The Albany Hotel is one of potentially many pubs that is in business today after legally wiping most of its debt, courtesy of Australia’s new-ish Small Business Restructuring (SBR) laws.
Turning 60, Neville Walton went through with a long-held dream to buy and operate a pub in his pre-retirement, taking over the business at the Albany in 2017.
The Hotel is thought to be the oldest in Western Australia, serving locals for 200 years, and for a while business was good, until the pandemic. As patronage dwindled, running and supply costs ballooned, and burdens such as paying GST were deprioritised.
Before long he says debt to the ATO “blew out of proportion” and Walton ended up on a payment plan to service a $350K obligation to the tax man. But this too became more difficult and caused him a lot of stress.
In desperation, Walton considered bankruptcy and using his own superannuation to repay the money until he learned of a relatively new provision under the Corporations Act that allows small businesses – instead of liquidating – to request creditors reduce or forgive debts, as the business continues to trade.
It provides a system akin to the USA’s Chapter 13 provisions, as an alternative to liquidation, where the company is wound up and creditors are paid from whatever can be salvaged from a fire sale of the business’ assets. This process can leave suppliers and creditors with little or nothing.
SBRs stipulate that the debt must be less than $1 million, and cannot be monies owed to staff, such as wages or superannuation, and a business will be disqualified if any of its directors have taken part in any restructure or liquidation in the past seven years.
Creditors must vote for an SBR before it will go ahead, with voting based on the debt, meaning the largest debt calls the shots.
Albany Hotel’s SBR submission, through specialist firm Business Reset, aimed to alleviate the tax bill and allow Walton to continue slinging beers.
The proposal strove to show the Hotel now had limited concerns for its future viability, and detailed evidence of its return to profitability, having made decisions including reducing staff hours and axing Foxtel.
It was accepted by the ATO, and Walton is now back on monthly instalments, repaying $76K, down from $350K, which amounts to just 22 cents in the dollar. The original debt will be reinstated if the Albany defaults.
According to ASIC data, the number of SBRs submitted in the last financial year has soared to around 3K. However, the number that are still registered after a year is close to 93 per cent. The Commission suggests the scheme is basically a ‘reset’ for suitable companies.
The increase in the number of SBRs is attributed to both the newness of the scheme and the tough trading conditions being experienced by a lot of small businesses.
Hospitality, which has always experienced insolvency rates higher than most sectors, seeing nearly 10 per cent of food and beverage operations wind up last year, is particularly stressed, says data out of CreditorWatch, which suggests any industry exposed to consumer spending is “still doing it really tough”.
Insolvencies in hospitality are at historic highs, up nearly three per cent, as operators face the ongoing economic pressures of costs and interest rates.
Construction is the next most volatile, but while recording half the rate of hospitality the sector is the most often involved in the lodgement of SBRs. Between them these industries make up 50 per cent of all SBRs.
A typical SBR is asking for relief of roughly 80 per cent of an average of $200-400K debt – most commonly involving the tax department – and in the region of 80 per cent are accepted. A report by ASIC found around $90 million paid to the ATO from restructures, implying debt forgiveness of potentially around $700 million.
ASIC records show the ATO was involved in 93 per cent of all SBRs lodged and a spokesperson says the department will usually support an SBR if it’s “commercially appropriate” and it is appropriate given the company and its directors’ history of compliance.
It’s speculated that a need for the leniency stems from the ATO’s current so-called “clawback” initiative, attempting to recoup business debt accumulated during the pandemic.
SBRs were instigated in 2021 by the Morrison government, aiming to help family businesses impacted by the pandemic.
ASIC reports that to date there has been no evidence the SBR laws are facilitating any dodgy business practices.
After fighting for his survival, Walton believes anyone in his position would “jump at that opportunity”.
