Two cases of small business restructuring success, including a group of companies

From financially distressed to solvent, within months.

The small business restructuring (SBR) regime has made headwinds in recent months. SBR appointments have enabled many companies to successfully restructure its debts with creditors, allowing owners to avoid closing their doors for good.

In many cases, the SBR regime is used as a tool to propose a discounted payment plan to all creditors over a period often spanning up to three years; and formally binds the company, the director, creditors, and the restructuring plan practitioner to the plan for that term.

Two SBR cases recently handled by our Melbourne office highlight how the SBR process has allowed the companies to return to a solvent position and continue operating, all within a few months, while the directors keep control of the business. 

Case 1

Two companies within a corporate group structure commenced SBR processes due to mounting debts with the Australian Taxation Office (ATO) and trade suppliers. These entities are critical to the overall success of the corporate group: company A is the manufacturer for the group, and company B its major customer. Failure of one ultimately means the failure of the other.

The directors and accountant took an active role in formulating the plan with our team. Significant negotiations with the ATO also meant the plan and our report could be presented to creditors within the 20-business day proposal period.

The directors paid an upfront lump sum for each entity within days of creditors accepting the plan, delivering returns of 26 and 27 cents in the dollar to creditors of company A and company B respectively. Again, paid out as a dividend within days.

The companies became solvent, in under two months from the SBR process commencing.

Case 2

A construction company hit by COVID’s economic impact had a strong ATO compliance record and tax lodgments consistently being up to date. However, just as the company regained some traction after COVID-19 restrictions ending, the external administration of a large construction company resulted in a bad debt in the vicinity of $600k. This was ultimately too much of a hit to the business and the company entered into the SBR process.

Early and proactive involvement from the directors and accountant enabled a timely cash forecast for discussions with the ATO (the major creditor) to negotiate any potential issues with the restructuring proposal, which creditors then accepted. Fast forward six months and the final contribution under the plan has been received, and creditors received a final distribution/dividend of just under 30 cents in the dollar.  

The company is back to a position of solvency and is continuing to operate successfully due to the SBR process.

Key takeaways

The key takeaways for advisors and their clients are:

• Directors actively involved in the SBR process can lead to earlier and positive outcomes to creditors and the company.

• The SBR process is a debtor-in-possession model, meaning the directors stay in control and continue to run the business while the proposal is formulated and being considered by creditors.

• The SBR process can be successfully leveraged to turnaround a company’s financial uncertainty within a matter of a few short months.

• The SBR process is a tool that can be successfully utilised to restructure a group of companies.

• Creditors gain a more certain return compared to the alternative liquidation scenario.

The continued rise of SBR appointments is paving the way for financially distressed but viable businesses to reset and ensure financial viability, and allow its owners the opportunity to be in a position to enjoy future success. For more information on the SBR process and to download our complimentary guide to small business restructuring,  go to Small Business Restructuring.