The majority of insolvent firms in Australia are small businesses with relatively small debt, which means they have a chance of recovery. Unfortunately, many owners are unaware that they could avoid liquidation by restructuring.
Accountants play a crucial role in guiding these businesses back to health, or helping them navigate the next step.
“Accountants are at the coalface,” says Adrian Hunter, expert in recovery and restructuring and partner at RSM Australia. “They’re often the first port of call when businesses start to make losses.”
Recent years have seen a steep rise in insolvencies due to cost pressures, volatile trading conditions and ATO debt enforcement.
More than 11,000 companies entered administration in 2023-24, according to ASIC’s annual insolvency data, slightly surpassing prior peaks.
Here’s how accountants can assist firms in trouble, and how small business restructuring could be the answer.
Accountants to the rescue
For accountants, early detection of clients who are struggling is key.
Signs can include poor cash flow, tax debts, late super payments, directors paying wages personally, or reliance on second-tier lenders.
Hunter says quarterly catch-ups keep accountants on top of any issues.
“At year-end, accountants should create a 12-month budget with clients and reassess its progress every three months during BAS reviews to address discrepancies promptly. They can offer cost-reduction or profit-improvement advice, help identify alternative financing and analyse expenses.”
Chris Cook, partner at Worrells Solvency and Forensic Accountants, says business owners should view accountants’ advice as insurance.
“Investing in upfront planning can lead to game-changing savings.”
He says catch-ups may involve difficult conversations.
“Directors can’t always see the forest for the trees. They’re fighting and focused on winning work, but they have to trust their accountants who can read the numbers. Sometimes they need to make difficult decisions to save the business.”
The longer an organisation is in trouble, the harder it can be to save, adds Cook.
“If it gets left too late, it may not be possible to avoid liquidation.”
The difference between, liquidation, voluntary administration and SBR
When a firm can’t pay its debts, it’s considered insolvent, with insolvency options including liquidation, voluntary administration and small business restructuring (SBR).
- Liquidation involves winding up the company, selling assets, and distributing proceeds to creditors, ultimately ending the company’s existence.
- Voluntary administration appoints an external administrator to assess and potentially restructure the company, with the aim of rescuing the company or creating better returns for creditors than immediate liquidation.
- SBR, introduced in January 2021, is a cheaper pathway for businesses than voluntary administration. It allows directors to retain control while developing a plan to restructure, settle debts and ultimately keep going with the help of a restructuring practitioner.
SBR is an increasingly popular option for small organisations facing insolvency.
“It’s far less intrusive than voluntary administration or liquidation,” says Hunter.
Cook describes SBR as a “lifeline”, providing a second chance instead of closure.
According to the ASIC, of the 573 companies that began restructuring since January 2021 and had completed their restructuring plans by June 2024, 89.4 per cent remain registered.
Which businesses can opt for SBR?
SBR isn’t always an option. To be eligible, a small business must have:
- Liabilities under $1 million, including all debts
- Up-to-date tax lodgments and employee entitlements, including superannuation
- Directors in agreement without past involvement in restructuring or liquidation within seven years
Directors must also calculate if they can afford SBR, in which they will typically need to pay creditors between $0.15 to $0.30 to the dollar.
“This means a business owner with $800,000 in debt may need $200,000 to save it. If they don’t have that money available, they may be looking at liquidation,” says Hunter.
“Accountants are at the coalface. They’re often the first port of call when businesses start to make losses.”
Adrian Hunter, Partner, RSM Australia
Directors need to prove they can return to profitability, or liquidation may be the best option, adds Cook.
“Otherwise you’re just going to rack up more debt that you can’t pay at the expense of everybody else.”
Cook says business owners need one more thing: the fight to keep driving the business forward.
“The finances must stack up, but they also need to be emotionally invested to continue.”
A three-party solution
To develop an SBR plan, an accountant collaborates with a liquidator.
“We evaluate asset values and claims, then develop an SBR proposal with the director, detailing what they can pay and over what timeframe,” says Cook.
“After four weeks, we present both scenarios to creditors — liquidation versus SBR — and provide a recommendation, which is usually the one with the higher return. Creditors then vote.”
Cook says while liquidators have the SBR expertise, accountants play a key role.
“Directors may find direct dealings with liquidators overwhelming, so having their trusted accountant guide them is reassuring. Accountants also ensure the accuracy of cash flows and financial projections, which helps assure creditors that the company’s projections are realistic.”
A strong partnership between the liquidator, accountant and business owner gives an SBR “the best possible chance of a good outcome”, adds Cook.
“And with a successful outcome, they also get to keep their client for the future.”
Hear more from Chris Cook with the IPA’s Small Business Restructuring, Voluntary Administrations & Practical Examples on-demand webinar.
