In this month’s case study, we look at the case of Jeff whose business suffered severe cashflow problems during the covid pandemic. This put Jeff under a lot of pressure and created an enormous amount of stress for him personally. Lately we have been seeing more and more clients who just wish to exit their business on the best terms possible. Covid forced a lot of business owners to reconsider their positions, and many came to realise they did not have the passion needed to rebuild. For many, the best choice has been to pursue alternate employment or new opportunities, but exiting a business is usually not as simple as turning the lights out and locking the door.
Background
A severe decline in business cashflow basically forced Jeff to seek external employment. He was able to secure a good job in the mining industry and was generating a good income. Jeff decided to close the business down but was concerned about his personal liability and was not really sure how to go about it. We helped Jeff identify and determine any personal liability he may have arising from the company’s financial affairs, and worked with him to develop a plan on how to deal with his personal financial exposure.
Before he met with us Jeff had arranged the sale of his business, which operated from two separate locations. The only security interest registered over the company, other than specific charges by financiers over vehicles, was by his father’s company for a loan that related to the establishment of business. The security interest was an AllPAAP charge, meaning a charge over all present and after acquired property. An AllPAAP is a powerful security interest and was crucial in protecting the lender’s interests. This positioned the father’s company as a secured creditor with a right to be repaid before any ordinary unsecured creditors. Jeff had arranged the best price he could for the business, but that still left the company with significant debts.
The situation Jeff faced
At the time he met with us, his company’s position was as follows:
Assets:
Motor Vehicle 1: $24,000
Motor Vehicle 2: $28,000
Loan – Director: $94,000
Total: $146,000
Liabilities:
ATO: $257,000
Superannuation: $ 185,000
Loan – Father’s company: $285,000
Motor Vehicle Finance 1: $17,000
Motor Vehicle Finance 2: $10,000
Total: $754,000
By selling the business Jeff had resolved some of the problems that directors can face when exiting a business. Jeff used the sales proceeds to pay his trade creditors in the normal course of business, which he had always strived to do. The purchaser took over the premises leases, which dealt with the personal guarantees Jeff had granted. All the business assets, except for vehicles Jeff and his wife used, were sold for their full market value. However, Jeff still had some issues to consider.
Firstly, a portion of the superannuation debt, around $100,000 came about due to an audit by the Australian Taxation Office (ATO). While Jeff had thought he had done the right thing, the ATO found that some staff that Jeff was not paying superannuation were actually entitled to it. As Jeff had not reported these obligations to the ATO he now faced a lockdown Director’s Penalty Notice (DPN). Had he reported these debts on time he may have been able to achieve remission of the penalty by having the company placed into liquidation or administration within 21 days of the date of the notice.
Jeff also wished to retain the two vehicles, but these were under finance and subject to registered security interests by the lenders. The other issue Jeff faced was the fact that the books and records showed that he owed a loan to the company.
What was the outcome?
de Jonge Read entered into negotiations with the asset financiers. The vehicles both had equity in them, so the financier may have had options around recovery action. Jeff’s father’s company was in a strong financial position, and we were able to demonstrate that it could afford the repayments. On this basis, the financiers agreed to assign the finance to the father’s company.
While the vehicles had equity, once the financier’s security interests were satisfied under the assignment, Jeff’s father controlled the remaining security interest. He was able to assert his rights under the security to take possession of the vehicles without having to pay the company for the equity in them. This amount, $25,000 was offset against the debt owed. Jeff then made payments to his father’s company so he could continue to use the vehicles.
We then worked with the company's accountant in relation to the apparent loan that Jeff owed the company. After full reconciliation, this was treated by the accountant as wages. Jeff incurred a personal tax liability for the current tax year, but did not owe the company any money.
Jeff still had the issue of the potential DPN for $100,000. Our firm liaised with the accountant and Jeff, and it was decided that should a DPN be issued Jeff would enter into a payment plan with the ATO. While Jeff may have had the option of entering into bankruptcy, he really did not want to do this and preferred to pay the debt off. He was earning a good income and felt his situation was now manageable.
Once these arrangements were finalised Jeff appointed a liquidator through a Creditors' Voluntary Liquidation (CVL), bringing finality to all other debts. Importantly, our firm supported Jeff through the process and gave him clear advice and direction. This was really important to Jeff, as while he knew he had issues he had no idea where to start in exiting his business in a controlled way.
At the end of the day:
Jeff retained possession of the vehicles used by he and his wife in a cost-effective way.
His loan to the company was dealt with, resulting in a modest personal income tax liability.
Jeff understood his potential liability under a DPN. He now had a clear plan on how he would deal with this if he actually did receive a penalty notice in the future.
The stress and uncertainty of exiting his business was eased. Jeff was supported by de Jonge Read through the whole process.
Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies.
Contact us now on p. 1300 765 080 | info@djra.com.au