In the last few years, the Australian government put in place a small business restructure option for companies with debts owing of less than $1 million. This new process is designed to help companies restructure their debts and continue operating in a difficult economic climate.
The small business reconstruction option is different from informal reconstruction methods in that it is a legislated process that is supervised by ASIC. The Practitioner putting together the Small Business Reconstruction Plan must be qualified and creditors must vote in favour of The Plan for it to go ahead.
Many companies find themselves struggling financially during difficult economic times, but with careful planning, they may be able to avoid liquidation or receivership using small business reconstruction.
To be eligible for the small business reconstruction option, companies must have paid the entitlements of employees that are due and payable, lodged all returns, and not be in liquidation or receivership.
The steps in the process are:
- The company meets the eligibility criteria and chooses a Small Business Reconstruction practitioner. Many businesses need assistance to get to this point, Director’s Advocate Ginette Muller, of GM Advisory, advises that she is often asked to assist companies to work toward eligibility for this and another form of protection, the Safe Harbour Process.
- The Small Business Reconstruction practitioner puts together a plan and puts it to creditors.
- Creditors must vote in favour of the plan for it to go ahead.
- If the plan is approved, the company goes into a restricted period. During this time, only transactions approved by the Small Business Reconstruction practitioner can take place. The business continues to trade.
- At the end of the restricted period, the company comes out of the restricted period and is either wound up if the plan fails, or continues to operate under the terms of the plan.
The minimum criteria to be eligible for small business reconstruction are that:
1. The company must have debts of less than $1 million,
2. The company must have paid all entitlements of employees that are due and payable;
3. The company must have lodged all returns; and
4. The company cannot be in liquidation or receivership, and has not been in Small Business Reconstruction or a Simplief Liquidation for the last 7 years. Similarly, anyone who has been a Director of the company in the last twelve months cannot have been a director of a business within the last 7 years that has been in Small Business Reconstruction or a Simplified Liquidation.
Many companies find themselves struggling financially during difficult economic times, but with careful planning, they may be able to avoid liquidation or receivership using small business reconstruction.
There are several things directors should keep in mind when considering this option:
1. Other specialist consultants such as accountants and lawyers can also be helpful before or during the restricted period, providing advice on debt restructuring, asset protection, and other areas relevant to small businesses undergoing reconstruction..
2. Choose a practitioner who understands your business well and can help you navigate these difficult waters.
3. Stratos Legal’s Bruce Pasetti points out, “Unlike a Voluntary Administration, small business reconstruction does not result in automatic termination of the director duties during the restructure. It is important to remember that directors still have fiduciary responsibilities to creditors and shareholders that continue during this time. As always, Directors should seek legal advice if unsure about their obligations.
Want to know more? Get in touch with the team at Stratos Legal and we can share our experience with this new process and connect you with the right experts.
