Mary operated a café in a popular Gold Coast weekend destination. The business had been in the family for over two decades. Mary had taken over the business from her mum some 5 years prior and still owed her some money for this purchase. Mary chose to operate the business through a corporate entity. Mary’s husband Bill was unemployed so the business had to cover the weekly family expenses.
Furthermore, as Mary’s mum still worked in the business (albeit part time), Mary felt obligated to pay her the above-market salary that she was accustomed to. Whilst the business performed satisfactorily, it could not cover the excessive family drawings and, as a consequence, statutory debt arrears had grown.
When de Jonge Read got involved in the business, the position was as follows:
Cash at Bank $ 5,000
Plant & Equipment (WDV) $ 20,000
Stock $ 5,000
Total Assets $ 30,000
Trade Creditors $ 10,000
Tax Debt $150,000
Funds owing to Mum from
the business purchase $ 50,000
Staff Superannuation $ 20,000
Rent (6 weeks overdue) $ 13,000
Total Liabilities $243,000
Further to the above obligations the lease still had a 2-year period to run and Mary was personally exposed for the rental payments under a personal guarantee. Thankfully, the BAS statements had been lodged on time and therefore no director liability would be applicable under a lock-down Director’s Penalty Notice (DPN). It is important for advisors to remember that the simplest way for their clients to avoid lock-down director’s penalty from the ATO is to simply lodge the BAS and SGC statements within 90 days of the due date even if the debt cannot be paid.
Mary had had enough of the long hours and stress associated with the mounting creditor position and wanted out and therefore engaged a business broker to sell the business. Mary put a price on the business of $275,000, which would result in enough money to pay the business broker and settle all debts of the company. The business broker had concerns about achieving this price as although the business was returning a profit, the asking price was not realistic. The business sat on the market for months and the debt position kept growing.
The business broker referred Mary to de Jonge Read to explore options that could be used to help her through this position. At this stage, he identified that a quick sale could be obtained at circa $140,000. Once this was established, de Jonge Read then put together a strategy that involved offering the business for sale at this price, paying priority creditors and using a creditors’ voluntary liquidation (CVL) to bring finality to the company’s affairs.
The broker quickly identified a buyer once the business was marketed at a realistic price and the sales proceeds were distributed as shown below:
Proceeds from sale $140,000
Commission to broker $ 18,000
Staff superannuation $ 20,000
Trade creditors $ 10,000
Rent $ 13,000
Once the above payments were made the balance remaining in the account ($79,000) was insufficient to pay all of the remaining creditors totalling $200,000.
We note that a liquidator may have been able to claim that the rental payment was preferential. However, this payment was required to allow the assignment of the lease to the purchaser to be effectuated. Failure to assign the lease would have jeopardised the sale. We often find that a preference in this scenario is not pursued as was demonstrated in this case.
A fixed fee of $13,000 was negotiated with the liquidator. This was important to Mary, as she sought the maximum return to creditors, including her mum who was one of them. The liquidator finalised the affairs of the company and, after covering his fees, made a distribution to unsecured creditors of some 30 cents in the dollar.
This course of action left Mary in a position where she could:
Move on with her life without the lease obligations, that she had personally guaranteed, and all matters with the business finalised;
Obtain the largest return possible to her mum ($15,000);
Bring finality to the stress.
If it were not for the business broker’s understanding that there are alternatives in finalising business affairs, Mary would have remained under the illusion that she required a sale at $275,000 to be able to move forward. This would likely have ended in a situation where the ATO, or another creditor, would have moved to wind-up the business and exposed Mary to potential personal insolvency due to the outstanding superannuation and lease exposure.