How successful has the small business restructuring process been so far? 

Introduction

The Small Business Restructuring Process (SBRP) was introduced in Australia in 2021 as a streamlined process for insolvent small businesses. The objective of the process is to allow small businesses to put a restructuring plan proposal to creditors without losing control of their business. The first set of results has been released in ASIC Report 756, which assesses the outcomes of the SBRP in its first 18 months. In this blog post, we will analyse the results and discuss the effectiveness of the SBRP for insolvent small businesses.

Low number of SBRP appointments

During the first 18 months of the SBRP, there were a total of 82 SBRP appointments, compared to 7,154 external administrations during the same period. The low number of appointments suggests that the SBRP might not be the first choice for small businesses facing insolvency, or that it might not be widely known or understood by small business owners. The SBRP process has the following benefits (compared to voluntary administration): Lower costs, less reporting requirements and no loss of director control over the business. 

High approval rate of restructuring plans

Despite the low number of appointments, the proportion of restructuring plans approved by creditors is remarkably high at 87%, with 72 of the 82 appointments resulting in approved plans. This high approval rate indicates that the SBRP has been effective in helping small businesses restructure their debts and reach agreements with their creditors.

Diverse businesses utilizing the SBRP

A variety of businesses have taken advantage of the SBRP. The most common industries include accommodation and food services (21%), construction (20%), and retail (16%). This diversity demonstrates that the SBRP is applicable and beneficial to a wide range of small businesses across different sectors.

Successful completion of plans

Of the 72 accepted restructuring plans, 65% have been completed successfully by the companies as of September 2022. This number is expected to increase as the calculation is ongoing because restructuring plans can run for up to 3 years. The relatively high rate of successful completion suggests that the SBRP has been an effective tool for helping small businesses regain their financial footing.

Debt forgiveness in restructuring plans

The ASIC report does not provide a specific calculation of the proportion of debt forgiveness that small businesses have obtained through a restructuring plan. To estimate the amount of debt forgiveness obtained through restructuring plans, it is necessary to deduct it from other calculations in the report.

The restructuring plans involved a significant amount of debt forgiveness, with an estimate of 84.8% of the debt being forgiven. This estimate is calculated by subtracting the proposed dividend rate (15.2%) from 100%. It is important to note that the Restructuring Practitioner fees must be added to the total, with median remuneration of $22,055.

Key hurdles to success

While the SBRP has been successful in many aspects, there are still some hurdles that need to be addressed. These include building licensing issues, insurance ipso facto clauses, and statutory compliance issues. It is crucial for small business owners and their advisors to understand these challenges and consider them when deciding whether the SBRP is the right solution for their business.

Conclusion

In conclusion, the Small Business Restructuring Process in Australia has shown promising results in its first 18 months of implementation. Despite the low number of SBRP appointments, the high approval rate of restructuring plans, successful completion of plans, and significant debt forgiveness demonstrate the potential of the SBRP to effectively assist insolvent small businesses. However, there are still hurdles to overcome, and further understanding is required for small business owners to make the best decisions for their companies.