ASIC’s review of small business restructuring: key insights

How Worrells’ findings and outcomes compare.

It’s been a slow start, but it seems the Small Business Restructuring process is starting to gain some transaction and we’re seeing great results for companies in financial distress, particularly those with tax debt.

To recap, after a very rushed consultation process the government introduced on 1 January 2021 a new simplified process that allows small businesses that are in financial trouble to reach a deal with their creditors, that sees the company continue on into the future and creditors get some or all of their money back. The government was concerned about a ‘tsunami of insolvencies’ once the COVID stimulus and insolvency relief came to an end, and needed to a pathway for small businesses to rehabilitate quickly and cost effectively.

It’s been a rocky start, perhaps because there hasn’t been an insolvency tsunami. A recent review of the Small Business Restructuring process[1] by the Australian Securities and Investments Commission (ASIC) for the period 1 January 2021 to 30 June 2022 shows 82 small business restructuring practitioners had been appointed. In an average pre-COVID year there are 10,000 odd corporate insolvency administrations, so 82 SBR appointments seems a bit of a fizzer.

It's important to note that the process is designed for small business with eligibility criteria of:

• Debts less than $1 million.

• Substantial compliance with tax obligations. The Australian Taxation Office (ATO) takes ‘substantial compliance’ to mean all tax lodgments are up to date, even the 2021/22 income tax return which isn’t due until May 2023.

• All employee entitlements are paid up to date.

• No current or recent director has been involved in the SBR process in the past seven years.

Here’s the key information from ASIC’s report:

• The main industries leveraging the SBR process were accommodation and food services (21%), construction (20%), and retail (16%).

• Of the 82 SBR proposals 72 restructuring plans were accepted (47 are completed; 24 were ongoing; and 1 was terminated). The 10 SBR appointments remaining did not proceed because either the company was not eligible, creditors rejected the proposal, or the directors ended the appointment.

• 79% of these companies had debts of $600,000 or less.

• The ATO was the majority creditor in 79% of the companies (and a creditor in 89% of all SBR appointments).

• The return to creditors of the 44 companies (where data was available) was 15.2 cents in the dollar. Owe $600k—pay $91k. Not a bad deal!

• The main sources of restructuring plan contributions were from the director/others (44%) and future trading profits (34%).

In respect of Worrells SBR appointments up to mid-January 2023:

• Worrells were appointed small business restructuring practitioner to 40 companies.

• The main industries were construction (13) and hospitality (6).

• Creditors accepted 35 plans (1 did not meet the criteria; 2 are ongoing; 2 were rejected by creditors).

• Total debts ranged from $158,000 to $938,000, within which the ATO’s debt ranged from $0 to $936,000.

• The return to creditors ranged between 1.3 to 50 cents in the dollar. Removing the extreme position of 1.3 cents return, the average return was 28 cents in the dollar. And the median was 20 cents in the dollar.

• Employees whose jobs were saved totaled 396.

Whether the SBR process remains after the effects on the economy of the pandemic have washed through, remains to be seen. What we do know is that the process is an effective way to deal with legacy debt, particularly debt to the ATO.

[1] REP 756 Review of small business restructuring process.