Quick summary
A related-party creditor is someone connected to the company — like a director, family member, or associated entity — who’s also owed money. Under regulation 5.3B.01, they’re “excluded” from voting on the restructuring plan if that status existed when restructuring began, though they’re still generally paid alongside other creditors.
On this page
- Introduction
- What Makes a Creditor “Related”
- Related Creditors vs Excluded Creditors
- Voting Rights
- Do Related-Party Debts Still Get Paid?
- Disclosure Obligations
- Why the ATO and Other Creditors Scrutinise Related-Party Debt
- Common Issues
- Next Steps
- FAQs
Introduction
Many small businesses owe money to people or entities connected to the company itself, most commonly a director loan account, a debt owed to a family trust, or a balance owed to an associated company within a broader group structure. In a restructuring plan, these are referred to as related-party, or “related,” creditors.
Related-party creditors are treated differently from ordinary, arm’s-length creditors at several points in the Small Business Restructuring (SBR) process under Part 5.3B of the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 (Cth). Getting this classification wrong, in either direction, can affect whether a restructuring plan is validly accepted at all.
This guide sets out exactly how a related creditor is defined, how that status affects voting and disclosure, and why arm’s-length creditors, including the ATO, pay close attention to related-party debt when assessing a proposed plan.
A related creditor is simply someone who is both a creditor of the company and a “related entity” of it — a person or business connected to the company in a specific, defined way (regulation 5.3B.01, Corporations Regulations 2001).
That second part, “related entity,” comes from a separate, broader definition under section 9 of the Corporations Act 2001.
The Section 9 Definition
Section 9 sets out an exhaustive list of who counts as a related entity of a company. It includes:
- a promoter of the company, or a relative of that promoter or their spouse
- a director or member of the company (or a related body corporate), or a relative of that person or their spouse
- a body corporate related to the company
- a beneficiary under a trust of which the company is or has been trustee, or a relative of that beneficiary or their spouse
- a body corporate sharing a common director with the company
- a trustee of a trust under which a person who is already a related entity is a beneficiary
Because this list is exhaustive, a creditor either fits one of these categories or it doesn’t — there’s no broader “commercially connected” category to fall back on.
Related status isn’t limited to obvious, direct connections.
A company that shares a director with the restructuring company is related. So is a company owned or directed by a relative of that director, depending on which part of the definition applies. A creditor with no obvious connection on the surface can still meet the definition once you trace through the shareholding, directorship, and family relationships underneath.
This means you can’t just list the “obvious” related parties — the directors and their immediate family — and call it done. Each creditor’s ownership and directorship structure needs to be checked individually against the section 9 categories, since related status can be indirect and not apparent from a creditor’s name or how they trade with the company.
Being a “related creditor” is just a factual label — it identifies the connection. What actually triggers the practical consequences described later in this guide is a separate, more specific label: being an “excluded creditor” (also defined under regulation 5.3B.01).
Three Categories of Excluded Creditor
A creditor is an excluded creditor if they:
- are the restructuring practitioner for the company; or
- were a related creditor of the company at the time the restructuring began; or
- were a related entity of the restructuring practitioner when they became an affected creditor
(regulation 5.3B.01, Corporations Regulations 2001)
The second category is the one most small businesses need to focus on: if a creditor was already related to the company when the practitioner was appointed, they’re an excluded creditor for the rest of that restructuring.
A creditor who only became related after the restructuring began — say, through a transaction entered into during the process — doesn’t automatically fall into this category, since the test is applied at the point the restructuring began, not afterward.
Voting Rights
A related-party creditor’s debt doesn’t count when working out whether a restructuring plan is accepted. Specifically, an excluded creditor’s claim is left out of the majority-in-value calculation used to decide the vote (regulation 5.3B.25(c), Corporations Regulations 2001).
In practice, this means a director can’t rely on a related entity’s support to reach the required majority, and a related entity’s objection can’t be used to block the plan either. The vote comes down to the company’s arm’s-length creditors.
Yes, generally — being excluded from the vote doesn’t mean being excluded from the payout. The restructuring plan’s standard terms generally require all admissible debts and claims to rank equally, mirroring the pari passu principle used in a winding up (regulation 5.3B.27(1), Corporations Regulations 2001).
So, a genuine director loan or related-entity debt that qualifies as an admissible debt is typically paid on the same proportional basis as everyone else’s, even though that creditor had no say in whether the plan was accepted. Bound by the plan but with no vote on it, yet still sharing equally in the payout — this isn’t an oversight. It’s a deliberate part of how the excluded creditor mechanism is designed to work.
