Small Business Restructuring: Eligibility and Plans

What Small Business Restructuring Does

Small business restructuring is the formal company process under Part 5.3B of the Corporations Act 2001. It gives creditors a proposal for dealing with admissible debts and claims, often through a compromise of the amount owed.

The company appoints a restructuring practitioner who must be a registered liquidator. Directors continue running the business. Transactions outside the ordinary course require the practitioner’s consent or a court order. That restriction covers payments of old admissible debts, so directors need consent before preferring an old supplier.

The practitioner assists with the plan and makes reasonable inquiries into the company’s affairs. Their signed declaration addresses eligibility, the ability to discharge plan obligations and the completeness of the proposal statement. The Corporations Act provisions on restructuring set the appointment and control rules.

Appointment starts the restructuring process. It does not mean creditors have accepted a plan or agreed to reduce their debts. The practitioner must assess the company’s position and help prepare the information for a later creditor decision. Directors must assist the practitioner and supply the company’s records.

An informal refinancing arrangement follows its own loan and creditor agreements. It does not create this statutory plan. The small business restructure tax rollover concerns transfers of business assets between entities and is a separate tax concession.

Assess Eligibility and Compliance

Assess entry eligibility at appointment, then assess the employee and tax requirements before the proposal goes to creditors. Record the evidence for each decision separately.

1. Confirm the appointing entity is a company. This pathway does not apply to a sole trader or partnership. Section 453B also excludes bodies regulated by the Australian Prudential Regulation Authority and their related bodies corporate. Existing administration, liquidation or an unterminated restructuring plan can prevent appointment.
2. Obtain the board resolution. Directors voting for it must consider the company insolvent or likely to become insolvent and resolve that a practitioner be appointed.
3. Calculate the liability test. Regulation 5.3B.03 limits total liabilities to pay admissible debts and claims to $1 million when restructuring begins. Use the statutory definition, which excludes employee entitlements. A turnover figure or a bank balance does not answer this test.
4. Check previous use by the company and relevant directors. The lookback is seven years for restructuring and simplified liquidation. The director test includes anyone who was a director during the preceding 12 months. A narrow related-body-corporate exemption applies where the other appointment or simplified liquidation starts within the specified 20-business-day window.
5. Before circulating the plan, establish payment of employee entitlements that are payable and completion of required tax lodgements. Regulation 5.3B.24 also permits substantial compliance with the matter concerned. Record the basis for that conclusion, including superannuation treatment.

The Corporations Regulations restructuring rules distinguish these tests. The proposal-stage tax requirement concerns lodgements. It does not require all existing company tax debt to be paid before proposing a plan.

For each unmet lodgement, keep evidence of the steps taken and the reason it remains outstanding. The Australian Taxation Office (ATO) assesses each obligation separately when considering substantial compliance. A general promise to lodge later does not explain the company’s position.

Reconcile Debts and Test the Funding Proposal

Reconcile the creditor schedule at the start of restructuring before calculating the return or predicting the vote. Use the same cut-off across accounting records and creditor statements.

For each creditor, record the legal entity owed, the balance claimed and the amount admitted for the proposal. Retain invoices, credit notes and payment references. Explain disputed amounts in a separate field. Flag related creditors and security interests without deleting their balances from the underlying records.

Match ATO account balances to lodged returns and activity statements. Identify pending assessments, tax credits and the components of superannuation guarantee charge. Reconcile payroll entitlements to actual payments and fund receipts. A payment leaving the bank account does not, by itself, prove that the correct entitlement reached the correct recipient.

Use bank statement reconciliation to connect recorded payments with source transactions. FinTrace saves practitioners hours of statement conversion and review by returning one searchable Excel ledger with a findings report. Source PDF filenames and pages put the supporting evidence beside the analysis. That leaves the practitioner more time to assess the company’s finances and plan funding.

A Fictional Funding and Delay Test

Assume a company has $300,000 of admitted unsecured debts, including $180,000 owed to the ATO. It proposes twelve monthly contributions of $8,000. The resulting $96,000 fund pays fictional plan remuneration of $6,000, including GST, leaving $90,000 for creditors: 30 cents per dollar.

These amounts illustrate the calculation and are not a practitioner fee quote. Pre-appointment and proposal fees have already been paid outside this fund. The operating outflows below include current wages, superannuation and tax, alongside other trading costs.

Cash movement	Base: first month	Delayed receipt: first month	Receipt recovered: second month
Opening available cash	$20,000	$20,000	-$3,000
Customer receipts	$90,000	$65,000	$115,000
Current operating outflows	-$80,000	-$80,000	-$80,000
Plan contribution	-$8,000	-$8,000	-$8,000
Closing available cash	$22,000	-$3,000	$24,000

The stress case delays a $25,000 customer receipt by one month. Recovery in the second month does not fund the first month’s $3,000 shortfall. A further $3,000 of accessible funding, or a supported change to payment timing, is needed before this proposal can be described as funded through that delay.

Extend the schedule across the full contribution period. Record the collection assumptions behind customer receipts and proof of access to any third-party contribution. Keep a working-cash reserve separate from funds committed to creditors.

