This month’s case study looks at an issue a client of de Jonge Read faced due to a poorly executed restructure performed some years earlier. It shows the importance of getting the right advice when considering insolvency alternatives before action is taken. BACKGROUND Pippa and Harry had operated a family cleaning company for over 15 years. They both started the business and have seen it grow from a small operation of 2 employees to a team of 60. Due to non-payment by a major debtor, the company experienced problems and was facing an insurmountable debt position of trade creditors and statutory obligations that were restricting trading operations. They had attempted to reduce their creditors by realising some excess plant & equipment, however, these measures did not provide sufficient to cover the shortfalls the loss of the debtor’s failure to pay had caused. Pippa and Harry were then advised by a consultant to undergo a restructure (sale to a related entity) and to liquidate the existing company in an attempt to ease the pressures. The restructure was completed, and all was going well. ISSUES ARISE However, when undertaking the restructure, the directors chose to use one of their pre-existing dormant companies that had been around for numerous years as the purchaser of the business and therefore the new trading entity. Both entities were registered for payroll tax with the State Revenue Office at different times. After trading the restructured entity for about 14 months, the State Revenue Office deemed that the restructured entity was related to the original entity for the following reasons:
The principal place of business was the same for both entities;
Both entities had shared the same resources, specifically the same workers;
Both entities were in existence at the time the debt was incurred;
Both entities were represented by the same accountant and had the same registered office;
Both entities had similar and/or related Officeholders;
Both entities were trustees of trusts where the beneficiaries were the same;
After the restructure, the new company used the existing website, thus implying they were the same entity.
Based on these reasons, the State Revenue Office (OSR) deemed that the old entity and the new entity were related and therefore “Grouped” them for payroll tax liability. This meant that the old entity’s payroll tax liability (approx. $850K) was not quarantined to the old company, slipped under the corporate veil and was now due and payable by the new entity, even though the old entity was in liquidation. The decision of the OSR had made the new company technically insolvent which left it with little alternative but to consider liquidation or a payment arrangement. THE SOLUTION AND LESSONS TO BE LEARNT The client met with de Jonge Read and in this matter, we were able to negotiate a settlement with the OSR for Pippa and Harry however, the outcome could have been substantially better if the right advice was sought initially. The following points should be taken into consideration when considering a restructure especially if the OSR is a creditor of the insolvent company -
It is important to undertake the process properly and refrain from using a pre-existing company as the purchaser/new trading entity however tempting the use of existing/possible tax losses may be;
Avoid the same or similar officeholders, especially if there are similarities in the name of the new company;
Should a trust have been used with the original entity, it is important that this trust is wound up at the same time as the original entity is liquidated;
There must be clear and identifiable distinctions between the old entity and the new entity.
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.
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