Business turnaround


31 Mar 2024

Learnings from recent small business restructuring successes


6 min

A tale of a cash poor but asset rich business, and an upfront contribution being the difference for creditors

A lot has been said about the small business restructuring process. At Worrells, we have had our fair share of SBR (small business restructuring) appointments. We would like to share our experiences with two SBRs that were accepted by the ATO (Australian Taxation Office), who tend to be the sole or major creditor in most SBRs we see.

A cash poor but asset rich business

Company A operated a motor mechanical repair business in metropolitan Melbourne. Due to the pandemic, Company A encountered staff shortages, and saw a large price increase on materials. At the same time, the Company incurred trading losses and was accruing significant interest and penalties on unpaid taxation debts. The Company’s cash position was inadequate to allow it to sustain the losses and satisfy its taxation obligations.

Upon receiving a statutory demand from the ATO for $165,000, Company A’s director appointed Worrells as its Restructuring Practitioner. Company A also owed $735,000 to related party creditors.

Company A had a positive net asset position at the time of our appointment, primarily represented by fixed assets used in Company A’s business. If these fixed assets were realised to pay the ATOs debt, it would mean the business would be unable to continue trading.

Company A proposed a restructuring plan providing for a 48 cents in the dollar return to the ATO, payable from future trading profits and director contributions over 12 months. This represented a return of 75 cents in the dollar of the primary taxation debt (i.e. excluding interest and penalties).

At the time of proposing the restructuring plan, Company A also entered into conditional deeds of forgiveness with the related party creditors, providing for those debts to be forgiven if the restructuring plan was accepted. This allowed for a higher return to the ATO under the restructuring plan, as they were the only remaining creditor that would participate for a dividend.

We assessed what the likely return to creditors would have been in a hypothetical liquidation scenario. That assessment indicated that there would have been sufficient assets to pay the ATOs debt in full, but would have seen the business cease trading.

Despite the favourable hypothetical liquidation scenario, the ATO accepted the proposed restructuring plan. This allows Company A to continue trading, whilst repaying just under half of its historical tax debt.

Our key learning from this appointment is just because a company may be asset rich, it doesn’t mean they cannot utilise the SBR regime. If cashflow is the issue, the assets are not readily saleable, and/or the company needs the assets to operate the business, the ATO (and other creditors) may still vote in favour of the plan if it’s reasonable.

Debit loan accounts and upfront contributions

Company B provided engineering and consulting services in regional Victoria. The pandemic resulted in Company B’s margins being reduced due to the increasing prices of materials. This led to Company B shifting its services from manufacturing to consultancy to address the rising prices of materials. The Company had also accrued a $255,000 taxation debt.

Company B proposed a restructuring plan offering a 15 cents in the dollar return to its creditors. The restructuring plan would require a total $66,000 to be paid as follows:

  • $30,000 upfront from the director; and

  • $36,000 paid via 24 monthly instalments of $1,500.

Company B’s financial statements disclosed debit loan accounts totalling $330,000 owing by the director and their spouse. Our assessment of a hypothetical liquidation scenario indicated they did not have the financial capacity to repay the loan and there would unlikely be any return to unsecured creditors.

The ATO had reservations about the debit loan accounts, however they appeared to be satisfied that the director’s upfront contribution demonstrated a commitment by the director to make a part repayment of his debt.

The ATO ultimately approved the restructuring plan. In this case it was evident the loans had accumulated over several years, essentially in lieu of wages given the director and his wife had not drawn a salary from the company. This outcome differed to a similar scenario we encountered, where the ATO rejected a restructuring plan because the director’s drawings had been used to fund their extravagant lifestyle at the same time as the company’s taxation debt was increasing.

The lesson out of this case is the director’s conduct in relation to, and likely recoverability of, a loan account will be relevant factors considered by creditors in deciding whether to accept or reject a restructuring plan. A large upfront payment will also be attractive to creditors, as it provides them with more certainty.

Other considerations

In determining whether to accept a restructuring plan, the ATO considers:

  • the commercial terms in comparison to a hypothetical return in a liquidation;

  • the company’s ability to make the payments under the plan on time and in full;

  • the company’s compliance history and that of related parties or entities (such as completing lodgements on time);

  • the behaviour of the directors in relation to any loan accounts with the company; and

  • potential breaches of the Corporations Act.

Our experiences have also identified the ATO tends to be more favourable with accepting restructuring plans if:

  • there is a benefit to employees retaining their employment;

  • a viable business can continue operating; and

  • the return to creditors is reasonable.

If your client is struggling financially and may be eligible for the SBR regime, we strongly encourage you contact your local Worrells Principal for a free consultation about saving your client’s business. Do not leave it until it is too late to act to give your client the best chances of survival.

Business can be tough

Our team is focused and ready to help

Get in touch

Subscribe for all the latest help and news