Another business saved in small business restructure

Another successful Small Business Restructure (SBR) – maintaining our 100% strike rate in securing creditor approval and helping businesses overcome financial challenges.

In recent times there has been an uptick in the number of enquiries relating to Small Business Restructure (“SBR”) appointments. This is likely due to business owners being more aware of the SBR process as well as the high rate of success for restructuring proposals.

We are proud to say that all SBR appointments undertaken by us have been approved by creditors. These appointments range from various industries, such as hospitality, wholesale, construction, manufacturing, and childcare services.

The most recent success story is the restructure of a company that operates in the construction industry. The company had accumulated taxation debts in excess $900,000 that needed to be resolved, or the business would have to face the likely prospect of ‘shutting shop’. In short, the business needed to secure a reprieve from accumulated debts so that it could rebuild a brighter future.

After assessing the financial position, we identified the company was eligible for SBR and our assessment showed that there was a viable business that could be saved. To qualify for SBR, the company needed to bring its superannuation entitlements up to date which involved seeking external finance.

The restructure involved many complications, but it was not impossible. Some of the issues dealt with were:

• Legal proceedings commenced by a creditor prior to the SBR. This raised the issue of contingent claims against the Company.
• A number of parties had lodged security interests against the Company. We were able to determine that the security would not be unaffected by the restructure.
• The risk of secured assets being repossessed.
• Completing overdue workers compensation and tax lodgements prior to the SBR proposal being issued to creditors.

A Win-Win for Creditors and the company

The company proposed a plan offering a greater, more certain and timely return to creditors than would be received in a hypothetical liquidation or voluntary administration scenario. The proposal put forward to creditors would allow for a distribution of approximately 20 cents in the dollar. The contributions will be paid within three (3) months, which will result in creditors receiving a distribution within four (4) months.

Fifteen (15) business days after creditors were informed of the plan, the plan was approved by creditors which included approval from the largest creditor, the Australian Taxation Office (“ATO”).

The outcome meant that the Company was able to compromise the participating debts by 80%, saving more than $700,000 and thus allowing it to continue trading.

Recapitalising director loan accounts

A further issue that had to be considered as part of the SBR was the director’s loan account. In this instance the director had been financially supporting the business and had become for some time a significant creditor. The director had two options, being to either write off the debt or covert the debt to equity.

The latter option was preferable in this instance given the following benefits:

• It alleviated the financial strain on the company’s balance sheet.
• It improved the company’s cash flow.
• It increased the overall financial stability.
• It enabled the director to retain shares in lieu of a debt that would otherwise be written off.

Key Takeaways

• SBR’s are a good option for financially stressed businesses to consider as the process has garnered support from creditors, including the ATO.
• The SBR process is often a more affordable and quicker restructuring option compared to a Voluntary Administration.
• Recapitalising the loan account from debt-to-equity alleviated pressure on the company’s balance sheet and cashflow.
• We can assist businesses in all types of industries.
• The team at PKF can help guide owners and advisors in complex matters.

If you’re facing financial difficulties and/or mounting tax debts, don’t wait until it’s too late. Acting earlier leads to better outcomes. Contact us today and let’s discuss a way forward.