Background

Changes to the insolvency framework which came to effect on 1 January 2021 have led to a new process known as the small business restructure (SBR). The most notable feature of this new regime is that company directors stay in control of the business as opposed to registered liquidators. Additional information on the SBR scheme can be found in our previously published article.

ASIC has recently reviewed 82 SBR appointments that took place during the period from 1 January 2021 to 30 June 2022. ASIC’s full report on its findings can be downloaded from this link.

In this article, we summarise some of the critical findings by ASIC and provide some insights from our recent SBR engagements.

What were ASIC’s key findings?

Key findings, as per ASIC’s media release, are:

• Creditors approved the majority (72) of the 78 proposed plans sent to affected creditors (92%).
• Where a restructuring plan was accepted, 47 plans were effectuated (65%), one plan was terminated (2%) and 24 plans were ongoing as at 30 September 2022 (33%).
• The majority of companies where a restructuring plan was effectuated or was ongoing appear to be continuing to operate their business (66%).
• The ATO was a creditor in 89% of companies which entered a restructuring plan and was a major creditor in 79% of those companies.

Unsurprisingly, industries that utilised the SBR strategy the most were businesses in the accommodation and food services sector, closely followed by construction and retail trade.

Whilst the number of appointments of the SBR process is relatively low given what businesses had endured during the pandemic, it appears however that creditors, particularly the ATO, have been supportive of the proposed restructuring plans and most pleasingly, almost two-thirds continue to trade.

What did the restructuring plans look like?

Some of the key points included:

• In most plans (79%), ATO represented 50-100% of the total claims. The median average of total claims was $387k for FY21 and $355k for FY22.
• The lion’s share (88%) of the restructuring plans had contributions between $15k and $200k which were mainly sourced from the directors or others (44%) and future trading profits (34%).
• Median total contribution amounted to $60k. Total plan contributions as a proportion of total estimated claims had a median of 20%.
• Median average restructuring practitioners’ fees for the total restructuring process (restructure and plan) was $22k.

What has been our experience and what can be done better?

Our experience with SBR engagements is that directors are more receptive to the notion of staying in control of the business and are more likely to consider the SBR than any other formal restructuring strategy. As observed by ASIC, our perception has been that creditors have generally accepted the proposed restructuring plan.

However, what we have also recognised is that a sizeable number of companies do not meet the eligibility criteria and continue to operate in the market with solvency issues which makes it, in our view, a public policy issue. From our perspective, the SBR process could be tweaked to make it more accessible to small businesses by addressing certain eligibility criteria, especially in respect to types and level of debts. Time will tell if some of those kinks will be ironed out by government.

How can Charles & Co. help you?

Our Team with more than 50 years combined experience is well placed to help businesses in a range of challenging and distressed situations. We encourage anyone experiencing financial and/or operational distress to contact us to discuss your options.