Business Reconstruction Post Covid-19

Insolvency Practitioners like us here at Robson Cotter, inevitably, do many business closures and liquidations which amount to “burying the dead”. It is not glamourous or particularly satisfying work. If there is no viable business to be rescued or turned around, no prospects of saving jobs, or selling an enterprise as a going concern to someone with fresh ideas and capital, then the Liquidators role is invariably to collect in and sell off what assets are left and distribute anything that is left over (usually not much) to the creditors.

However, the current Covid-19 crisis and resultant economic downturn may well provide the perfect opportunity for proactive advisors to use certain parts of the Insolvency Regime as they were intended - to rescue and restructure struggling client businesses. The Voluntary Administration (or ‘VA’) process particularly was designed for this purpose! Part 5.3A of the Act (which contains the VA & DOCA provisions), states in its introduction “The object of this part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

• Maximises the chances of the Company, or as much as possible of its business, continuing in existence; or
• If it is not possible for the company or its business to continue in existence – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company” (section 435A Corporations Act)

The Bankruptcy Act has a very similar regime under Part X, called a Personal Insolvency Agreement (or ‘PIA’), which is designed for individuals, including sole traders, to similarly do properly sanctioned “deals” with their creditors to avoid the worst case scenario - bankruptcy.

The use of these two insolvency regimes has fallen into some decline over recent years for a variety of reasons. However, the current crisis is ideal for them to be dusted off and utilised for the purpose they were intended - a business that was otherwise viable pre Covid-19, can be rescued via a VA and DOCA, or PIA.

A VA and Deed of Company Arrangement (or ‘DOCA’) is essentially a mechanism for doing a binding deal with a company’s creditors and is the ultimate flexible restructuring tool. A DOCA may involve creditors taking a “haircut” and agreeing to take cents in the dollar as opposed to full payment, or it may be accepting delayed repayment terms, or could be a little of both. It may involve a one-off contribution of personal funds from directors, shareholders or new equity participants, or possibly contributions from future trading of the business for the next few years.

It is to be expected there will be some degree of sympathy and enthusiasm from creditors to see an otherwise viable business survive in the current circumstances. Where a business has a good story to tell, the support may be surprising. Strong historical relationships, good credit and payment history (pre-covid) and a good plan for the turn-around into the future, will all lend themselves to situations where creditors may be willing and eager to provide support. By sharing in the short term pain, the creditors (comprising employees, suppliers, landlords, banks, and even the tax man) all enjoy the benefit of an ongoing future trading relationship and potential for future profits.

The VA and DOCA process does also provide a good framework and protection for genuine restructure activity to occur. That marginal trading location may now be closed. Surplus staff may (regrettably) be culled. New funding sources or refinance may be arranged and invested.  Unprofitable contracts or onerous leases can be terminated. Surplus equipment or obsolete stock can be cleared out and converted to cash in the short term. In short, fat can be trimmed and a lean, mean, profit making machine, can be returned for the future.

This benefits all parties, certainly it maximises ongoing employment opportunities for staff, and maintains supplier and financier customer relationships, it returns revenues to the good old ATO by way of future GST and income tax receipts, and vitally, it secures the business's future viability and hence benefits the owners as well.

So, if the above sounds like a scenario that may potentially suit your circumstances, and you would like to hear more, call us. Initial chats and consultations with us are always at no cost and with no obligation whatsoever. We will always be happy to sit with you (and your accountant or other advisors if you wish), to confidentially discuss available options and a process that may help to find your way out of the current difficulties.

As licenced Insolvency Practitioners (via Government regulators ASIC and AFSA), and as members of professional accounting bodies (CAANZ & CPA Australia) and insolvency bodies (ARITA & AIIP) we have the “know how” to provide you with all of the relevant facts and information, and we have the experience and ethical standards to ensure everything is done correctly and within the law.  Anyone facing the dire straits of financial distress in this time, should remember to remain wary of the unscrupulous spruikers and unlicensed and unregulated so called ‘experts’ who are out there - promising the world, but often taking advantage of desperate circumstances, needlessly charging, and often providing ‘solutions’ that may well be illegal, like the often referenced “phoenix” sale.

So please be careful, good luck, and keep your chin up! There is plenty of specialist help out there, from professional business advisers right through to vital mental health support. There are solutions to be found and a viable future for your business to be secured!!

Bill Cotter
Director - Robson Cotter Insolvency Group