What if I Don’t Qualify for SBR? Exploring Options for Businesses in Financial Distress

Olvera First
Olvera First

Do you know there are other ways to settle your business’ financial debts besides SBR? 

Small business restructuring (SBR) is a turnaround framework created in January 2021 by the Australian Government to help small businesses with financial difficulties. It allows eligible companies to enter a restructuring plan with creditors to manage their debts.  

There are many benefits to SBR, as it allows company directors to stay in control of their company and continue operations while a restructuring practitioner comes up with a restructuring plan. However, SBR has a stringent set of requirements for businesses to qualify.  

As registered liquidators, we understand that each business circumstance is unique and that you may need a different solution than SBR. So, what other options exist for your business in mitigating debts and satisfying creditors? 

This blog article examines SBR eligibility and explores four other solutions that may suit your business: Liquidation, Safe Harbour Provisions, and Voluntary Administration.  

SBR eligibility  

For a company to qualify for small business restructuring (SBR), it must meet the following criteria as of the day the restructuring practitioner is appointed: 

  • The company’s total liabilities must not exceed $ 1 million.  
  • It must have updated tax lodgements.  
  • It must pay all outstanding employee entitlements (wages, superannuation)  
  • The company or director must not have used the SBR process or a simplified liquidation process in the past 7 years.  
  • It must not be under any restructuring or administration process  

With these criteria in place, it may affect the eligibility of businesses with unique circumstances. Here are some examples of when a company might not be able to leverage SBR: 

  • A business operating under a sole trader instead of a registered company name. 
  • Businesses with more than $1 million in liabilities on the day of appointment of a restructuring practitioner. 
  • Businesses or companies that have undergone an SBR or simplified liquidation process in the last 7 years.  
  • Businesses with outstanding superannuation obligations. 
  • Businesses with outdated tax lodgements and unlogged Business Activity Statements (BAS).  

If the SBR is not applicable to your business, there are other options for restructuring legacy debts. Here are some of them.  

Liquidation  

Liquidation is the act of winding down a company. There are two types of liquidation: members voluntary liquidation and the creditors voluntary liquidation. The difference between the two types is that in a creditors voluntary liquidation, the company is insolvent.  

The appointed liquidator has numerous tasks to complete here, which include realising the assets of the company, paying a dividend to creditors (if sufficient funds exist), and reporting to creditors and the Australian Securities Investment Commission (ASIC).  

Once the winding up is complete, the liquidator files a final return with the ASIC and the company is deregistered. Essentially, the debts of the company “die” with the company upon deregistration.  

Oftentimes, we see businesses placing themselves in liquidation prematurely when there are other options available for their business.  

There are many drawbacks to the liquidation option, such as loss of reputation and employee redundancy. Plus, the director may be personally liable for insolvent trading or liable to pay creditors outside the liquidation if personal guarantees were provided. We think liquidation should be considered as a last resort, and businesses should exhaust other options before considering this.  

Fortunately, the next two options offer a possible turnaround solution for company directors to restructure and rebuild their business.  

Safe harbour provisions  

Safe harbour provisions were introduced in 2017 to promote a culture of restructuring among businesses facing financial difficulties. They allow companies to continue trading while focusing on reasonable rescue and turnaround efforts instead of hastily placing the company into liquidation.  

Safe harbour is essentially an informal restructuring process that allows organisation boards to consider all options available to the company. In this process, a qualified practitioner determines the business’s eligibility for safe harbour provisions and develops a plan that could lead the company to a better outcome within a reasonable time frame.   

There are a few things to consider before deciding if safe harbour is suitable for you. Here are some of the pros and cons.  

 

Advantages of Safe Harbour Provisions 

Disadvantages of Safe Harbour Provisions 

 

  • Allows companies to restructure outside a formal insolvency process. 
  • Offers companies more time to pay off creditors.  
  • Allows companies to continue operating while a restructuring plan is in progress.  
  • Safe harbour programs can remain confidential and are not required to be disclosed outside the company. 
  • Company directors remain in control of the company. 
  • Protects company directors against any personal liability risk during a restructure.  
  • Encourages companies to seek turnaround solutions as an alternative to premature liquidation.  
  • Companies must meet the eligibility criteria (i.e. ensuring all tax and employee obligations are met).  
  • Companies deemed not recoverable under safe harbour provisions will have to undergo voluntary administration or liquidation. 
  • Small businesses may lack the financial capacity to seek safe harbour advice 

 

Voluntary administration  

Voluntary administration is the process of allowing an independent restructuring expert to take full control of the company with a view of finding a way, if possible, to save the company or its business. When a company is placed into voluntary administration, one of the options available is for a Deed of Company Arrangement to be proposed, or DOCA.  

Usually, the company director or any third party can propose the DOCA.  The DOCA is structured in consultation with your creditors, who will have the power to vote to approve the proposed DOCA at the second meeting of creditors. Once the DOCA is approved, your business can continue trading as usual while the DOCA is being administered by the deed administrator, which sees the company paying off its creditors through the DOCA over time.     

As with Safe Harbour, voluntary administration has a few pros and cons.  

 

Advantages of Voluntary Administration  

Disadvantages of Voluntary Administration 

 

  • Offers an option for companies to seek advice to develop a viable plan for business recovery.  
  • Creditors cannot enforce their claims against the company or call on a personal guarantee with the court’s consent.  
  • Avoid liquidation if DOCA is approved. 
  • The company may still be operational and trade while the administrator assesses the viability of the business. 
  • If the creditors have approved the DOCA, the company director can resume control of the company and continue business as usual. 
  • Creditors may accept less than 100% of what’s owed.  
  • Administrators are in control of the business during the voluntary administration process. 
  • The business may have to shut down if the administrators deem it not financially viable, or if majority creditors vote against the DOCA.  
  • Companies will have to publicly disclose financial information during the process.  

 

Key takeaway  

If small business restructuring isn’t an option for your business, there are other ways to improve your company’s financial position and pay off creditor debts. However, it’s crucial that you take remedial action immediately and not wait until it’s too late.  

Speaking to a restructuring practitioner sooner can be the difference between saving a viable business and making an uninformed decision to shut it down.   

Olvera Advisors helps businesses stay ahead in a dynamic environment with bespoke restructuring solutions. Explore our blog for more insights on navigating the financial complexities of this dynamic industry. 

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CEO - Founder

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