Presented by Jones Partners

The COVID-19 pandemic has rocked the global economy to its core. Supply chain issues and labour shortages brought global trade to a relative standstill. Two years later, Australia emerged from its isolation, only to be presented with new, unprecedented challenges.  The pandemic was a period of lucrative fiscal support from government, tax relief and heavy domestic spending which has created the current, uncertain situation. In addition, aggressive insolvency reform has significantly repressed the usual numbers of both corporate and non-corporate insolvencies. The situation appears to be changing rapidly, as insolvency numbers are beginning to climb. This is particularly true of voluntary administrations.

Fortunately, the ATO, Australia’s most ubiquitous creditor, has taken a practical, if not supportive approach when dealing with companies and individuals making a genuine attempt to resolve their situation. So, the new focus of the ATO? To maximize their genuine commercial interest and protect viable businesses from collapse.

When the ATO is considering a proposal, it is less concerned for the size of the debt, and more concerned with the core viability of the business. In other words, entities with mounted debt must prove they are a commercially viable enterprise. The causes of financial difficulty (whether they are due to understaffing, supply issues, poor management, or low sales) must be accurately identified as the cause of the of debt.  Only once these issues are effectively and objectively appraised can a business stand a reasonable chance of turnaround.

After the reasons for difficulty have been identified, the business must show it has resolved the issue. For example, the ineffective staff have been dismissed, sales are back on target and costs have been contained.

Working capital is another vital ingredient for this recipe for success. Regardless of the size of accrued debt, access to working capital is critical in allowing a business to develop a commercial proposal to present to creditors.

When presenting a restructuring plan to creditors, business owners must focus on a believable and achievable proposal. It must be developed through an economic, social and commercial rationale, with thoughtful consideration for current market conditions and the needs of society. The ATO is also a government body and may consider broader societal issues. However, like any other creditor, the crux of the matter rests on which approach will achieve an optimal financial return. Fortunately for business owners, ASIC statistics show overwhelming preference for voluntary administrations and Deeds of Company Arrangement, over the more aggressive liquidation or court appointment procedures.

The final considerations for those seeking to put forward a deed proposal is compliance regarding statutory debt. To receive your lifeline, all BAS lodgements, insurance, payroll tax and other statutory compliance obligations must be up to date. A failure to comply may cast doubt about how your management is meeting its broader social obligations referred to above. Without these lodgements, the ATO will also be unable to accurately quantify the debt, and less willing to choose a path of cooperation through a restructuring or Deed of Company Arrangement. The ability to accurately quantify the debt of a business is crucial in giving it the best chance of survival.

Call our specialists on +61 2 9251 5222  if you’re considering putting forward a deed proposal to creditors.