Vol 21 (2024) - Issue 1

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Small Business Restructuring in Australia

Synopsis
The economic recovery from the COVID-19 pandemic has caused many governments around the world to focus on supporting small businesses to deal with their financial problems through the introduction of new bespoke restructuring tools. While the pandemic may have provided the catalyst for such change, the need for targeted and effective small business insolvency and restructuring tools has been widely recognised.
The World Bank's MSME insolvency report in 2017 noted the particular circumstances that micro, small and medium enterprises face when seeking to restructure and recommended governments consider specific small business restructuring tools that would better meet the particular needs of MSMEs. These enterprises find it more difficult to raise finance than large businesses, maintain smaller asset bases and have less sophisticated accounting and information systems.
MSMEs will usually have less runway for a restructuring effort because their starting asset positions are low, and they have little of a cash buffer.
MSMEs often involve an overlap between the business' finances with the personal finances of their owners and managers who may be regular lenders to the company and may be required to give personal guarantees over the company's debts in order to obtain external finance or even trade credit. This means that the strict legal separation between the company and its shareholders and directors is blurrier than for larger companies in financial distress. While directors and executives of large companies are likely to be professional managers who may or may not have equity in the company, directors of MSMEs that are incorporated are likely to also be major shareholders. The dynamics involved with MSMEs can mean that traditional restructuring tools are too expensive, too complicated and/or take too long.
Many jurisdictions have been reforming their restructuring laws to facilitate MSME restructuring by making their procedures streamlined, simplified and more flexible than full-service restructuring tools available to all companies. Australia introduced its first debtor-in-possession corporate restructuring law on 1 January 2021 by amending the Corporations Act 2001 (Cth) to add a new Part 5.3B (restructuring), which is commonly called small business restructuring ('SBR') because it is limited to companies that have no more than $1 million in liabilities.