Prepare the Plan and Creditor Information

A restructuring plan is the statutory arrangement that binds the company and relevant creditors once the acceptance requirements are met. An informal workout binds parties through their agreements instead. The statutory proposal combines the executed plan, contribution schedule and supporting creditor information for the acceptance decision.

Prepare a plan that identifies the money or other company property to be dealt with and explains how it funds creditor payments. The regulations permit only money to be transferred to a creditor under the plan. Company payments for admissible debts cannot extend beyond three years from the day the plan is made.

State contribution amounts, payment intervals and the collection mechanism. Show the gross fund, plan remuneration and expected net dividend separately. Identify the execution date and any conditional event. The proposal statement includes the schedule of debts and claims.

The practitioner signs the declaration after making reasonable inquiries and taking reasonable steps to verify the company’s information. If they cannot form a required belief on reasonable grounds, the declaration identifies the matter and explains why. Treat that declaration as an evidence-based assessment, not a standard form to sign without inquiry.

The normal proposal period is 20 business days from the start of restructuring. On the company’s application, the practitioner can grant one extension of up to 10 business days where the regulatory test is met. The court also has an extension power.

The following flowchart separates appointment from the later proposal requirements.

Send affected creditors the executed plan, standard terms, proposal statement and practitioner declaration. The practitioner also asks creditors to state whether they accept and to verify or dispute the scheduled debt. Australian Securities and Investments Commission (ASIC) restructuring guidance explains this document sequence.

ATO Participation and Proposal Assessment

The ATO generally supports an eligible company’s plan where it produces a higher creditor payment within a reasonable period than winding up would produce. Public-interest concerns or risks can make support inappropriate. The ATO’s small business restructuring guidance explains its approach and required information.

Provide three years of profit and loss accounts and balance sheets, with interim financials before appointment. Supply the asset position at appointment and the estimated liquidation dividend. The ATO also requests director and related-entity loan transactions, cash-flow assumptions and evidence supporting lump-sum contributions. Include relevant research and development offsets, excluded-employee amounts above the priority cap and documented management or operational changes.

Where the ATO is a major creditor, it accepts drafts for feedback. Supply the complete draft and supporting information at least five full business days before the required creditor issue day. Authorised access to company tax information is needed for the practitioner to discuss the account.

Address the company’s actual compliance record. The ATO identifies unpaid director or related-entity loans, poor tax compliance and non-payment of tax liabilities among common rejection reasons. It also considers unfair competitive advantage. Explain the underlying transactions and corrective actions using records, rather than describing restructuring as a guaranteed tax discount.

A tax credit is not automatically cash available for contributions. The ATO applies offsetting rules according to the period to which the credit relates. An existing garnishee notice generally continues operating on the relevant amounts. Reflect those effects in the funding schedule.

Assess director penalty notice exposure separately from the company’s plan debt. A successful plan does not remit a lockdown penalty or an ordinary penalty that was not remitted within the notice’s 21-day period. Plan payments can reduce the parallel penalty liability, but a personal balance can remain.

Creditor Decisions, Costs and Implementation

A plan is accepted when more than half the value of responding eligible creditors supports it at the end of the acceptance period. The usual period is 15 business days. Count creditor value under the regulations, including required set-offs and the purchase-price rule for purchased claims.

Excluded creditors do not count in that decision. They include related creditors at the start of restructuring, the practitioner and specified practitioner-related creditors. Related-party status affects voting, so keep that classification separate from the debt balance and treatment under the plan.

Admissible debts rank equally and share proportionately if the fund is insufficient to pay them in full. Secured creditor rights require separate treatment. A plan generally binds the unsecured shortfall, while binding secured value depends on consent. Acceptance alone does not erase every security or property-recovery right.

A made plan binds the company and relevant creditors within those statutory rules. If the proposal is not accepted, it lapses and restructuring ends. Directors must assess the company’s continuing financial position and available alternatives, including voluntary administration.

Agree proposal-stage practitioner remuneration separately from remuneration for administering the plan. Keep both separate from the creditor distribution and ongoing trading costs. For the fictional proposal, the cash schedule promises $96,000 to the plan, while creditors expect $90,000 after the stated $6,000 remuneration.

The plan practitioner receives and holds money on trust, then pays creditors under the plan. Maintain a contribution register showing each amount due and received. Reconcile it to the trust bank account and record remuneration, distributions and remaining cash. Compare actual trading receipts with the forecast so a funding delay is identified before the next contribution falls due. Ongoing tax reporting and payments continue during implementation.

If a promised contribution is late, reconcile the missed amount and notify the practitioner immediately. Under regulation 5.3B.31, an unrectified contravention lasting 30 business days causes the plan to terminate on the following business day. Undealt-with admissible debts then become due and payable under the termination rules.

Before recording completion, reconcile total required contributions to actual receipts. Match every distribution to its admitted claim and check the plan’s remaining obligations, including obligations of other parties. Once every plan obligation is fulfilled and each admissible debt or claim is dealt with, the company is released from those debts and claims.