You’re no doubt sick of hearing about COVID. If you’re a company owner, you probably just want to shake it off and get back to business. But the reality is the pandemic may have left you with a few challenges.
The ones we’re commonly seeing include reduced sales putting pressure on profit and cash flow, not enough cash to reopen and get the business running again, and accumulated lockdown debts that can’t be paid in full.
The good news is that there are several options available to help you regain control of your company finances and debts so you can bounce back in 2022.
Solutions to Revive: Negotiate, Business Restructuring or Sale
There are a few options available to help small and medium businesses (SMEs) experiencing financial difficulties here in Australia.
You may be able to negotiate and trade your way back to stable ground without any formal intervention. However, if you have an Australian Taxation Office (ATO) debt you can’t pay in full, you may need formal restructuring or an insolvency appointment to reduce your debt to a manageable level.
An increasingly common option is also a sale of business or assets to an unrelated or related party, generally followed by the liquidation of the former trading company.
Each of these options has its pros and cons.
The main risk with a sale of a business, particularly to a related party, is that it can be deemed an illegal phoenix if done incorrectly. In this case, the transaction can be undone, claims may be made against the purchaser, director, and their advisors, and the Australian Securities and Investment Committee (ASIC) could take disciplinary action.
To avoid the risk of being an illegal phoenix, we generally recommend formal restructuring if available. Let’s look at the two main options – SBRP and VA in more detail.
SBRP: The Best Thing You've Never Heard of
Introduced by the Government as a COVID recovery measure from January 2021, the SBRP is intended to be a cost-effective, streamlined process to reduce debts and/or reschedule payments over time to help you stabilise cash flow and regain control of your finances.
In reality, only a handful of these appointments have happened so far – and we’re among one of the few firms to undertake one – with a great outcome!
Success Story: The Situation
A company sold its well-regarded restaurant business in mid-2021. However, the business had been affected by lockdowns causing the sale price achieved to be $200,000 less than expected. After paying suppliers and rent, the company:
- Was left with $170,000 cash from the sale
- Had unsecured liabilities of approximately $570,000 (an ATO debt of $370,000, a director loan of $200,000, and a small finance agreement for the director’s car).
While the company could have entered liquidation to finalise its affairs, it operated a small online retail business, and the directors preferred to avoid the uncertainty, financial risks, and increased costs that come with liquidation. Because of this, they offered the company's remaining funds to settle creditors' claims in full.
How we Helped
We gathered the information required to proceed to ensure the process went smoothly. We considered the information creditors would need to make an informed decision and helped the directors put their proposal to them.
The ATO was our main concern as it's always uncertain how they'll vote. But they were very reasonable and, after answering their further queries, the ATO supported the proposal to receive 25c/$ against their $370,000 debt, writing off $277,000
The directors even received a substantial return themselves – something they weren’t expecting.
This SBRP allowed the directors to:
- Retain control of their company during the SBRP
- Reduce the ATO debt by $277,000
- Keep their house with no further contribution from personal funds
- Reduce company debts to a manageable level and have the process behind them in just 9 weeks
- Know the low fixed costs of the process before commencing, allowing an improved return to creditors
- Receive a return on their own debt owed by the company.
Voluntary Administration: if SBRP isn't Available
Voluntary Administration (VA) is similar to SBRP in that it:
- Aims to restore financial viability to a company
- Provides breathing space for about 5 weeks
- A plan can be proposed to reduce debts and/or reschedule payments.
However, it differs from SBRP because:
- It doesn't have eligibility criteria
- The Administrator takes control of the company and is personally liable for the expenses he/she incurs
- The costs are generally much higher.
So, if your company isn't eligible for SBRP, VA can help it achieve the same outcomes by proposing a Deed of Company Arrangement (DOCA).
Success Story: The Situation
Following a decline in sales, a transport company was left with debts and expenses too high for it to service. The ATO issued a director penalty notice (DPN), giving the director 21 days to appoint an administrator or liquidator, or become liable for the company’s $180,000 BAS debt for PAYG.
Their company had owed the ATO debts for $390,000 superannuation guaranteed and $600,000 for debts it couldn't pay. The directors were already liable for $320,000 of superannuation and a portion of the BAS debts under director penalty notices. Rather than putting money into the company to deal with a particular issue, the directors wanted to resolve the company's whole financial position.
How we Helped
The company didn’t have sufficient cash and other assets to meet the costs for us to trade the business as administrators. Plus, we would have had to cease trading on appointment.
Because of this, the company’s advisors entered into a licence agreement to significantly reduce the cost and risk for the Administrator, allowing the administration to proceed. Which it did, successfully!
During the administration, a related entity operated the company’s business under the licence. The directors proposed a DOCA to creditors to allow a reasonable period of time to sell their house and pay the superannuation debt in full.
The ATO viewed this proposal favourably, voting to accept the DOCA and release the company from the $600,000 debt in full.
This VA appointment allowed the directors:
- Save their business
- Regain control of their company in just over 5 weeks
- Significantly reduce their company's debts and restore viability
- Have enough time to achieve a great sale price for their house, avoiding a forced bankruptcy sale. As a result, they were able to keep the remaining equity to buy a replacement property.
Take Action Now to Restore Business Health
The most difficult step in getting your business back on track is acknowledging to yourself that trading through won't get you where you want to go and that you need help. It's a bit like going to the doctor.
The good news is options are available to help bring your business back to good financial health - but time is of the essence. The longer you wait, the worse things can become. Plus, your options evaporate. So what are you waiting for?
Talk to someone who can answer your questions about business restructuring, help relieve your stress and get your business back on track on 1800 861 247 for professional, non-judgemental support and advice. If your business uses XERO for its accounting, you can receive an instant score and suggested actions based on your personal situation, using our free Business Viability Tool.