Updated: Jul 22, 2020
At times business partnerships run their course. Be it retirement, interstate relocation or a divergence of ideologies there can come a time where shareholders of a corporate entity seek a return of their investment in order to transition into a new stage in their career. At times, this can be simply undertaken via another shareholder purchasing the exiting party’s shares, however, in some instances this does not bring the finality required.
In this month’s case study, we review the close down of a successful civil earthworks company. Our clients were the directors and equal shareholders of the company. They had decided the time had come where they wanted to wind down the business operations, with one shareholder wishing to continue in the industry, while the other was looking to retire.
The business was solvent holding sufficient cash and assets to satisfy all outstanding liabilities. However, the director wishing to continue in the industry held insufficient capital to purchase the outgoing directors shares at commercial value, nor did he wish to create a loan account on the company’s financials. Furthermore, over the years the directors had provided numerous personal guarantees to the company’s bankers and trade creditors, which the exiting director sought to ensure were extinguished.
In most cases you can undertake a controlled exit of one director/shareholder where they are paid fair commercial value for their shares, with the remaining director taking responsibility for the ongoing debts of the company. This process often involves refinancing lending agreements and opening new trade accounts to ensure the outgoing party is no longer listed as a guarantor. With the remaining director being unable to finance this purchase, the company’s accountant referred the clients to de Jonge Read for some strategic advice.
As the company was solvent and held assets sufficient to settle all liabilities, we determined the best course of action would be to undertake a Members Voluntary Liquidation (MVL). This decision was based on the composition of the balance sheet of the entity. Under the MVL we would be able to ensure all creditor accounts and associated debts of the company could be paid out, with the company being deregistered ensuring finality had been brought to all matters for the directors. A further benefit of the MVL process is that the funds returned to the directors in this case was not a distribution of income, but a return of capital. This is however reliant on the composition of the balance sheet but in some cases where we use MVL’s there can be significant tax savings for the shareholders.
The first step in our process was to undertake a controlled shut down of the company, collecting in all debtors and paying out all creditors and liabilities of the company. Once completed the company was left with cash and unencumbered assets. As mentioned above one of the remaining directors wished to retain the assets in order to continue using these in another venture. The equipment was near new, well maintained and represented a significant savings over the purchase or finance of new equipment.
As such, an agreement was reached between the shareholders wherein one would receive the bulk of the cash available, with the other taking an in-specie distribution of the unencumbered assets of the company.
The benefits of proceeding with this course of action were:
Both directors achieved the outcome they were seeking;
An efficient and tax effective distribution of shareholder funds was achieved;
Finality was brought to the company by reducing any exposure to future claims for both parties;
One director was able to continue using the equipment without the need to finance the purchase of new equipment or payout the retiring director.
At de Jonge Read we worked closely with the company’s accountant to achieve this result, maximise the tax savings and ensure the process was managed in a timely and orderly fashion providing both directors the result they were seeking.
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.