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Small business restructuring, in Part 5.3B of the Corporations Act, lets an eligible company propose a plan to pay creditors a proportion of what they are owed, while the directors stay in control. The ATO is the major creditor in most plans and has supported a large share of them. The plan has to be funded, and that is where property equity often comes in.
How the process runs
A restructuring practitioner is appointed. The company has 20 business days to develop a plan. Creditors then have 15 business days to vote, and the plan is accepted if a majority in value of those voting agree. Accepted plans bind all unsecured creditors, and the balance of their debts is released once the plan is completed.
Where the money comes from
Plans are funded from future trading, from a lump sum, or both. A lump sum from outside the company makes the offer more attractive and completes the plan quickly. Typical sources are a director’s savings, family, the sale of an asset, or a loan secured against property held outside the company: the director’s home or investment property, or property in a family trust.
The borrower is that outside person or entity. They advance the money to the company as a loan or capital contribution, and the company pays it to the practitioner for distribution. The purpose is business, so the loan is business-purpose lending, but the security and the risk sit with whoever owns the property. See using your home as security for a business loan.
What a lender will ask
- The practitioner’s details and the draft or accepted plan.
- The contribution amount and when it is due.
- The exit for the loan. This is the hard part. The restructured company’s improved cash flow, a later refinance, or a sale of the property or another asset.
- Confirmation that the person giving security has had independent legal and financial advice.
A second mortgage over 12 to 24 months usually suits better than a short caveat loan, because the exit takes time.
Think hard before securing personal property
The point of a limited liability company is that business debts stay with the business. Borrowing against a home to fund a plan reverses that. It can be entirely rational: it saves a viable business, protects a director from a director penalty notice or personal guarantees that would crystallise on liquidation, and preserves employment. It can also be throwing good money after bad. The restructuring practitioner and your accountant are the people to test that with. Related funding is covered on the restructure and turnaround page.
We match you with a funder and email you their introduction. Reply to it and they’ll be in touch.
Get matched with a funderFAQ
Who is eligible for small business restructuring?
Broadly, a company with total liabilities under $1 million, tax lodgements up to date and employee entitlements paid, that has not used the process in the past seven years. A restructuring practitioner confirms eligibility.
Can the company itself take the loan?
Usually not during the process without the practitioner's consent, because its property cannot be dealt with outside the ordinary course of business. The funds typically come from a third party.
Do creditors prefer a lump sum?
Generally yes. Certainty of payment now is worth more than a larger sum promised over two or three years, so lump sum plans are accepted more readily.