The Newly Introduced Small Business Restructuring (SBR) Provisions

The Newly Introduced Small Business Restructuring (SBR) Provisions

The small business restructuring (SBR) provisions within the Corporations Act (“the Act”),[1] introduced 1 January 2021, have provided a gateway to ease pressure on small businesses facing creditor issues amid the COVID-19 pandemic. The provisions allow a company to engage a small business restructuring practitioner (SBRP) to assist with the creation of a restructuring plan to propose to creditors. The purpose of the plan is to allow the company to trade forward while avoiding the costs associated with a formal company administration or liquidation, but while maximising payouts to creditors.

Eligibility Criteria

An SBR Practitioner can be appointed upon application by the business in satisfaction of the following qualifying criteria:

  1. Any other requisite test for eligibility in relation to liabilities is satisfied (i.e. total liabilities upon entering the SBR process equal less than $1m)[2];
  2. No person appointed as director of the company within the preceding 12 months have been subject to other restructuring or simple liquidation processes (or some other prescribed period); and
  3. The company has not been under a restructuring or simplified liquidation process for the preceding 7 years,[3] or for a time as prescribed by the regulations. 

The Small Business Restructuring Practitioner

The role of the SBR Practitioner is to provide advice on the restructuring and related matters of the company; is to assist in preparing a restructuring plan; compile and make a declaration to the company’s creditors on the plan; and any other adjoining functions.[4]

There is a positive duty on directors of a company subject to an SBR plan to assist the SBR Practitioner.[5] The director must provide the SBR Practitioner with all information and books and records as required to assist the SBR Practitioner in their role, regardless of who is in possession of such records (i.e. company accountants, solicitors, etc).[6]

What Can My Business Do Under SBR?

The SBR provisions allow for a ‘debtor-in-control’ model, meaning the company officers maintain full control over the trading and affairs of the company during the restructuring. However, the director in control of the company’s affairs may only continue to trade in matters that are considered the ‘ordinary course of the company’s business.[7] Whilst a business is under the SBR process, they may seek adjournments or cease any current or future legal proceedings in relation to the debts of the company.

Transactions that may not be considered in the ordinary course of business must then be consented to by the SBR Practitioner, or by order of the Court, and are otherwise considered a breach of the Act by the director.

Recent Case Study: Re Dessco Pty Ltd [2021] VSC 94

In the recent Victorian matter of Re Dessco Pty Ltd, a petitioning creditor filed a wind-up application against Dessco Pty Ltd (“Dessco”) for failure to comply with a statutory demand in the amount of $81,748.29 (excl interest). Descco’s board of directors resolved to appoint a SBR Practitioner on 15 February 2021, and sought an adjournment of the wind-up proceedings for 50 days.

The appointment of the SBR Practitioner and adjournment was opposed by the petitioning creditor, based on three key arguments:

  1. The company’s liabilities exceeded the $1m threshold;
  2. As a substantial creditor of the company, the proposed plan was rejected; and
  3. The appointment was not in the interest of creditors due to the late stage of wind-up proceedings.

In consideration of the above points, the Court found company liabilities to total $750,592 (discounting the total claim by the petitioning creditor). Further, such a plan could not be rejected as the petitioning creditor was not yet provided with a restructuring proposal statement and declaration. Finally, a 5c/$ return to creditors was sufficient for the purposes of restructuring, as opposed to a costly liquidation model diminishing creditor returns. His Honour Irving JR, relevantly found these factors to be satisfactory on the basis that it was a ‘sufficient possibility as distinct from mere optimistic speculation’.

Ultimately, the court allowed the adjournment of proceedings and the appointment of the SBR Practitioner. The basis of the finding being that the process would not diminish creditor returns as posed by the petitioning creditor.

Given the success of the SBR plan as a way to avoid liquidation, it can be reasonably speculated that in future decisions, disputes will be brought forward by creditors to determine which is the option of greater value to creditors – a wind-up or SBR. Watch this space!

How Do I Enter the SBR Process?

For a company to enter the SBR process, the company’s board of directors must pass a resolution deeming that the company is, or is likely to be insolvent and that a SBR Practitioner should be appointed.[8] Once these resolutions are passed, and the eligibility criteria is satisfied, an SBR Practitioner can be engaged to commence the company restructuring.

We’re here to help.

If you think the SBR process is appropriate for your business, contact our insolvency lawyers now for tailored assistance and advice regarding the next steps. We can help by representing you through the restructuring process and by referring your restructuring request to a qualified practitioner.

[1] Corporations Act 2001 (Cth) Part 5.3B.
[2] Corporations Regulations 2001 (Cth) Reg 5.3B.03(1).
[3] Ibid Reg 5.3B.03(3).
[4] Corporations Act (n 1) s 453E.
[5] Ibid s 453F.
[6] Ibid s 453G.
[7] Ibid s 453L(2)(a).
[8] Ibid s 453B(1)(b)

 

 

 

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June 24, 2022 |

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