Small Business Restructuring

Small Business Restructuring, also called Simplified Debt Restructuring, refers to the process where a company reorganises its operations, structure and/or finances in order to address financial distress and improve business performance. This usually involves an agreement with creditors to pay part or all of the amounts it owes in a lump sum or instalments over an agreed period of time. For Australian businesses, and particularly smaller companies, a business restructure can be a significant strategic decision. It provides a formal framework to handle admissible debts and propose a plan for creditors. This is especially relevant for companies on the brink of becoming insolvent or who would be insolvent if the business restructure did not proceed.

Why is Restructuring Important for Small Businesses?

Restructuring is critical for small businesses as it can be a decisive factor in overcoming financial distress and ensuring long-term viability. Engaging with restructuring practitioners allows businesses to develop a comprehensive business restructuring plan which can include a strategy for managing tax debts, allocating funds to creditors and utilising assets including company property effectively,

The insolvency reforms have made it more accessible for eligible businesses to retain control of business operations while formulating a compromise with creditors. This involves a declaration to creditors about the company’s financial status and providing a clear plan to creditors about how the company intends to move forward. Moreover, the restructuring process can lead to reduced costs and a more efficient operational model.

It is vital for a company director to seek professional advice as early as possible when considering restructuring, particularly when personal guarantees are involved. The guidance of an insolvency practitioner can be instrumental in navigating through this formal insolvency process, ensuring all requirements are met and setting the business on a path to recovery and success.

Signs Your Business Should Consider Restructuring

Inability to pay all debts as and when they fall due for payment

If a company is unable to pay all its debts as and when they fall due for payment there is a significant likelihood that it is insolvent. If it subsequently fails and enters liquidation, any unpaid creditors incurred from the date it became insolvent may be recovered from the directors as a personal liability. This can happen at the instigation of the liquidators or the unpaid creditors directly. In view of the above, as soon as a company can’t pay its debts as they fall due, urgent action should be taken to avoid accumulating further debts which also won’t be able to be paid. Providing the company is eligible, a Small Business Restructure can be conducted relatively quickly and cheaply.

A once off significant financial event is that unlikely to be repeated

Companies often start to fail due to a once off event that they don’t correctly address. Typically a single major loss is not immediately seen as a cause to consider a formal solvency appointment. Such a loss could be caused by a large client failing so its debt is not recoverable, a large overrun on a project which means it is completed at a loss or something like a flood, fire or any other significant loss of assets.

Usually when such an event occurs the company tries to trade through the issue and make back the loss from future profits. While this is appropriate if a company can do so within a shorter period of time, this may not be appropriate if the time to recover is going to be significant. Trying to trade though in the wrong circumstances means amounts that should have been available from future profits are lost making up the past loss.

Worse still, the lost future profit is not held in reserve so is not available if there is a future unexpected loss. Any significant once off loss should trigger a consideration of if a small business restructure is appropriate. This is the time that creditor are likely to be most supportive of the company and any proposal it wishes to put forward. Over time, as unpaid debts build and the amount of time they have been outstanding increases, creditor will generally become less supportive of any proposal put to them. Further, a proposal put at this early time is likely to provide a better return to creditors which is key so obtaining their support.