When founders learn what voluntary administration actually costs — an external administrator taking the keys, professional fees that routinely run deep into six figures, and a process built for companies much larger than theirs — the arithmetic often collapses on itself: the cost of the rescue exceeds what anyone would recover. Since 1 January 2021, Australian law has offered a cut-down alternative. Small business restructuring (SBR) under Part 5.3B of the Corporations Act 2001 (Cth) lets an eligible insolvent company propose a binding debt compromise to its creditors while the directors stay in control of the business throughout. It is faster and dramatically cheaper than administration — and for a small startup whose value is its team, code and contracts, staying in control can be the difference between a rescue and a fire sale.
The catch is in the word small. Eligibility turns on a $1 million liability cap, and for startups the awkward question is what counts toward it.
How the Process Works
The company’s directors resolve that the company is insolvent or likely to become insolvent and appoint a restructuring practitioner — who must be a registered liquidator — under section 453B. That appointment starts the restructuring, and with it a moratorium that looks a lot like the administration version: court proceedings and creditor enforcement are stayed, secured creditors and lessors are restricted from seizing property (section 453R), personal guarantees given by directors and their relatives cannot be enforced without court leave while the restructuring is on foot (section 453W), and the ipso facto stay prevents counterparties terminating contracts merely because the company has entered restructuring (section 454N).
The critical structural difference from voluntary administration: this is a debtor-in-possession process. The directors keep running the company in the ordinary course of business; the practitioner’s consent is needed only for transactions outside it. Directors also get insolvent trading protection for debts incurred in the ordinary course during the restructuring (section 588GAAB) — no administrator moves into your office or takes over the company you founded. The process is not invisible, though: the company must add “(restructuring practitioner appointed)” after its name on public documents such as invoices and business letters (section 457B), and the appointment shows on ASIC’s register.
From the start of the restructuring, the company has 20 business days to put a restructuring plan to creditors (the practitioner can extend by up to 10 more). The plan is usually simple: a lump sum or contributions over time — funded from trading, a director loan or a shareholder top-up — distributed to unsecured creditors pro rata, in full and final satisfaction of their claims. Plans cannot run longer than three years. Creditors then vote by written statement within 15 business days, and the plan is accepted by a majority in value of the creditors who respond. Related-party creditors — founders who have lent the company money, and their associates — are excluded from voting. There is no creditors’ meeting at all.
If the plan is accepted, it binds all admissible unsecured claims, the company pays it out, and the residual debt is extinguished. If it is rejected, the restructuring simply ends — the company is returned to its pre-appointment position, usually to face administration or liquidation with whatever runway remains.
The Eligibility Gate — and Where Startups Hit It
The core criteria, set by the Act and the Corporations Regulations:
- Total liabilities must not exceed $1 million on the day the practitioner is appointed. The cap counts secured and unsecured debts and admissible claims, but excludes employee entitlements and contingent liabilities.
- Employee entitlements that are due and payable — including superannuation — must be paid, and tax lodgments (returns, BAS) must be up to date, before the plan is proposed. The tax debt doesn’t have to be paid; the paperwork has to be lodged.
- Neither the company nor its directors (including anyone who was a director in the previous 12 months) can have used SBR or simplified liquidation within the preceding seven years.
For startups, the $1 million cap does the sorting. A bootstrapped or pre-seed company with trade creditors, a tax debt and a modest director loan will often fit. A venture-backed startup frequently will not — and the trap is the instrument founders think of as equity: convertible notes are debt. A $500,000 outstanding note likely counts toward the cap, and can sink eligibility on its own. SAFEs sit in murkier territory — they carry no repayment obligation, which is the strongest argument they are not a “liability to pay a debt or claim” at all — but the answer depends on the terms, and it needs analysis before you appoint, not after. Venture debt almost always blows the cap by itself. If your liabilities land above the line, the path runs through voluntary administration and a deed of company arrangement instead.
The employee entitlement and lodgment conditions bite too. A startup that has quietly fallen behind on super — depressingly common in a cash crunch — cannot propose a plan until it has (at least substantially) paid the arrears; the statutory test is substantial compliance, but banking on the shortfall being “insubstantial” is not a strategy. Compliance hygiene, or the money to fix it fast, is effectively an entry ticket.
The ATO Usually Decides
Because related-party lenders can’t vote, the creditor pool in most startup SBRs is trade creditors plus the tax office — and the tax office generally dominates by value. ASIC’s review of the regime from mid-2022 to the end of 2024 (Report 810) found the ATO was a creditor in at least 93% of companies that completed a plan and took about 87% of all dividends paid; the median plan returned creditors around 20 cents in the dollar, and 87% of proposed plans were approved. In practice, an SBR is largely a structured negotiation with the ATO.
That is worth knowing because the ATO’s posture has hardened. It votes commercially — the plan has to beat the likely liquidation return — but it now scrutinises proposals closely, expects a genuine turnaround story supported by improved compliance, and is increasingly reluctant to accept low single-digit returns or proposals that look like debt-dumping while the directors carry on as before. A well-prepared plan with clean lodgments, paid-up super and a credible explanation of how the business survives is a very different proposition from a last-minute Hail Mary.
Why It Beats Administration — When You Fit
The same survival logic that makes a DOCA attractive applies here, at a fraction of the price: the company itself survives, so contracts, IP and licences stay where they are, and there is no administrator’s fire sale. Practitioner costs are typically a fixed fee in the tens of thousands of dollars rather than the six-figure burn of an administration, which matters enormously when total liabilities are under $1 million. Directors stay in control, the business keeps trading under its own name, and ASIC’s data shows most companies that complete a plan are still registered afterwards.
The limits are equally real. SBR compromises the company’s unsecured debts — it does not release personal guarantees once the restructuring ends, cannot cram down a secured lender beyond the unsecured shortfall of its debt, and does nothing about a director penalty notice that has already locked down against you personally. And using it consumes a once-in-seven-years option for both the company and its directors.
The Bottom Line
Part 5.3B is the rare piece of insolvency law actually sized for an early-stage company: a debt compromise measured in weeks, at startup-affordable cost, with the founders still in the driver’s seat. But the window is defined by the $1 million cap — count your convertible notes before you assume you fit — and the process rewards companies that arrive with their tax lodgments and super in order and a plan the ATO can say yes to. If the numbers are tightening, get eligibility assessed early: the worst time to discover you don’t qualify is after the runway is gone.
This article is general information only, not legal advice — whether SBR is available or sensible depends on your company’s liability profile, creditor mix and funding options. Viridian Lawyers advises Australian startups and their directors on distressed situations — safe harbour planning, restructuring, eligibility analysis and negotiating with creditors and investors. If your runway is shorter than your plan, get in touch.
