A small business group specialising in the repair, maintenance and installation of automatic sprinkler and other fire protection systems for commercial premises got into financial difficulty after the first two years of trading.
We were called in as voluntary administrators (VAs), taking control of their business and cash flow for two months.
Voluntary administration is when an insolvent company places themselves in the hands of an independent expert who can assess all options and generate the best outcome for both business and client.
This is the story of how, for this small business group, voluntary administration was the correct option to take…
Background to the difficulties in the business group
The group faced financial difficulty primarily because of:
- Aggressive unstructured growth from $0 to $2m in two years, without the right controls or team in place to manage the cash flow effectively
- The directors receiving poor business advice from the previous company accountant and external bookkeepers (Note: they also acknowledged that they should have been more involved in the finances of the business).
The key challenges faced
The above situation created a number of challenges for the small business group, resulting in the voluntary administration process being started. These challenges included:
- Approximately $1.4m worth of ATO and OSR debt due to trading losses and failure to remit required statutory payments including GST, PAYG and payroll tax (the ATO had refused a payment arrangement and was moving forward with a tougher stance on debt collection);
- Difficulties in reconciling the true financial position and performance of the group;
- Unsecured debt position too high to trade out of the situation over the short to medium term; and
- No access to debt or equity to complement an informal turnaround plan.
The proposed solution
As voluntary administrators we proposed the following solution:
- The implementation of a holistic business turnaround strategy alongside the newly appointed company accountant;
- An independent review into the business’s projected trade profitability and cash flow to verify viability; and
- Formulation of a Deed of Company Arrangement (DOCA) between the company and creditors to satisfy the businesses existing debts.
The following were the terms of the proposed solution:
- All creditor claims to be pooled and dealt with from a single DOCA fund;
- Related parties not to participate in the DOCA;
- Control of the company to revert to the directors upon execution of the DOCA; and
- DOCA contributions via an upfront payment on execution of the DOCA and weekly instalments for a period of two years to be paid from continued trading.
Benefits of accepting the proposal
Acceptance of this solution provided the following benefits:
- Greater returns for creditors – see projection comparison tables below;
- Monthly monitoring and compliance reporting assistance to ensure continued viability;
- Maintenance of all further tax and employee obligations;
- Avoidance of complexities associated with the group structure;
- Avoidance of a court application to appoint a receiver over the trust business assets;
- Estimated intra-group and related party claims removed from the creditor pool; and
- Employee job retention avoiding the crystallisation of employee entitlements and redundancies.
Projected returns to creditors under liquidation
|Company 1||Company 2||Company 3|
|Winding up||Liquidation Low ($)||Liquidation High ($)||Liquidation Low ($)||Liquidation High ($)||Liquidation Low ($)||Liquidation High ($)|
|Estimated dividend to priority creditors||N/A||N/A||Nil||Nil||N/A||N/A|
|Estimated Return to unsecured creditors (c/$)||5.78%||10.58%||Nil||Nil||53.28%||53.70%|
|% of total group debt||88%||7%||5%|
|Timing of return (from date of liquidation)||12-18 months||N/A||2-4 months|
Projected returns to creditors under DOCA
|Pooled DOCA||DOCA ($)|
|Dividend to priority creditors (c/$)||100%|
|Return to unsecured creditors (c/$)||19.975%|
|Timing of return (from date of execution of DOCA)||First Interim dividend was paid 4 months. Further final dividend was estimated to be paid after 26 months. However the Group was able to secure finance and paid the DOCA out in full within 12 months.|
A successful outcome…
We completed a successful small business voluntary administration turnaround alongside the new accountant and directors.
The group accepted and completed the DOCA and is continuing to trade profitably – a great result for all stakeholders involved.