SBR still works – but the bar is higher

Small Business Restructuring remains a vital lifeline for many struggling small businesses, often delivering better outcomes and returns for creditors than liquidation. However, with the ATO tightening its scrutiny, directors and advisers must be more diligent than ever to ensure proposals are credible, transparent, and commercially viable.

Insolvency appointments are rising across Australia, with many distressed businesses searching for the most effective way to stay afloat. For eligible small businesses, the Small Business Restructuring (SBR) regime continues to offer a valuable pathway – but it’s no longer a given that proposals will sail through.

At Jirsch Sutherland, we’ve noticed a clear shift: the ATO, often the largest creditor in these restructures, is applying greater scrutiny to SBR proposals. And the latest data appears to back it up – in June, SBR appointments dropped from almost 25 per cent of all new insolvency cases to just over 15 per cent, according to the latest Alares Credit Risk Insights.

However, that doesn’t mean SBR is no longer effective. We’re still using it successfully for many clients, because when used appropriately, SBR can save businesses, preserve value that would otherwise be lost in liquidation, and it often delivers better returns for creditors compared to liquidation. But it does mean that directors and their advisers must be better prepared and realistic about what it takes to secure creditor support.

Why SBR isn’t always the right fit

SBR was introduced in January 2021 to help small but viable businesses restructure their debt without relinquishing control. It remains a cost-effective and efficient tool but only when the fundamentals of the business support its use.

When my colleagues and I assess whether SBR is appropriate, we consider several questions:

• What caused the financial distress?
• What’s changed that gives the business a credible path forward?
• Can we offer creditors a clear commercial benefit?

The ATO is asking similar questions – and has flagged a number of red flags that can trigger rejection:

• Significant director loan accounts
• A poor compliance history (especially around lodgements)
• Past payment plans that weren’t honoured
• The ATO being the only or largest creditor, suggesting tax has been de-prioritised.

The ATO remains supportive of the SBR regime, but it expects transparency, accountability, and a plan that holds water. That’s crucial – particularly because the ATO is a party in 93 per cent of all SBRs lodged, according to ASIC. I understand the tax office has also been involved in more than 2,500 approved SBRs to date. And while the most common users of SBR are businesses in construction, closely followed by those in accommodation and hospitality, we’ve helped companies across a broad spectrum of industries.

Scrutiny is a strength, not a weakness

Concerns around misuse, including phoenixing, have added pressure. ASIC has been reported as stating it has concerns SBRs could potentially facilitate phoenix activity – however, the corporate regulator has not yet found evidence the regime is being flouted or misused. That said, the scrutiny from regulators reinforces the importance of ensuring proposals are grounded in good faith and properly documented.

This growing scrutiny isn’t a flaw in the system, it’s a strength. It helps ensure SBR is used by businesses that genuinely qualify, and it protects the regime from being undermined.

Voluntary Administration and DOCA on the rise

We’re seeing more businesses opt for Voluntary Administration (VA) and Deeds of Company Arrangement (DOCA), particularly in situations involving complex creditor arrangements, where businesses are not eligible for SBR, or when the ATO won’t support an SBR. These formal processes offer greater flexibility and oversight, and they remain a strong solution, particularly when SBR isn’t viable.

The earlier, the better

The message for business owners is simple: seek advice early. The earlier we get involved, the more solutions we can put on the table. And SBR is still one of the most effective when used in the right circumstances. It’s not about SBR being harder. It’s about making sure it’s used properly – with transparency, planning, and genuine intent. When those things line up, it still delivers excellent outcomes.

Andrew Spring
Partner
Jirsch Sutherland