When a business is experiencing financial distress, it’s easy to feel overwhelmed by the uncertainty and pressure to “fix it fast.” However, one of the most effective tools available to small business owners is the Small Business Restructuring (SBR) process, a simplified and cost-effective “creative way to reorganise and recover from financial challenges.
But what happens when personal liability comes into play?
Let’s unpack how SBR works, and how it affects directors who may also be personally exposed through things like Director Penalty Notices (DPNs) and personal guarantees.
What is Small Business Restructuring (SBR)?
Small Business Restructuring allows eligible businesses to restructure their debts while remaining in control of their operations. It’s designed to be more accessible than traditional insolvency processes, particularly for small business owners who need a pathway to financial stability without shutting up shop.
Working closely with your bookkeeper is essential here. They’re often the first to spot early warning signs of financial trouble and can guide you toward the right support before the situation escalates.
When Directors Face Personal Liability
In some cases, directors can be personally liable for company debts, especially when the ATO issues a Director Penalty Notice (DPN). These notices are increasingly used by the ATO to recover unpaid amounts for PAYG, GST, superannuation and other taxes.
There are two types of DPNs:
- Non-lockdown DPNs: These allow directors to avoid personal liability if action (such as entering an SBR) is taken within 21 days.
- Lockdown DPNs: These make directors automatically and personally liable for the debt, regardless of what action is taken afterward.
If your business receives a non-lockdown DPN, acting quickly is key. Entering into an SBR within the 21-day window can help shield directors from personal liability and result in a compromise on the debt owed. However, lockdown DPNs offer far fewer protections, and any unpaid amounts can become the director’s personal responsibility.
What About Personal Guarantees?
It’s common for directors to provide personal guarantees when financing equipment or entering into lease and loan agreements. These guarantees often remain in the background until a problem arises.
During an SBR, creditors cannot enforce personal guarantees, giving businesses breathing room. However, once the restructuring process is complete, creditors will take action on those guarantees, particularly if the business has fallen into arrears.
The key here is preparation and professional advice. If you’re aware of personal guarantees attached to your business finances, factor them into your strategy early. Ideally, before they’re enforced.
How to Reduce the Risk of Personal Exposure
While SBRs don’t eliminate personal liability entirely, they do provide a vital opportunity to restructure and avoid the worst-case scenario. The earlier you act, the more options you have to minimise your exposure.
Here’s what we recommend:
- Stay on top of your numbers – Your bookkeeper can flag risks before they become serious issues.
- Seek professional advice early – Especially if you receive a DPN or are struggling to meet repayment terms.
- Understand your obligations – Know whether personal guarantees are in place and how they could impact you.
Final Thought
An SBR can give small business owners the breathing room they need to recover, restructure and refocus. But the success of this process depends on early action, clear financial records, and working with a knowledgeable team, including your bookkeeper.
If you’re worried about personal exposure or need guidance on the restructuring process, reach out to your trusted advisors. You don’t have to navigate it alone.
(Article sourced from the Institute of Certified Bookkeepers)
