A Creditors Guide To Small Business Restructuring

What Is Small Business Restructuring

SBR is a form of insolvency that allows a company to propose a plan to repay creditors. This potentially reduces the amount owed and avoids liquidation. It gives the company a chance to survive financial difficulties and thrive under a structured plan.

SBR was introduced in 2021 in response to the economic impact of COVID-19. Designed to reduce complexity, time and cost for small businesses, the owners/directors retain control rather than an insolvency practitioner. Instead, a restructuring practitioner (who must be a registered liquidator) is appointed to guide the process. Unlike an insolvency practitioner, they are not personally liable for company debts/actions.

According to Insolvency Australia’s most recent Corporate Insolvency Index, there has been a three-fold increase in SBRs in the first half of the 2025 financial year.

SBR is typically successful when the company is worth saving – where circumstance has adversely affected the business rather than severe financial problems that are unlikely to improve. In this case, an SBR is usually a more favourable outcome compared to liquidation.

Eligibility rules:

• Incorporated companies
• Liabilities less than $1 million
• Insolvent or likely to become insolvent in future
• All employee entitlements must be paid
• All tax lodgements (documents) are up to date, even if not fully paid
• Can only be used once in a seven-year period

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What Is The Small Business Restructuring Process

A ‘debtor-in-possession’ model applies, where directors can continue to trade while undergoing the process. There are two phases:

1. Proposal (20 business days): Directors and the restructuring practitioner evaluate whether the company qualifies for SBR and develop the restructuring plan. The plan’s goal is to repay creditors either partially or fully and covers all unsecured debts accrued before restructuring commenced. During this time, there is a moratorium on most types of security enforcement against the company.
2. Acceptance (15 business days): Creditors vote to approve or reject the plan. Approval requires a majority calculated by value (dollar amount of debts) from unrelated creditors.

Outcomes:

1. Approved: The company maintains normal trading while the plan is administered by the restructuring practitioner (up to a maximum of three years). All creditors are paid the same ‘cents in the dollar’ and all are paid at the same time. No creditor, or class of creditor, receives priority in repayment of their debts or claims. Once the obligations under the plan are paid off, the company is released from all debts or claims that were admissible and the plan ends.
2. Rejected: Creditors can then take action to recover debts, although the company will likely be placed into liquidation.

If a plan is approved but the company fails to make the required payments, the company exits the plan. The company then remains liable for the original debt (minus any repayments).

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How Does The ATO Relate To Small Business Restructuring

The ATO is typically the largest creditor in an SBR, for a business tax debt. This automatically gives them a voting majority, and therefore the power to approve or reject the plan. Anecdotally, the ATO is putting more scrutiny on plans than in the first few years, although approval levels remain high. The ATO is recognised as acting cooperatively and commercially, looking for signs the company is a good corporate citizen and has a history of tax compliance before approving.

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How Are Unsecured Creditors Impacted By A Small Business Restructure

Admissible debt for ordinary unsecured creditors is the debt outstanding at the time the SBR process commenced. Any ongoing payment arrangements cease to have any effect, with the outstanding balance included in the plan.

While the company is restructuring, there is a moratorium period where unsecured creditors cannot begin, continue or enforce their claims.

Admissible debts and claims rank equally and receive a pro-rata share of the funds available. Unsecured creditors are then bound to the repayment proposed under the plan, with no recourse to the shortfall even if they do not vote to approve.

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How Are Secured Creditors and PPSR Impacted By A Small Business Restructure

Creditors with a PPSR registration are classed as a secured creditor. During the moratorium period secured creditors may be restricted from enforcing their security interests.

Secured creditors with a PPSR registration may have an admissible debt to an SBR if there is an estimated shortfall between the debt and the value of the secured property, or if they decide to be bound by the plan for a specified amount. Only the shortfall or specified amount is classed as unsecured and included in the SBR process. The creditor can then vote and be compromised under the plan.

If there is no shortfall, then they are not an affected creditor and have no claim in the SBR process. They therefore do not vote on the restructuring plan. They stand outside of the plan and must wait for the moratorium to end (if subject to) and then enforce their security if needed.

PPSR implications:

• ALLPAAP holders – must estimate the value of all the company’s assets should they be sold. If worth less than the debt, the estimated shortfall is to be claimed in the SBR. This means that the company is then discharged from any unsecured portion, regardless of the creditor’s participation in the voting process.
• Second ranking ALLPAAP holders – if the value of the assets will not pay out the first ranking secured creditor, the entire debt is included in the SBR process. The holder becomes an ordinary unsecured creditor entitled to receive the same cents in the dollar dividend as other unsecured creditors. There are no rights against the company (in relation to the debt) after the SBR process.
• PMSI holders – Creditors with security over a specific asset must estimate its value and claim for the shortfall. Unless the value of the security is greater than your debt, the claim must be included in the SBR process.

Once the SBR plan is completed, personal guarantees can be enforced for any shortfall.

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ATO Business Tax Defaults: A Predictor Of Insolvency and SBR

A red flag alert for potential SBR or insolvency is an ATO business tax debt default. The ATO may disclose overdue business tax debt to approved credit reporting bureaus (including Access Intell) if a business meets certain criteria.

One of the collection tools used by the ATO is to issue a Director Penalty Notice (DPN) to recover the debt personally from current or former company directors. Once a DPN is issued, a director has 21 days to act before they become personally liable. Options typically are to pay the debt or appoint an insolvency or restructuring practitioner. This short timeframe often leads to insolvencies or SBRs seemingly coming ‘out of the blue’.

Credit Managers should think of disclosed tax debts as a red flag alert, and act quickly to protect their business.

Clients that use our online trade application and assessment and credit risk monitoring products have instant access to this vital information both within the platform and via email alerts.

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What Creditors Should Do If A Customer Enters a Small Business Restructuring

Creditors should:

• Check to ensure your PPSR is up to date and accurate – you’ll then be treated as a secured creditor.
• Check if you have a charging clause - which may enable you to register on PPSR to improve your security position.
• See if you have a personal guarantee – whilst you can’t enforce the guarantee during the SBR, you can remind the customer that you can and will enforce the guarantee for any shortfall once the SBR is complete.

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Credit risk management strategies are crucial to protect your business from bad debts. Ensure you onboard the right clients, register your interest on the PPSR and monitor your clients for signs of risk. When red flag alerts appear, take action quickly. Our leading-edge products create an integrated, automated process for every stage of the customer life cycle.

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DISCLAIMER: This information contained in this article is general in nature and should not be relied upon as legal advice. Access Intell is not a law firm. Readers should seek suitably qualified legal opinion prior to taking or refraining from taking any action.