by Mark Marlow
Readers might recall my article about the Small Business Restructuring Plan (“SBRP”) posted on our website on 23 February 2021.
In that article I emphasised the essential elements required for a successful restructure and how the SBRP might assist Directors to turn around their business. In this article I discuss a restructure via a Voluntary Administration, (“VA”) to demonstrate that the elements of deciding to restructure do not change no matter what restructure method is used ( formal or informal). In this case study it was determined that a VA gave the company the best opportunity to restructure, however the key reasons in deciding to restructure are the same.
This isn’t an article on how VA’s works, except to say an Administrator is a registered Liquidator who is usually (but not always ) appointed by the Director/s. A VA usually runs for about a six-week period with outcomes being that creditors can vote for a proposal put to them usually by the Directors (but not always) and if creditors accept that proposal usually the company is handed back to the Directors and The Administrator of the VA usually becomes the Administrator of what is known as a Deed of Company Arrangement (“DOCA”) and is responsible for ensuring the funds promised are received and distributed to creditors.
Briefly as outlined in my February article the key reasons to restructure are:
- Can the company become profitable?
- Are key Stakeholders willing to support the company?
- Planning to convince yourself of the vision for the road ahead and to convince the company’s stakeholders that the company can become and remain or become viable
- How will you manage Cashflow & how will it be funded?
- The reason you are restructuring.
This case study I will call Brilliant Outcome Pty Ltd (“Brilliant”). It is almost the perfect restructure because of the future prospects the company had for work.
Brilliant’s main business was software development for industrial applications and ongoing maintenance contracts once the software is installed. When we first spoke to them, they were in the process of developing software for a very large North American company, with factories across the USA and Canada. This was by far the largest project ever undertaken by the company and the development took 1 ½ to 2 years. During this time, the company’s only income was from smaller jobs, a level of income that was not sufficient to cover the capital outlay in developing this project over an extended period. As a result debts grew and the company could not service its debts. When we were appointed, the company had creditors of more than $4 million. These included the Australian Taxation office for unpaid superannuation guarantee pay as you go tax deductions from employee’s wages and some GST that remained unpaid, a landlord for a significant amount and an unsecured bank loan and overdraft they had arranged to support the business. There was also a significant amount owing to employees if the company closed. So the company was undercapitalised and could not pay its debts.
So, it was clearly insolvent. The jewel in the crown however was it was on the verge of completing the software development mentioned and with its completion the company could potentially generate sales of around $15 million over the next 12 to 18 months.
However, the company was being attacked from all sides and there was a strong danger it would fail before it had a chance to enjoy the fruits of its achievements, as creditors pursued payment of their debts. If the company failed before the software could be implemented there would be no return to creditors.
Following discussions, the Directors decided that they would place the company into a VA, the reason being to give breathing space to the company so it could roll out this major installation of its software across North America. The VA gave the company protection regarding the premises they leased in that the landlord could not evict them, the leased premises were set up as a special sterile dust free environment that would be difficult and expensive to set up elsewhere and unsecured creditors were parked because of the VA. Cashflow was freed up because the need to immediately pay creditors disappeared. There would be trade on creditors to pay during the VA, this being more manageable as the debts to be incurred were within the cashflow generated.
In discussions with the North American company and the directors of Brilliant, it was determined that the rollout of the software could commence within a month to six weeks with the installation taking 7 to 10 days with payment 30 days after completion. The terms of trade were obtained in writing from the North American Company to evidence to creditors the contract would proceed.
The other fortunate advantage of the timing of the VA was that the major expenditure to develop the software had already been completed. In consultation with the Directors a budget was drafted and sensitised for both the VA period (usually about 6 weeks) and post the VA. The budget initially showed a slight shortfall for the first 3 months, however commitments were made by the directors to inject their own funds into the company to cover wages and rent. They also agreed to defer the repayment of their debts until the effectuation (gathering of funds promised and distribution to creditors) of the proposed DOCA. The bank who had an unsecured loan and overdraft also agreed to transfer any funds deposited to the overdraft post the appointment back to the Administrator to aid cashflow to trade on. Little further debt apart from rent and wages would be due during and post the VA. There would be travelling and accommodation costs to be incurred to cover the supervision of the software implementation also.
With the company now in a position to generate the $15 million over the next 12 months a DOCA was proposed that would see the creditors paid 100 percent of their debt via two dividends over the next twelve months, with interest being offered at commercial rates for the period between the DOCA and the repayment in full of all creditors. The alternatives were for the Administrator to attempt to sell a highly specialised software package to the market and maybe even the North American company, however their desire was for Brilliant as the experts in the software to instal it. A liquidation would not have likely paid a return to creditors.
At a meeting of creditors, they voted to accept the proposal and the DOCA was effectuated as described so it was a successful outcome for all stakeholders.
Few restructures bring about such a great result, but they often see a company meet part of their pre restructure debts and successfully trade into the future with those same creditors often benefiting from supplying a successful company that can pay its debts on time etc.
Looking back at our key essentials for a restructure , we now had a company that was profitable, and because of the success of the software rollout in North America saw it continued to make profits into the future as it varied and sold its software to other users.
Support from the creditors (including the ATO ) and employees of the company was vital and because the directors were able to communicate and demonstrate what the DOCA offered was feasible they got that support. It was more than just saying they could pay 100 percent of monies owing they also sold others on their vision by demonstrating via the roadmap of a plan how they would achieve what they offered. So the reasons for the restructure were made clear to all stakeholders. The directors were able to share their vision and the stakeholders accepted the DOCA because they understood it could work and provide them a return, it wasn’t just the Directors trying to avoid a liquidation.
If you would like to discuss any aspects of either formal or informal restructures and the fundamentals of same, please do not hesitate to contact us on (02) 9251 5222.