Restructuring a small business: What is this process and how does it operate?

The government implemented measures to make it easier and less expensive for small firms to restructure debt in light of the difficult economic climate brought forth by COVID-19.

Read More: Small Business Restructuring Sydney

What are the advantages of restructuring a small business?

Small business restructuring was implemented to provide the following advantages to small enterprises, their creditors, and their staff:

lower expenses

reduced turnaround times

enhanced and more convenient access

retaining authority by directors and owners of the company (under the debtor-in-possession model).

Who is eligible for small company restructuring?

Companies that are currently incorporated and have liabilities of less than $1 million (exclusive of employee benefits) are qualified. Every tax liability has to be current. This indicates that, in accordance with tax legislation, directors have filed any returns, notices, statements, applications, or other paperwork (within the parameters of the Income Tax Assessment Act 1997).

Before the restructuring plan can be presented to creditors, all employee entitlements that are due and payable must be paid. It mandates that directors disclose specific business transactions as well as the rationale for their belief that the company qualifies for a reorganization plan.

There is only one usage of the small business restructuring method per seven years. This holds true for the directors as well as the corporation (including those who resigned during the last year). Additionally, it is not applicable if the directors and the firm agreed to a streamlined liquidation (implemented as part of the restructuring process reform) or small business restructure appointment within the same seven-year period.

What makes a director decide to employ restructuring?

Directors that wish to maintain control over company operations and relationships with creditors while attempting to salvage their firm through debt restructuring.

Can I apply restructuring?

Although restructuring is primarily intended for use by companies, it is also open to other incorporated bodies, including registered clubs and cooperatives. Under the personal insolvency process, sole traders are not afforded an equal alternative. However, under some circumstances, a part 10 arrangement under Part X of the Bankruptcy Act 1966 may result in a comparable conclusion.

Additionally, the directors must decide that a restructuring practitioner should be hired and that the firm is insolvent or likely to become insolvent at some point in the future.

For the purposes of restructuring, contingent obligations as well as debts owed to linked parties are considered liabilities.

What information must directors disclose?

Directors should deliver to the restructuring practitioner a signed declaration confirming the following within five business days of the restructuring starting (or longer if the restructuring practitioner grants permission).

The business qualifies.

If the business has engaged in a transaction that can be revoked.

The directors have good cause to think that the firm satisfies the qualifying requirements.

A liquidation may be able to nullify transactions that are not within the regular course of business, such as the transfer of substantial assets and the forgiveness of debts owed by connected parties. If unsure, directors could wait to make the declaration until they have received the proper counsel.

How does the process of restructuring operate?

During the reorganization process, directors are permitted to go on with their company’s regular operations (with some limitations and controls).

There are two stages to the procedure, which can take up to 35 business days:

During the proposal phase, directors and outside professionals work for a maximum of 20 business days on the plan.

The plan is subject to approval or rejection by creditors during the acceptance phase, which lasts for up to 15 business days.

Are there limitations on the proposals that directors may submit?

A number of required terms and conditions must be included in every restructuring plan. For instance, admissible claims and debts have to be ranked equally and be allocated a pro rata portion of the available cash, which includes connected creditors. Furthermore, a transfer of any kind of property other than money cannot be accepted by a creditor.

The restructuring plan may include conditions, such as the sale of real estate or other assets within ten days of the creditors accepting the plan.

The duration of the reorganization plan is only three years.

How does this affect secured creditors?

According to rule 5.3B.29, secured creditors will only be obligated by a restructuring plan to the degree that they choose to be bound and are subject to identical moratorium requirements as apply in a voluntary administration. Nonetheless, the restructuring plan will cover any shortfall experienced by a secured creditor, and they will remain obligated by it.

How does this affect linked creditors?

Voting on the proposal is not permitted for related creditors. They do, however, get a distribution as part of the reorganization plan.

How does a restructuring plan that has been approved end?

An authorized restructuring plan ends (is finished) when all of its provisions are followed, at which point the firm is released from the obligations it was designed to pay.

Can a restructuring plan that has been authorized be abandoned?

Indeed. Terminating a plan is possible if:

A court order is obtained by a creditor.

If a certain event is required to happen within 10 business days of the plan’s creation and it doesn’t (i.e., a condition precedent), then the plan is nullified.

if a breach occurs and is not fixed within 30 working days.

if the firm is assigned an administrator, liquidator, or interim liquidator.

Can a restructuring plan that has been authorized be changed later?

Indeed. However, because a court judgment is necessary, changing an authorized restructuring plan could not be economically feasible in many situations.

What is the practitioner of restructuring doing?

It is automatically authorized for all registered liquidators to function and be designated as restructuring practitioners. With the new streamlined liquidation procedure, only registered liquidators are authorized to operate and appoint themselves.

The duties of the restructuring practitioner consist of:

assisting in the eligibility determination

assisting the directors in creating their plan and examining the business’s financial situation

approving the proposal so that creditors can decide on it

overseeing payments if the proposal is accepted.

Since the directors continue to have daily authority over the firm, the restructuring specialist is not held personally accountable for the debts or deeds of the company.