The Small Business Restructuring Process, Step by Step

This is the stage most directors skip and most failed restructurings can be traced back to. Nothing here is on a clock, which is exactly why it drifts.

Three things have to be true. Tax lodgements must be substantially up to date — lodged, not necessarily paid (s 453C(1)(b)). The employee entitlements that are due and payable must be paid, superannuation and unpaid superannuation guarantee charge included (s 453C(1)(a); s 596AA). And total liabilities must not exceed $1 million on the day the restructuring begins (reg 5.3B.03), which requires an actual schedule of every liability including ATO interest and penalties, unpaid super, director and related-party loans, equipment finance and leases, and contingent liabilities such as guarantees the company has given.

Alongside that, you need to be able to show the business earns money without the legacy debt, and to model what it can afford to pay under a plan. A proposal that promises more than trading can deliver does not save a company — it converts a debt problem into a failed plan and then a liquidation, several months later.

The first two bite at the plan rather than at the appointment. A company with unpaid entitlements or overdue lodgements can still appoint, and use the 20 business days that follow to clear them — on day one the directors need only be satisfied that the company will have met them by the time a plan goes to creditors. What has to be true on day one is the liability threshold, the seven-year bar, and a board resolution that the company is insolvent or likely to become insolvent.

Realistically this stage takes weeks rather than days if lodgements are behind, and it is the only part you can start today without engaging anyone.

The directors resolve to appoint a restructuring practitioner, who must be a registered liquidator, or a registered liquidator (small business restructuring) under the restricted sub-category the 2021 reforms created (s 456B; reg 5.3B.61). The appointment is made under s 453B and takes effect on that resolution, and it is the moment the statutory clock starts.

Several things happen at once. The company must lodge Form 505 and Form 5604 with ASIC within one business day of the appointment (reg 5.3B.08), and creditors must be told. A moratorium comes into effect: unsecured creditors generally cannot start or continue recovery action against the company while the restructuring is on foot, and a creditor is stopped from enforcing a guarantee of a company debt against a director, their spouse or a relative (s 454J).

What does not change: you keep running the company, you keep signing the cheques, and you keep the obligations that come with that.

You and the practitioner prepare two documents: the restructuring plan itself, and a declaration by the practitioner, who must make reasonable inquiries and take reasonable steps to verify the company’s affairs, then state whether the eligibility criteria are met and whether the company is likely to be able to discharge its obligations under the plan (reg 5.3B.18).

The plan sets out what creditors get: the total pool, how it is funded, over what period, and how it is divided. It is a commercial document as much as a legal one. Creditors are being asked to accept less than they are owed, so the comparison in their minds is not with being paid in full — it is with what they would receive if the company were liquidated instead. That comparison is what the plan has to win.

The plan must be proposed within 20 business days of the appointment (reg 5.3B.17(1)). The practitioner can extend that by up to 10 further business days on reasonable grounds (reg 5.3B.17(2)). It is short. It is workable only because the substantive preparation happened before the appointment.

The practitioner also has to form a view and state it. They are not simply a conduit for your proposal — they have to tell creditors whether the plan is one they should accept.

Creditors have 15 business days from when notice of the proposed plan is given (reg 5.3B.21(1)(b)). The threshold is a simple majority in value — more than 50 per cent of the dollar value of the admitted claims that vote (reg 5.3B.25(1)). There is no headcount test and no 75 per cent special resolution, so it is the size of the debts, not the number of creditors, that decides it. In most small companies this means the ATO’s position is decisive.

Related creditors cannot vote at all. They are excluded creditors (reg 5.3B.01) and are disqualified from voting on the plan (reg 5.3B.25(2)). That matters where directors or associated entities have lent money into the company: those loans still count toward the liability threshold, but they buy no influence over the outcome.

An accepted plan binds all admitted unsecured creditors, including those who voted no and those who did not vote at all (s 455B). A rejected plan ends the restructuring. The company is not automatically wound up at that point, but the debts are unchanged and the creditors have just declined to compromise them.

With a plan accepted, the company trades on and makes the payments it promised. The practitioner administers the plan: receiving the funds, admitting and adjudicating claims, and distributing to creditors.

A plan can run for at most three years from the day it is made (reg 5.3B.27(1)(b)). Within that, duration is a commercial choice, and the practical constraint is what trading can actually fund. Missing payments matters: a plan can be terminated for default, and termination puts the company back where it started, minus the time and the money spent.

Directors keep their management powers throughout (s 453L), the ordinary duties continue, and debts incurred in the ordinary course are the company's. A debt incurred outside the ordinary course without the practitioner's consent, or incurred while insolvent after the plan ends, can still attract s 588G — this is not a licence to trade without regard to solvency.

When the company has made every payment the plan required, the plan is complete. The compromised balance of the admitted unsecured debts is extinguished, and the company continues as a going concern with the legacy debt gone.

If the plan fails — through default, or because it is terminated — the compromise is extinguished and the debts revive to the extent they were not paid (reg 5.3B.31(2)). In practice most terminated plans are followed by liquidation.

Two things survive completion in every case: secured creditors’ rights over their security, and personal guarantees. The moratorium on enforcing a guarantee against a director, spouse or relative applies during the restructuring, not after it.

1. 1.Lodgements that were never brought current. The most common reason a company cannot appoint at all.
2. 2.A liability schedule that grows after appointment. A forgotten related-party loan or an unquantified guarantee can push the company over the threshold once it is counted properly.
3. 3.A plan the business cannot fund. Optimistic forecasting is the leading cause of terminated plans.
4. 4.Losing the ATO’s vote. Where the ATO is the largest creditor, its view of the plan is close to decisive, and it assesses proposals against its published approach to debt relief and small business restructuring (PS LA 2020/1).
5. 5.Arriving too late. Once a winding-up application is filed, directors cannot appoint a restructuring practitioner without the leave of the court (s 453B(2)).

The stage that decides the outcome is the one before the clock starts. If lodgements are behind, entitlements are unpaid, or you cannot yet put a number on total liabilities, that is the work in front of you — and it is work you can begin now, without committing to anything. The statutory stages are short and largely administrative once the preparation is done properly.