As part of changes to Australia’s insolvency framework that came into effect this year, eligible small businesses trapped under the weight of insurmountable debt can now access a simplified debt restructuring process. 

In a business insights series, CCIWA member RSM Australia explains what this means for you.

The simplified debt restructuring process essentially allows business owners to retain control of their company while repaying the company’s debts, with some protection against creditor claims. 

The aim is to enable a transition from insolvency to solvency so the business survives, employees keep their jobs, and creditors are repaid.  

If your business is insolvent, or likely to become insolvent, you have a limited window to minimise the risk of insolvent trading and breaches of director’s duties by proactively seeking appropriately qualified help and if need be, engage a Small Business Restructuring Practitioner. 

Simplified debt restructuring plan — am I eligible? 

To be eligible for the simplified debt restructuring process, your business must meet these key requirements: 

• Be incorporated with less than $1 million in liabilities (provable debts per s553 and excluding employee entitlements); 
• Be either insolvent or likely to become insolvent at some future time*; 
• Be up to date with the payment of employee entitlements; and 
• Be up to date with all tax lodgements (not necessarily tax debt). 

Your business and its directors (including former directors from the past 12 months) can’t have gone through either a simplified liquidation or the small business restructuring process in the last seven years (some exceptions apply to this). 

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

* Insolvent means your business is unable to pay its debts as and when they are due. 

How does simplified debt restructuring work? 

To implement simplified debt restructuring in your business, you must first contact a registered liquidator. Only registered liquidators can act as a “Small Business Restructuring Practitioner” and advise you on simplified debt restructuring.  

The simplified debt restructuring process generally follows these steps: 

1. Directors agree the company is insolvent or may soon be insolvent. 
2. Board meeting to confirm the appointment of a Small Business Restructuring Practitioner. 
3. Work with the practitioner to prepare a restructuring plan within 20 business days. 
4. Finalise and propose the restructuring plan to creditors. 
5. Creditors have 15 business days to vote to approve or reject the plan. 

Throughout the process, the directors remain in control of the business and continue trading while putting the plan into action. 

During the process, the business is afforded some protection from being forced into liquidation by creditors. Some secured creditors can still take enforcement action against the business though, so it’s important to discuss this with your registered liquidator before you decide on the best way forward. 

The Small Business Restructuring Practitioner must be kept up to date on how the business is tracking — and the company’s books made available to them at any time, if they need them.  If the plan is ultimately approved (you need 50 per cent support based on the “value” of the “affected creditor” debts), then the practitioner will be responsible for disbursing payments to creditors as per the terms in the approved restructuring plan. 

One key concern with the Small Business Restructuring process versus voluntary administration is that your practitioner is not liable for debts incurred while you trade on. Creditors know this — so while they may approve your restructuring plan, they may not be inclined to continue supplying your company with the goods or services you need to remain operational. 

If the plan is not approved, directors need to discuss other options with the practitioner, such as voluntary administration or liquidation. 

What’s in a debt restructuring plan?  

The debt restructuring plan includes all current unsecured debt that your company is liable for (including shortfalls to partly secured creditors and participating secured creditor debts). 

It does not include employee payments (wages, superannuation, and so on), which is why these must be paid for before the restructuring plan can commence. 

If you incur new debt during the simplified debt restructuring process, this needs to be repaid outside of the restructuring plan. 

As part of the terms of the plan, all creditors rank equally and are repaid at the same time. If the company cannot make its payments, the plan is exited and the practitioner will work with you to determine next steps. 

Is Simplified debt restructuring right for your business? 

While simplified debt restructuring is a great initiative, it will not suit all businesses in financial distress. 

This table explains the key differences between the 3 most common appointments for assisting an insolvent business. 

View the table here.

* Subject to any agreement concerning costs for dealing with legal actions 

** Prior to issuing the restructuring plan being within circa 20 business days of appointment 

*** During both the voluntary administration and the restructuring period 

What does simplified debt restructuring cost?

A Small Business Restructuring Practitioner will present you with a fixed fee for providing their services throughout the simplified debt restructuring process. 

Once you agree to this fee the restructuring can begin. 

The practitioner’s fee for executing and managing the approved restructuring plan is paid as a percentage of the payments to creditors, which creditors must agree to as part of the debt restructuring plan.

To find out if the simplified debt restructuring process is the right step forward for your business, contact RSM’s restructuring and recovery team via a local RSM office.

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