Based on its meteoric rate of uptake, the number of small businesses (SMEs) opting to use the Small Business Restructuring process is expected to overtake those entering voluntary administration very soon.
What is also driving a growing number of company directors to appoint liquidators to help restructure - using the SBR process - is a major push by the Australian Taxation Office - usually the biggest creditor - to recover more than $35 billion in debt.
Since coming into effect four years ago, the SBR almost instantly captured around 20% of all insolvency appointments. Fast forward to 2024 and around 2,400 companies had deployed the official restructuring path to help them stay in business.
Between June and December 2024, there have been 1,500 SBR appointments, up over 200% on the previous year and up over 800% on 2022 figures; and some insolvency experts expect SBRs to reach 3,000 this financial year.
Introduced by the federal government in 2021, an SBR appointment allows SMEs to bring one of the country’s 7,000 registered liquidators to help a company get back on track rather that help to wind it up.
Based on the initial uptake of SBR appointments in 2021 registered liquidator, Andrew Spring with Jirsch Sutherland predicted they would exceed voluntary administration within three years.
While insolvency data published by Australian Securities & Investments Commission suggests insolvencies hit 11,000 in 2023-24, Spring expects this year’s figure to be above 13,000.
Different roles
According to Spring, the key differences between the SBR process and voluntary administration revolve around a) when the registered liquidator gets involved and b) the role they play.
“The critical timing points, between the decision to seek the SBR process or voluntary administration; is typically around six months or even longer,” Spring told Azzet.
Given that SMEs using the SBR process typically continue trading, while voluntary administration is terminal, Spring urges company directors to start having conversation during the first signs of financial distress.
“The results speak for themselves; SMEs seldom return money to unsecured creditors through voluntary administration but typically through an SBR appointment, the business survives,” says Spring.
For example, average returns to creditors from the SBR process exceeds 20c in the dollar, while over 90% of creditors’ voluntary liquidations result in no return to unsecured creditors.
SBR versus voluntary administration
Before SBR appointments came along, the only option available to distressed companies was voluntary administration, which not only compounded the costs but also removed the directors from running the business.
By comparison, the SBR process is a debtor’s-in-possession model which allows owners to remain in charge of business. Similarly, given that the restructuring practitioner – under the SBR model – doesn’t get involved in the day to day running of the business, the fees are lighter.
“SBR fees tend to range from $10,000 to $40,000 (as a fixed fee) during the seven week window that registered liquidator is helping to tidy up the balance sheet,” says Spring.
“In my practice, 99% of fees are based on time spent, and the advantage of a fixed fee is that we know we’re to get paid; whereas often, if it’s left too late, not even the liquidator gets paid.”