia that leaves control of an underperforming company in the hands of its directors throughout the whole process, as opposed to other forms of external administration.
“Previously reluctant directors, not wanting to consider the traditional forms of insolvency appointment, may be very interested in the SBR framework where debts are dealt with while the director remains in control of the business throughout the process,” he said.
In exchange for directors’ retaining control, the framework requires that the company appoint a SBR practitioner, a registered liquidator, who will act as a facilitator between the company and its creditors, aiding in the formulation of a restructuring proposal/plan that will be presented to and voted upon by the creditors.
“If accepted by most creditors, the proposal is binding, and the company continues to trade in compliance with the restructuring plan,” said Mr Kelly.
“Before SBR, many small businesses would be forced to shut down instead of attempting some compromise of their debts to maximise their chances of survival, which in some cases is better for creditors, customers, employees, stakeholders, and the company.”
In order to be eligible for the SBR, the business must meet a number of requirements:
- The company has total liabilities of less than $1 million, including secured creditors (being the net shortfall after taking into account the assets secured) and related party creditors, but excluding employee entitlements.
- The company is either insolvent or likely to become insolvent.
- The company is up to date with respect to all of its tax lodgments.
- The company has paid the entitlements of employees that are due and payable.
- No person who is a director of the company or who has been a director of the company within the 12 months before the appointment of the restructuring
practitioner has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years unless they are exempt under the regulations. - The company must not have undergone restructuring or been the subject of a simplified liquidation process within the preceding seven years.
Mr Kelly said that in order to satisfy eligibility, the business is not required to pay all tax obligations but it must lodge its tax returns.
“Additionally, only employee entitlements that are ‘due and payable’ are required to have been paid,” he said.
Insolvency Australia has also seen a similar increase in uptake of the SBR regime this year.
One of its members, Jirsch Sutherland partner Chris Baskerville, said there has been an increasing desire by eligible small businesses to undertake SBR plans given the significant number of small business carrying less than $1 million in debt.
“SBRs will continue to increase commensurate with the education of trusted advisers,” said Mr Baskerville.
“As they get more familiar with the concept, the more it will be promoted. In terms of the number of appointments, I believe SBRs will overtake voluntary administrations in the future.”
Insolvency Australia director Gareth Gammon said Insolvency Australia’s index indicates a greater level of SBRs, particularly in NSW, Queensland and Victoria.
“In the past financial year there were 333 SBR plans executed – a significant increase from the previous year. It’s obvious that more advisers and directors are becoming aware of the many benefits of SBRs – including appeasing the ATO,” said Mr Gammon.
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