Disclosure Obligations
Because related-party status carries these specific consequences, accurately identifying and disclosing related creditors is a documented part of the restructuring plan process — not an informal side conversation between the director and the practitioner.
Restructuring Proposal Statement
The restructuring proposal statement, and the schedule of debts and claims it contains, needs to correctly identify which creditors are related to the company. This lets the practitioner and the arm’s-length creditors reviewing the plan properly apply the excluded creditor rules described above.
If a related creditor gets misclassified as an ordinary one, whether by oversight or otherwise, it puts the validity of the acceptance vote at risk if the true position comes to light later.
Practitioner’s Declaration
Separately from the company’s related creditors, the practitioner also has to declare their own relevant relationships — confirming whether they’re independent of the company and its related entities (section 453D, Corporations Act 2001).
This is a distinct requirement, focused on the practitioner’s own independence rather than the company’s related-party creditor list, but it comes from the same underlying idea: related-party involvement in the process should be visible to arm’s-length creditors.
Arm’s-length creditors, and the ATO in particular, routinely scrutinise related-party debt because it directly affects how much of the available return is shared among genuine third-party creditors.
Non-repayment of director or related-entity loan accounts is a commonly cited reason the ATO declines to support a restructuring plan. A related-party debt on the schedule of claims dilutes the pool shared pro rata among all creditors, including arm’s-length ones, even though the related creditor never got a vote.
If the ATO or another significant creditor thinks a related-party debt looks inflated, non-genuine, or structured to disadvantage arm’s-length creditors, that’s often enough on its own to withhold support, separate from the plan’s other terms.
Common Issues
Several recurring issues come up in practice, and most are avoidable with an accurate creditor review before the practitioner is appointed:
- Assessing relationships by trading name: A creditor’s relationship to the company is sometimes assessed only by its trading name or the person the business deals with day to day, rather than by tracing the actual shareholding and directorship structure section 9 requires.
- Assuming related debt is automatically excluded from payment: A related-entity debt is sometimes treated as automatically cut out of the plan’s distribution entirely, when the standard terms generally still require it to rank equally once it’s a genuine admissible debt.
- Repaying a loan to avoid disclosure: A director sometimes assumes repaying a related-party loan shortly before appointing a practitioner removes the need to disclose the earlier debt — when in fact that repayment can raise its own voidable transaction concerns under the Corporations Act 2001, separate from the SBR process itself.
Sorting these out before the restructuring proposal statement is finalised avoids disputes with arm’s-length creditors, and avoids the bigger risk of the acceptance vote being challenged later.
Next Steps
Accurately identifying every related-party creditor, and correctly applying the excluded creditor rules to each one, is a technical exercise — but it directly affects whether a restructuring plan is validly accepted, and how it’s perceived by the arm’s-length creditors reviewing it.
At Halo Advisory, we work for you — the director. Financial expert Greg Bartels offers a no-obligation consultation to assess your position and help you understand the best way forward. Get in touch today.
FAQs
What is a related-party creditor in SBR?
A related-party, or “related,” creditor is a person or entity that meets the definition of “related entity” under section 9 of the Corporations Act 2001 and is also a creditor of the company, as defined in regulation 5.3B.01 of the Corporations Regulations 2001.
Can a related-party creditor vote on the restructuring plan?
No, if they held related status when the restructuring began. Under regulation 5.3B.25(c) of the Corporations Regulations 2001, an excluded creditor’s claim is disregarded when calculating the majority in value needed to accept the plan.
Does a related-party creditor still get paid under the plan?
Generally, yes. The restructuring plan standard terms under regulation 5.3B.27(1) require admissible debts and claims to rank equally, so a genuine related-party debt is typically paid pro rata alongside arm’s-length creditors, despite having no vote on the plan.
Is a director’s loan to their own company a related-party debt?
Yes. A director is a related entity of the company under section 9 of the Corporations Act 2001, so a genuine loan from a director to the company is a related creditor claim and, if it existed when restructuring began, an excluded creditor claim.
Can a family member’s company be a related-party creditor?
Potentially, yes. Section 9 extends to relatives of directors and their spouses, and to related bodies corporate, including companies connected through shared directorships or shareholding chains, even where the connection is not obvious from the creditor’s trading name.
Why does the ATO scrutinise related-party debt in a restructuring plan?
Related-party debt included in the schedule of claims dilutes the pro rata return shared among all admissible creditors, including arm’s-length ones. Non-repayment of director or related-entity loans is a commonly cited reason the ATO withholds support for a plan.
What happens if a related creditor is misclassified as unrelated?
The acceptance vote may be based on an incorrect majority-in-value calculation, since an excluded creditor’s claim should have been disregarded. This can expose the plan to challenge once the correct related-party status is identified.
