For a company experiencing financial difficulty it may want to consider making a proposal to creditors to negotiate the debts owed. There are formal insolvency options to do this, a Small Business Restructure (“SBR”) or Voluntary Administration (“VA”).
After significant uptake in SBRs, it’s safe to say the SBR is here to stay, often taking rank as the first preference for many companies in financial distress. For those unfamiliar with the process, you’d be forgiven for considering an SBR as a VA tailored for small business. For more information on the SBR process and how it works, our guide on SBRs can be found using this link, there are also a number of resources on the process in practice which can be accessed here.
Whilst the SBR process can be seen as similar to a VA, there are many differences. The key differences can be summarised below:
There is strict eligibility criteria for a business to be eligible for an SBR (details on this criteria can be found in this video). These restrictions do not apply to a company considering a VA appointment.
Impacts on trading during the SBR process are minimal (if any at all); unlike with a VA, control of the company remains with the director. A director is only required to obtain the consent of the Restructuring Practitioner should there be any transactions outside the ordinary course of business.
Related party participation in the SBR process is limited. In a VA, related parties are able to vote on any Deed of Company Arrangement (DOCA) being proposed, however, related parties are prohibited from voting on a plan in an SBR.
A plan in an SBR is essentially the payment of money to creditors over a period of time, whereas in a DOCA in a VA, a company can include various other terms in addition to the payment of funds, such as licensing, the sale of business/assets and subordination of claims
Unlike a DOCA in a VA, in an SBR, there is no ability for related party creditors to subordinate their debt to provide a higher rate of return to unrelated creditors. This has led to instances of related parties in an SBR forgiving their debt owed by the company, which may trigger a deemed dividend under Division 7A for the related entity forgiving the debt.
There are restrictions on group appointments which do not apply in a VA.
In an SBR the practitioner is remunerated on an agreed fixed price for the process, and if the plan is accepted, the practitioner is remunerated at an agreed percentage rate of the amount paid out to creditors.
Currently there is no legislative mechanism to change a plan in a SBR. Only the Court may make an order to vary a plan that has been accepted by creditors, this contrasts with the ability for a DOCA to be varied under section 445A of the Corporations Act.
There is no automatic transition into liquidation if the proposal to creditors is not accepted, as is often the case in a VA.
A restructuring practitioner is engaged by a company to act for the company, in contrast to a VA.
In an SBR, the company can oust a practitioner.
As can be seen above, a SBR can differ significantly to a VA. A SBR is an often cheaper and more streamlined solution when compared to a VA however, a business may not meet all the eligibility criteria. If you have a client that does not fit the mold for a SBR, a VA may be a better option providing more flexibility.
There is a lot to consider for a company in financial distress, making a decision to proceed with a formal insolvency appointment can be a difficult one. Worrells can assist by reviewing a company’s financial position and providing advice on the best available options.
