May 19, 2016

A mining company's successful business turnaround

Mackay, like many of its Northern Queensland regional neighbours, has been adversely affected by the fall in commodities prices resulting in many mining service providers (both individuals and companies) struggling to survive in the short term, let alone over the next two to three years.  A recent turnaround restructure SV Partners undertook in Mackay utilised the voluntary administration process by adopting a co-operative approach with management and other stakeholders. This resulted in the underlying preservation of the business despite a winding-up order being filed against the company by the ATO.

In its simplest form, the voluntary administration process is a restructuring option available to companies which protects the underlining business whilst the company’s directors formulate and present a proposal to creditors.  If the proposal is accepted by the majority of creditors in both number and dollar value then the voluntary administration converts into a Deed of Company Arrangement (“DOCA”).  The terms and duration of the DOCA can vary but once the DOCA is completed it should see the survival of the business and unrelated external unsecured debts being extinguished (in part).

The voluntary administration process is ‘strict’ in respect to the process and timeframes allowed.  The initial creditors meeting is held within eight business days with the second ‘decision’ making creditors meeting usually held within 25 business days  (this period can be extended with Court approval).  It is at this meeting that the direction of the company is decided.  Even though the voluntary administrator may make a recommendation, creditors make the decision as to the final outcome of the company.

The business in question was a niche mining business specialising in dragline filtering cleaning services.  The underlining business was profitable, but due to company monies being used to partly fund interest payments for related party property debt and unpaid taxation debts, the ATO had commenced winding up proceedings against the company.  With little less than seven days before the winding up Court hearing, our Mackay office received a telephone call from the company’s accountant requesting our immediate assistance.

There was a myriad of immediate issues to deal with, including working with the ATO to adjourn the winding-up application, ensuring the secured creditor did not appoint a Receiver (which the bank are allowed to do within 13 days from the date of the voluntary administration) and negotiating with company’s key vendor number type clients to ensure these vendor numbers were not cancelled and day to day operations were ‘business as normal’.

In order to preserve the business and turnaround a company on the cusp of liquidation, there were three problems we worked through.

1. The ATO:

The first matter we had to address was the imminent ATO winding up application.  By fostering a co-operative approach, we successfully negotiated with the ATO to adjourn the winding up order until after the release of the second creditors report, but before the second creditors meeting.  This allowed us time to work with management in providing a Deed of Company Arrangement (DOCA) to the company’s creditors.  Despite the DOCA showing a return of 50 cents in the dollar compared to 20 cents in the dollar under a liquidation scenario, the DOCA proposal was rejected by the ATO who continued with their winding up order.  We successfully lodged an application to Court promoting the acceptance of the DOCA and seeking a further adjournment until after the second creditors meetings. At the second creditors meeting, the DOCA was ultimately accepted by the company’s creditors, and a few days later the ATO dismissed their winding up order.

2. License Agreement:

To minimise costs and disruption of business during the voluntary administration process, we entered into a license agreement that allowed a related third party company to effectively operate the business in the interim, but ensured the ownership of the assets stayed with the company. The license agreement would operate until either the DOCA was completed or until the sale of the business.  This ensured continuity of service to customers (which was vital in preserving the company’s goodwill) and all bills, payments to the bank and employees  continued to be honored during the voluntary administration process.  This was a great example of thinking outside the box to work towards a solution, minimising costs and protecting client vendor numbers whilst we worked with management to formulate a DOCA.

3. Working Capital Facility (WCAP)

In order for the above related party to fund the above license agreement obligations we provided a WCAP facility to the licensee company to allow it to trade whilst it established its own WCAP facilities.  Initially the directors requested an open ended WCAP facility, but by working with the management team in preparing forecast cash flows for the next 24 months we were able to not only assist them to project their cash flow needs, but were able to demonstrate to the company’s creditors that the business would be in a position to honor the proposed DOCA contributions.  Whilst open ended funding was not provided we did pay invoices up to the value of $100k which provided the initial WCAP required.

In order to protect the company’s WCAP facility we did require a General Security Agreement from the related third party company and registered this on the Personal Property Security Register (PPSR).  On a side note, despite the Personal Property Security Act being in effect for a number of years, we are still seeing suppliers not lodging a security interest over goods / assets supplied and in effect forfeiting their rights to these assets when their client goes into liquidation.  We strongly recommend to all stakeholders to review their internal PPSR registration procedures.

In summary, there are a number of business turnaround options available to companies who are experiencing financial difficulties.  We work with the company’s key stakeholders to maximise the chances for a successful restructure even if a winding up application has been filed against the company.  The voluntary administration process is easy to initiate, it’s flexible and DOCA contributions can be made over a period of time, and finally it maximises the survival of the underlying profitable business.

The SV Partners team can assist you and your clients with business restructuring options. Please call 1800 246 801 or contact one of our insolvency experts.

Article written by Frank O’Neill, Senior Manager, Queensland.

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