Small business restructuring process on track to surpass voluntary liquidations
More than 1,000 small business restructuring appointments were reported by the end of April 2024, averaging over 100 per month.
Recent data released by the Australian Securities and Investments Commission (ASIC) reveals a record high of 1,245 insolvency appointments in May 2024, marking a 44% increase from a year ago and a remarkable 122% surge compared to 2022.
This upsurge in business failures has been linked to adverse economic conditions, recovery actions for outstanding business tax debts, declining consumer spending, and persistent inflationary pressures including higher operating expenses. This has impacted companies across various sectors of the economy which is exacerbating financial stress for SMEs nationwide.
In March, the ABC reported that the Australian Taxation Office (ATO) was pursuing more than $34 billion in debts owed by small businesses and sole traders. It noted the ATO has been employing aggressive enforcement actions to collect these debts, a move many experts have said has led to the financial stresses and failures of some businesses.
At a recent webinar hosted by Mackay Goodwin, the ATO revealed that the Small Business Restructuring (SBR) process, introduced in January 2021 as part of the federal government’s response to the COVID-19 pandemic, has gained momentum in addressing SME debt owed to the ATO. It has seen a significant increase in appointments, with more than 1,000 SBR appointments reported by the end of April 2024, averaging over 100 per month. The SBR process is on track to surpass the number of voluntary administration appointments with associated deeds of company arrangement (DOCA) by the end of the financial year.
SBR appointments are gaining in popularity because they are a much more cost-effective option than liquidations or voluntary administration appointments and an SBR also leaves directors in control of their businesses to focus on business recovery.
Mackay Goodwin has witnessed an increase in SBR appointments to the firm recently, including a Perth daycare centre that had a large unpaid tax debt lingering from the COVID years. Being the only daycare centre in the area, it was important we found a way to keep the lights on. An SBR offered a lifeline to the business whilst also saving 60 local jobs and ensuring over 100 families could still access childcare. After creditors were initially opposed to the idea of an SBR and preferred the company enter into liquidation, we were able to obtain approval for the SBR proposal which was a great result for all parties involved and allowed the business to continue to trade into the future. The ramifications for local families’ childcare arrangements would have been terrible if we couldn’t find a solution, and the SBR was an efficient way to resolve the issues quickly.
These insights from the ATO emphasise the growing acceptance of the SBR process among Australian businesses, particularly in industries such as construction and hospitality, which account for more than 50% of all the SBR appointments so far. Moreover, most parties see the SBR process as a win-win, enabling businesses to restructure and get back into the tax system as compliant tax players.
In the SBR process, businesses have 20 business days to prepare a proposal for creditors and then creditors have 15 business days to approve the proposal. If successful, even if the business is still in a payment plan with creditors under external administration, it comes off the ASIC registry as under external administration. This quick process allows businesses to move forward.
What are the criteria for small business restructuring?
Businesses looking to undertake small business restructuring must fulfil specific criteria, including ensuring debts are under $1 million dollars in total, paying all entitlements such as wages and superannuation (including no outstanding superannuation guarantee charge), having up-to-date tax lodgments, and not having undertaken an SBR or a simplified liquidation within the past seven years.
Additionally, where tax debt is involved, the ATO can only disclose taxpayer information to authorised contacts, and debts owed to directors, shareholders, or related entities must be counted within the $1 million threshold amount.
At the webinar, the ATO said it anticipates further increases in small business restructurings in the upcoming financial year. Given the growth in insolvency figures, it makes sense that SBRs will be adopted more widely as well.
As the SBR process continues to gain traction, I expect its affect on the small business ecosystem to be significant, offering a viable pathway for businesses to restructure and navigate financial challenges effectively, cheaply and with the ability of directors to maintain control of their business throughout the process.
Richard Lawrence is an ASIC-registered liquidator and a director of Mackay Goodwin.
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