The small business restructuring process – Part 5.3B of the Corporations Act 2001 (Cth)

The new small business restructuring process (SBRP) under Part 5.3B of the Corporations Act 2001 (Cth) (‘Corporations Act’) came into effect on 1 January 2021 with the aim of streamlining insolvency law and its processes to ‘save’ viable small businesses. Treasurer Josh Frydenberg stated that the SBRP is part of the government’s plan to help rebuild Australia’s economy in a post-pandemic environment and give businesses ‘the opportunity to turnaround, restructure and survive.’ The SBRP is the first semblance of a debtor-in-possession insolvency model in Australia, in which a small business owner retains control over the business during the insolvency process.

To take advantage of the SBRP, a business must meet the following eligibility requirements:

  • be incorporated under the Corporations Act;
  • have total liabilities do not exceed $1 million (excluding employee entitlements); and
  • be insolvent, or likely to become insolvent at some future time.

Following the appointment of a small business restructuring practitioner, companies must produce a restructuring plan to creditors within 20 business days of entering the SBRP, after which time creditors have 15 business days to vote on the proposed plan. The restructuring practitioner’s remuneration, as a percentage of creditor disbursements, is also included in the plan which creditors must be aware of and consent to.

Hearsay guest and insolvency law expert Jason Harris published an article ‘Comparing the Start of Parts 5.3A and 5.3B’ where he discussed the key takeaways the industry can draw from the initial stages of the SBRP. He identified that as at 20th April 2021, there were only 8 notices of appointment, however 3 were duplicates for the same companies meaning there was a total of 5 appointments in the first 4 months of the commencement of the SBRP. During drafting stages, the government emphasised how the new process would cover 76% of all external administrations, yet this has not been reflected in the small number of appointments since its commencement. Comparatively, the first 4 months after the introduction of the voluntary administration regime saw 142 appointments in 1993.

Harris advocates in his article for the implementation of a business viability scheme, as suggested by the ASBFEO in their July 2020 Insolvency Practices Inquiry, to address the issue of many small businesses being ‘too poor to go broke.’ While business advisors can help small businesses navigate formal insolvency processes, which are expensive and may result in an unfavourable outcome, many small businesses cannot afford their expertise and therefore aren’t in a position to make decisions about what to do with their business.

Listen to our interview with Professor Jason Harris, and Mark Wellard from the University of Technology Sydney, in Episode 27 of Hearsay if you’d like to learn more about the strengths and weaknesses of the new small business restructuring process regime.