How a small business restructure plan is the CPR for small business

Has your client’s business suffered from COVID-19’s business interruption resulting in unmanageable debts?

A resuscitation through the new Small Business Restructure Plan (SBR) may just be the remedy to get them back on the road to recovery. SBR is the CPR for sick small businesses.

The SBR is a new legal process to help small businesses out of financial distress by compromising their debts with their creditors by agreement. Unlike the appointment of an external administrator or liquidator, directors of the company remain in control of their business during the process resulting in fewer costs compared to other types of external administrations. This regime aims to maximise the chances of continuing small businesses, providing better outcomes for businesses, creditors, employees, the economy, and the community.

A registered liquidator acts as the Restructuring Practitioner (RP) who works with the directors and their accountant to formulate a realistic restructure plan. The process has been well received by the Australian Taxation Office (ATO) which has voted in favour of most proposals to date. They have taken the position of assisting eligible businesses to access the SBR where possible and where appropriate.

Some of the benefits of SBRs include:

  • The ATO is willing to vote in favour of the proposal if sufficient information is provided to make an informed decision and the proposal has commercial merit.
  • The ATO is willing to confer with the RP and director about the plan to provide feedback and indicate whether the proposal is strong and what else would make it appealing for the ATO to accept.
  • It allows for a compromise of tax debts where an ATO payment plan may not be possible to comply with. Payment plans directly with the ATO require full tax payment, which may not be realistic. Debts can be compromised via a SBR.
  • There is a moratorium preventing any unsecured and some secured creditors from taking action against the company while the SBR plan is considered.
  • The process is less expensive than a voluntary administration process as directors retain control and may continue to trade the business in the ordinary course during the SBR.
  • Directors avoid personal liability associated with non-lockdown Director Penalty Notices issued by the ATO (if the SBR is commenced within the required time frame).
  • Directors are protected from being liable for insolvent trading.
  • Length of insolvency process likely to be reduced.
  • If the SBR is successful, the business is preserved and the return to creditors is maximised.

Qualifying Criteria to be eligible for a SBR and propose a restructuring plan:

  1. Creditors must be less than $1 million.
  2. Must pay all employee entitlements that are due. This does not include leave provisions and other entitlements that are not currently due to be paid.
  3. Tax lodgements must be up to date. Tax debts do not need to be paid to be eligible for a SBR.
  4. Not have previously been subject to a SBR or a simplified liquidation in the past seven years. Current and former directors (acting in the past 12 months) also cannot have been a director of a company that has been subject to a SBR or used simplified liquidation in the past seven years.

Preparing a plan:

The ATO has indicated that they prefer plans which are two years or less in duration and have identified information they require to be able to make an informed decision, including:

  • A summary of the historical profit and loss accounts and balance sheets.
  • Details of the assets as of the date of appointment.
  • A summary of the prospective financial information and assumptions relied upon for the proposed plan.
  • The estimated dividend to creditors in a hypothetical liquidation.

The formulation of a plan requires a collaboration between the company’s director, its current accountant, and the RP to assess the position and budget of the SBR instalment plan.

If you have a client suffering from financial distress, contact PKF for a free initial consultation for advice and guidance about whether they are eligible for a SBR and how it might be used to help them to the road on recovery. CPR via SBR.

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