Eligibility criteria for a Small Business Restructure in Australia

Navigating financial challenges can be daunting for small businesses, but the Small Business Restructuring (SBR) process offers a viable pathway to recovery. Introduced as part of Australia’s insolvency reforms in January 2021, the SBR process is specifically designed to help small businesses manage their debts while continuing to operate. Understanding the eligibility criteria is essential for businesses considering this option. Here, we break down the financial and operational requirements for qualifying for the SBR process.

What is the Small Business Restructuring process?

The SBR process provides small businesses with an opportunity to restructure their debts through a formal agreement with creditors. Unlike traditional insolvency proceedings, the SBR process allows business owners to remain in control of day-to-day operations while working with a restructuring practitioner to develop and implement a restructuring plan.

This streamlined process aims to reduce costs and complexity, making it an attractive option for small businesses facing financial difficulties. However, strict eligibility criteria ensure that only genuinely viable businesses can access this mechanism.

Eligibility criteria for SBR

To qualify for the SBR process, businesses must meet specific financial and operational conditions as outlined by the Australian Government. These include requirements related to the company’s debt levels, trading status, and compliance history.

  1. Company type

Only companies registered under the Corporations Act 2001 are eligible for the SBR process. Sole traders, partnerships, and trusts (without a corporate trustee) are not covered under this framework. However, such entities may explore alternative restructuring or insolvency options.

  1. Debt threshold

The company’s total liabilities must not exceed $1 million at the time of entering the SBR process. This includes all secured and unsecured debts, such as loans, unpaid invoices, employee entitlements, and taxes. Businesses exceeding this threshold will need to consider other insolvency options, such as voluntary administration.

  1. Solvent trading capability

The business must be capable of continuing to trade during the restructuring process. This means the company should generate enough income to cover its ongoing operating costs, excluding payments to creditors included in the restructuring plan. If a business is unable to meet its daily operational expenses, the SBR process may not be suitable.

  1. Directors’ eligibility

All directors of the company must meet specific requirements:

  • No recent involvement in the SBR process: Directors must not have been involved in another company’s SBR process or simplified liquidation process within the past seven years.
  • Good compliance history: Directors must have complied with their statutory obligations, including submitting business activity statements (BAS) and tax returns, to the Australian Taxation Office (ATO).
  1. Employee entitlements

All employee entitlements, such as superannuation and wages, must be up to date before entering the SBR process. Ensuring compliance with employee-related obligations is critical, as these liabilities cannot be compromised in the restructuring plan.

  1. Tax lodgements

The company must have its tax lodgements up to date, including income tax returns and BAS. While some tax debts may be included in the restructuring plan, accurate and current lodgements are essential to assess eligibility.

Preparing for the SBR process

If a company meets the eligibility criteria, preparation is key to maximising the benefits of the SBR process. Here are the steps businesses should take before entering the process:

  1. Engage a restructuring practitioner The first step is to appoint a registered restructuring practitioner. This professional will assess the business’s eligibility, develop a restructuring plan, and liaise with creditors on behalf of the company.
  2. Assess financial position Conduct a thorough review of the company’s financial position, including assets, liabilities, cash flow, and operational expenses. This information will form the basis of the restructuring plan.
  3. Communicate with stakeholders Inform employees, creditors, and other stakeholders about the decision to enter the SBR process. Transparent communication fosters trust and cooperation, which are crucial for the plan’s success.
  4. Develop a restructuring plan Work with the restructuring practitioner to create a viable plan that outlines how the company will repay its debts over time. The plan must be realistic and acceptable to creditors.
  5. Obtain creditor approval Creditors must approve the restructuring plan for it to be implemented. The practitioner will assist in negotiating terms and presenting the plan to creditors for their vote.

Benefits of the SBR process

For eligible businesses, the SBR process offers several advantages:

  • Cost-effective: The streamlined process reduces costs compared to traditional insolvency procedures.
  • Maintained control: Business owners retain control of operations, unlike in voluntary administration.
  • CreditoreEngagement: A structured plan improves creditor confidence and can lead to more favourable repayment terms.
  • Business continuity: Companies can continue trading while addressing financial issues, increasing the likelihood of long-term success.

When is the SBR process not suitable?

The SBR process is not suitable for businesses that:

  • Have liabilities exceeding $1 million.
  • Are unable to meet ongoing operational costs.
  • Have unresolved employee entitlement or tax compliance issues.

In such cases, alternative insolvency options, such as voluntary administration or liquidation, may need to be explored.

Conclusion

The Small Business Restructuring process is a valuable tool for Australian companies facing financial challenges, offering a pathway to recovery while minimising disruption. However, strict eligibility criteria ensure that only businesses with the potential for viability can access this process. By understanding the requirements and preparing thoroughly, eligible companies can maximise their chances of a successful restructuring and lay the foundation for future growth.

At AVA Advisory, we specialise in helping Australian businesses recover and thrive. Whether you need guidance on financial planning, restructuring, or growth strategies, our team is here to support you every step of the way. 

Get in touch with us on 1300 181 220 to schedule a confidential and obligation-free consultation or click here to lock in an online meeting via our bookings platform.

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