We were approached by a client who operated a steel manufacturing business that had lost a major trading partner and subsequently endured insurmountable cash flow issues. The situation compounded causing aged creditors to blow out to 120 days. The company was issued with a creditor statutory demand (CSD) which gave 21 days to pay the debt or otherwise the company would be deemed insolvent and the client would ultimately lose control of the business.
The company was also locked into a commercial lease that was entered into in better times but now had become unsustainable.
The directors had investigated implementing cost saving initiatives, including reducing staffing levels, however this was not sufficient to bring the company’s financial position back into the black. Redundancies meant the requirement for immediate cash payments which the company could simply not afford. This is a scenario we often see.
Both directors believed that the core business was profitable in a scaled down version and wanted to know what options and strategies were available to save the business.
After initial investigations, it was established that de Jonge Read could provide some significant assistance to these clients by implementing a corporate restructure with the assistance of an insolvency practitioner.
A corporate restructure is a process where the assets of the business (plant, equipment, work in progress, goodwill and intellectual property) are sold to a new purchasing entity for fair market value. The new business can then employ the existing staff and continue to trade with minimal to no business interruption.
The key to this type of transaction is that fair market consideration be paid for all of the components of the business purchased and that creditors obtain a superior result in this process than if they had pursued the company into liquidation and the business ceased to trade.
As part of this complex transaction de Jonge Read undertook to project manage the following actions:
Independent goodwill, stock and plant & equipment valuations were obtained;
A new corporate structure was established by the company’s accountant;
A commercial sale figure was determined to be $60,000 and a commercial sale agreement to the new corporate structure was drafted by the director’s solicitor;
A management agreement was drafted and the purchasing entity was immediately appointed as manager of the business for the period leading up to the proposed sale;
Once the sale documents were completed, we negotiated a new and superior lease arrangement with the landlord on behalf of the purchasing entity which was subject to the Administrator’s acceptance of the sale agreement;
During the period that the above information/documentation was being prepared, it became obvious that the company was insolvent and therefore an administrator was appointed prior to the expiration of the CSD;
We assisted the directors in communicating with key stake holders including staff;
The Administrator reviewed the proposed sale documentation and supporting valuations. The Administrator believed that the sale was in the best interests of creditors and signed off on the transaction;
The old entity was liquidated.
Ultimately the purchasing entity could retain the business by taking over responsibility for the priority creditors, (being the employee entitlements of some $20,000) and a cash payment of some $40,000. This sale being approved by the Administrator brought finality to some $480,000 of insurmountable legacy debts and gave the business a future.
Other significant benefits achieved from this strategy were:
Staff retained employment;
The Federal Government was not called upon to pay out any F.E.G. entitlements;
A superior return was achieved for creditors rather than if the Company had proceeded straight into a liquidation scenario;
Personally guaranteed suppliers had the opportunity to be repaid by the directors due to the directors being able to retain a source of income;
The directors were therefore able to avoid personal insolvency action.
The detailed project management that de Jonge Read undertook in this particular matter saved the business which was sustainable and profitable going forward post the restructure.
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.