Today we are discussing the successful restructuring of a business which was facing an ATO wind up, as well as providing you with some understanding as to the power of the administration process, as well as the ability to legally restructure your company debts by way of a Deed of Company Arrangement.
What is a Voluntary Administration?
The voluntary administration is an appointment of a licenced practitioner over a company with the view of preserving the company status, by protecting its assets and providing time for the directors to put forward a formal proposal to creditors to compromise its debts in a legal document known as a Deed of Company Arrangement.
The process itself is relatively quick. The Administrators have between three to five weeks to take control and investigate the affairs of the company. At the end of this period, the Administrator provides a report with a comparison of what return creditors can expect if the company is liquidated versus the return if creditors are paid out under a Deed of Company Arrangement.
What Are the Practical Implications on The Company and Its Directors?
To commence the process, the Directors pass a resolution to appoint a practitioner. This can be a daunting prospect for most Directors. However, after a few days, Directors usually feel a huge weight off their shoulders, as they’ve been carrying the stress of dealing with financial fires and suppliers, landlords, banks, and employees.
Now they have an opportunity to step back and work with professionals to craft the solution without all that noise and stress.
After making the Resolution, the Directors powers are suspended, and the Administrator takes full control of the company’s trade and assets. During the administration, there is a moratorium against any enforcement actions against the company and its Directors for personal guarantees.
This provides a certainty to the company that it can continue to trade business and provide time for the Directors to propose a Date of Company Arrangement.
A Real-Life Case Study:
We had a recent matter, where the Director of a Company had been told he had no viable options, given the level of debts of the company, and a pending winding up application by the ATO. The Director was also stranded overseas.
The company operated a steel fabrication business in Western Sydney, with four full time and two casual staff, a growing Trade Debtors book, a director’s loan balance that was ballooning with liabilities which included superannuation, employee entitlements, Trade Debtors, and a significant ATO debt of over a million dollars. It was clear the business had a significant shortfall.
After working through our process, I was able to hand back a company with no debts, no legal precedent, ceilings, and a business in a much better position.
How Is this Possible?
The company had received a winding up notice from the ATO which was due to be heard within three weeks. After receiving call after call from Advisors, who requested an upfront payment for meetings before they could solve the company’s problems, the client reached out to O’Brien Palmer.
I met with the Director for an obligation free consultation and was able to quickly establish that the company had cash reserves and Trade Debtors and was now trading moderately profitable. This was following a long period of poor trading and historical debts however, and it was clear the company could not get over those debts.
The Director had no financial means to inject any further funds into the company or to seek a settlement with the ATO.
The Director appointed me as a Voluntary Administrator with a view of proposing a Deed of Company Arrangement.
How Did We Approach This?
- We took control of the company’s trading position.
- We brought in a Manager to assist with the day to day running of the business in the absence of the Director.
- We brought up the company’s statutory lodgements to limit the exposure to potential DPN’s.
- We undertook a formal valuation of company assets and called in historical debtors which had been causing a cash flow restraint on the business.
- We worked with the director to come up with a Deed of Company Arrangement Proposal, which would still provide a greater return than the liquidation scenario.
How Do You Propose a Deed of Company Arrangement When the Director Has No Capacity to Inject Funds?
We put the following proposal to Creditors:
- The company’s historical debtors and cash in Bank will form the foundation of the deed.
- The Director had several work cars in his personal name, which would be transferred to the company and sold to enable release of funds for working capital.
- Related party Creditors would forego receiving a dividend which would provide a greater return to Trade Creditors and the ATO
- Employees agreed to defer their annual leave payments and receive payment in the ordinary course of their employment.
- The director provided an undertaking to the Taxation Office that he would continue to make lodgements on time, and report to the Administrator on a quarterly basis.
If the company would be liquidated, it was clear the Director had no financial capacity to meet potential claims, such as insolvent trading, or to repay loan liability accounts. The company would also have a significant exposure to their Landlord from breaching its lease, which we estimated would be more than $300,000. Related parties would be claiming around $250,000 of unpaid works.
The Deed of Proposal provided for return to all employee entitlements in full and five cent payment to ordinary Creditors.
How Did the Meeting of Creditors Go?
- The ATO took a pragmatic approach to the proposal.
- The Administrator was able to show that the business was now trading profitably.
- Management was installed to assist while the Director was stranded overseas.
- Employee entitlements will be met in full and there’ll be a continuation to now five full time staff and two casuals.
- There are now greater controls in place to ensure ongoing compliance.
Ultimately, even though the return was not significant. The ATO and Trade Creditors supported the proposal with 100% voting favour.
If you have a matter that you would like to discuss with myself or any of my experienced colleagues at O’Brien Palmer, please reach out to us for a no fee/no obligation consultation to discuss your individual case. We are here to help you and get the best possible outcome for all parties involved, and largely remove the burden from your shoulders.
Daniel Frisken
Partner, O’Brien Palmer