A growing number of businesses facing financial challenges are successfully getting back on track by opting for the Small Business Restructuring Process. And the ATO is proving to be a welcome ‘supporter’.
While the Small Business Restructuring (SBR) Process is still relatively new, more businesses are inquiring about it as an alternative to other insolvency options when they find themselves struggling.
The process has been in existence for 18 months and in that time more than 80 have been completed. Jirsch Sutherland has already undertaken a number of SBRs around the country, and according to Jirsch Sutherland Partner Andrew Spring, while there’s still some confusion about the practicalities of the SBR process among debtors, creditors and stakeholders, “a lot of learning is going on”.
“Something that has really stood out with all the SBRs we’ve handled is the support the proposed repayment plans have received from the ATO – often a significant creditor. We’ve now handled SBRs across a range of sectors including entertainment, retail, construction and publishing (see breakout below) – and the ATO has agreed to those restructures and repayment plan,” he says.
“The ATO is essentially saying it’ll support a viable business that has encountered some form of extraordinary headwind (such as COVID) and which needs a financial restructure – or ‘balance sheet prune’ – knowing that by restructuring, the business will return a greater amount to creditors than simply closing down.”
Spring adds that all the SBR matters Jirsch Sutherland has handled have provided a greater return to creditors than likely to be achieved in a winding up, as well as preserving the businesses and jobs. “For several of the businesses, it’s enabled them to grow,” he says. “With the ATO now back in debt-collection mode, the supportive nature of the ATO for the SBRs we’ve undertaken is certainly a positive take-out message for businesses struggling with tax debts.”
Benefits of an SBR
An SBR offers several benefits, but a key one is that creditors can receive a better return than if the company goes into liquidation – which is one of the more common options taken by struggling businesses. An SBR also helps saves jobs, deal with legacy debt which may have accrued during the turmoil of recent times and re-establish positive relationships with trade suppliers to allow the business to begin to grow again.
Other benefits include:
- Greater engagement with the ATO.
- Early intervention: at the first sign of financial distress, it enables a business to go to creditors and ask for help.
- Simplicity: SBRs are simplified, shorter and less regulated.
- Control: directors stay in control of their business during the process.
- Protection: acting early may protect directors from being liable for insolvent trading and from personally repaying the company tax debt.
- Lower costs: the process is designed to reduce access costs for small business.
- Specialist practitioners: a qualified SBRP manages the process, ensuring compliance and helping protect directors.
However, not all businesses qualify for the SBR process. The key requirements are:
- total liabilities of the company must not exceed $1 million.
- All statutory taxation lodgements must be up to date.
- All employee entitlements, including superannuation, must be paid.
Meanwhile, Spring says for businesses facing challenges, it’s important to realise there is no need to struggle. “Speak to your adviser now,” he says. “There are solutions to ‘right the ship’, and as many companies are finding, the SBR process is one of them.”
How Jirsch Sutherland is using the SBR process to help companies
The following examples are of companies Jirsch Sutherland has worked with using the SBR process. In all cases, the result was better than if the company went into liquidation.
A struggling engineering firm affected by COVID approached Jirsch Sutherland, which determined an SBR was the best option. The ATO was consulted during the process and approved the plan. The process returned 20 cents in the dollar to creditors, saved the company $600,000 in tax, and all eight staff kept their jobs. Both the accountant and the director were very happy with the result.
A concert and festival promoter found itself in financial difficulties when COVID restrictions led to the events it was promoting being cancelled. The company’s lawyer approached Jirsch Sutherland, which recommended an SBR as the most appropriate course of action. A successful plan was devised which required an upfront payment that resulted in 17 cents in the dollar returned to unsecured creditors. The process was completed within two months. Crucially, all staff kept their jobs, and the company saved over $200,000 in tax. As live acts once again return to Australia following the lifting of COVID restrictions, the business will be able to grow. Once again, the ATO was supportive of the process.
A well-established publishing business found its revenue was severely impacted following the bushfires, floods and pandemic as their clients’ advertising budgets were tightened. The business had limited tangible assets. Its value was in being able to continue to trade, and with the world starting to open again, its forecasts showed viability. The business also needed a succession plan, but the legacy of more than $500,000 of debt was an inhibiting factor. Shutting down the business would have likely led to a nil return to creditors. Jirsch Sutherland undertook an SBR that provided 30 cents in the dollar to creditors, preserved the business and all jobs, and assisted in an orderly succession.
A manchester retailer that largely operated from shopping centre concession stalls had its business decimated as a result of the pandemic. While it expanded its e-commerce offerings, due to its deep product diversity, this was an expensive and time-consuming investment. Once trading restrictions were lifted post-COVID, the business was well-positioned to take advantage of its traditional and new revenue streams. However, the legacy debt of $350,000 was dragging the business down. Shutting down the business would have likely delivered creditors a nil return. The restructuring plan that was developed provided for a 25 cent in the dollar return to creditors, a further advance of investor funds to support its recapitalisation, and a preservation of the business and jobs.
The business was impacted by a bad debt of around $300,000 at the start of the pandemic. While it struggled on through various stimulus packages and forbearance measures, it had been unable to cover the loss due to those issues much of the construction sector was experiencing. Over the past six months, the business has adjusted to deal with the industry headwinds and its forecasts showed viability. A shutdown would have likely returned less than 10 cents in the dollar. Instead, the SBR provided a return of more than 20 cents in the dollar to creditors and preserved both the business and jobs.