A little-known tool for the best chance of recovery.
Fundamental changes to the insolvency system happened in early 2020 including a new insolvency regime known as the small business restructuring (SBR) being introduced.
At the outset, SBR take up was very slow, but has spiked in the past few months with SBR appointments now rising exponentially. Given the positive results, this is no surprise.
So, what is an SBR? Well, at its most basic a SBR is a debt restructuring tool for companies—or corporate trustees—with insolvency concerns. The new law prescribes a method for a company to put forward an offer to its creditors. Basically, it is a process for a company to ask creditors to take a haircut on their debts with the aim of getting that distressed company back to a solvent position.
Why an SBR?
Perhaps the most attractive thing about an SBR for the directors is that there’s limited downside even if the offer is not ultimately accepted. Specifically, if a SBR plan is proposed but is rejected for whatever reason, the company is right back in the same spot as it was earlier, and trading continues. We can contrast this to the case of a voluntary administration, where if an offer under a Deed of Company Arrangement is rejected by creditors, the company almost certainly goes into liquidation. What’s more, business trading continues as normal during the SBR process—with the directors in full control.
Who can propose an SBR?
To be eligible for an SBR a company must be:
Up to date with its taxation lodgements (or get itself up-to-date by the time a restructuring plan is proposed to creditors).
One that has its crystallised employee liabilities paid up to date (or can get there).
Where the company and its director(s) have not been through an SBR process or a simplified liquidation in the past seven years.
The process is also only available to companies that have debts of less than $1,000,000. The criteria are necessarily limited as the process is less rigorous and less investigations are required when compared to a voluntary administration or a liquidation.
Who should consider an SBR?
SBRs are primarily aimed at that small-to-medium size business with solid fundamentals, a good track record with employee entitlements payments and ATO lodgements, but for one reason or another need their creditors to take a haircut otherwise they may not survive. Clearly, COVID-impacted businesses are leveraging SBRs as the 2021 law intended.
At Worrells, we’ve seen some great results achieved though the SBR process nationally. Offers proposed and accepted by creditors have been both cash upfront and/or payments overtime. Most SBR plans have provided returns in the range of 20-40 cents in the dollar.
Moreover, talk in the insolvency industry (admittedly anecdotally) is that the acceptance rates on SBRs proposed nationally exceed 90%. That is certainly what we have seen.
The SBR process looks poised to continue gaining in momentum and it can be a great tool to restructure unsecured debt where perhaps a payment arrangement with individual creditors alone will not fix the problem. There are several nuances to the laws, and I encourage advisors to reach out to their local Worrells office to discuss the process in more detail. We are happy to assist.
This article was written by Matthew Watkins, Senior Business Analyst in Worrells Melbourne. Click here to connect with him on LinkedIn.