Of late, we are seeing the ATO becoming more savvy in relation to the insolvency framework and using this knowledge in their collection methods. This case study shows how the ATO have used a garnishee notice to attempt to collect the majority of funds from a business going through a controlled exit.
BACKGROUND
Our client was a regional Victorian manufacturing company that had been experiencing considerable cashflow issues for quite some time. The director had been contributing large amounts of personal funds while he attempted to turn the business around (approx. $600,000).
STRATEGY
de Jonge Read was called in on the recommendation of the director’s accountant. After analysing the current situation and speaking with the two secured creditors (bank and debtor finance provider), it was decided that the business had a limited future. A controlled shutdown of the business and subsequent asset realisation prior to liquidation was the best strategy and would maximise the return for the company’s creditors.
Both secured creditors supported our strategy. Specifically, they had decided that to enforce their security and appoint a Receiver and Manager or Controller would be an added expense to the detriment of creditors.
The director ceased trading the business, employees were terminated and paid and an auctioneer was engaged to conduct an onsite advertised auction.
Shortly after the auction, the ATO issued a Garnishee Notice to the auctioneer for an amount that represented 70% of the realised funds from the auction. If this notice was enforced, there would have been a considerable shortfall to the secured creditors, which would have resulted in the banks enforcing their security through a formal appointment of a Controller or enforcing their guarantees to meet the shortfall. Both are costly avenues for the banks and a detrimental effect to creditors.
OUTCOME
Discussions commenced between the bank, the auctioneer, the ATO and de Jonge Read to try and come to a resolution. After a short period, the ATO agreed to revoke their Garnishee Notice and allowed the banks to receive the auction funds pursuant to their security, thus limiting the shortfall payable by the director under the guarantee.
The company was subsequently placed into liquidation and the balance of the funds (after payment of the secured creditors) were paid to the liquidator on appointment. Distributions were then made during the course of the liquidation to unsecured creditors (one of which was the ATO debt).
TAKE HOME
Directors and Advisors should be aware that it is becoming more common practice from the ATO to use the garnishee system in situations where companies or individuals with tax debts are realising property or company’s assets through sale. de Jonge Read now takes this potential ATO action into careful consideration when planning an insolvency strategy.
Should you have clients or associates that you know are struggling with financial issues, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Call us now on 1300 765 080.