22 Jun Don’t Waste the Crisis: Is NOW the Opportunity of a Lifetime to Restructure?
I am stating the obvious by saying the COVID-19 caused lockdown in Australia will not be remembered by most as the Time of Opportunity in the lucky country, or in any country. Seeing revenue drop for many businesses by amounts no-one (save for those wearing tin-foil hats) would have planned for has caused intense stress amongst business owners. Add to that the concern washing over your face as you see the toilet roll stash dwindle and it is understandable that many have been left petrified by the situation.
If such a severe situation was isolated to a single business, or small number of businesses, we would likely see those business owners seeking timely insolvency advice about options available to them, including restructuring. This is not currently happening. What we see at the moment, I believe, is a Safety in Numbers mentality – ‘because everyone is in the same boat, I will wait and see how it pans out’.
Hibernation – Good for the Business, not for the Business Strategy
The Government-supported hibernation sounds good in theory, but will it work? I am one of those people that always pushes a metaphor well beyond its intended parameters – typically because I try to apply it too literally, and the hibernation metaphor was no exception.
If you’ll indulge me for a moment – so, a bear will eat a number of huge meals in autumn to sustain it during an extended period (hibernation) over winter where it consumes very little, and once awoken in spring, again consumes a number of huge meals in order to meet its energy deficit and restore its body to pre-hibernation state.
Applying this to business – business will need to have had a bumper period of trade in January and February (possibly March) to sustain it through a period of shutdown or reduced trade where its revenue plummets, and will require a bumper trade when coming out of ‘hibernation’ to meet accruing liabilities on top of ongoing costs, in order to return to pre-hibernation state.
The glaring problems with the metaphor for me are that many businesses were not doing well pre-COVID19 hitting our shores and strong economic bounce-back is far from predictable.
As identified in the SV Partners Commercial Risk Outlook Report – March 2020, a staggering number of businesses had a high risk of failure BEFORE the COVID19-caused lockdown in Australia. Factors that contributed to this include the bushfires, drought, floods and deteriorating economy (yes, Australia has had a rough trot to put it lightly). These high-risk businesses are now in a state of Government-induced ‘hibernation’ as a result of the response to the COVID19-caused lockdown. It seems that many of the business owners may also be in hibernation (again, I come back to the Safety in Numbers mentality). This may cause a lost opportunity.
There are a number of things business owners should be doing now to ensure their business is in the best possible shape when markets fully reopen. These include:
- Get ATO lodgements up to date and understand any director-liability that may exists for PAYG, GST or SGC (click HERE for more information on director penalty notices);
- Get the books up to date – all invoices entered, management accounts reflect true position, conduct stocktakes etc;
- Gain a better understanding of the numbers – speak to your accountant about what the numbers can tell you and what you can do to improve business performance (eg other revenue streams, changes to pricing, inventory management);
- Prepare a cashflow using bottom-up approach (ie start with overheads and determine required sales). Consider whether the business is realistically viable;
- Seek advice about possible restructuring – where the business has substantial debt or strategic challenges that may not be overcome, it is prudent to obtain advice about the options available from an insolvency practitioner, accountant or lawyer. It is this task I want to consider further.
Broadly speaking, a restructure can either occur prior to/without an insolvency appointment or with the aid of an insolvency appointment. Businesses and advisors should be particularly careful and diligent if engaging in restructuring prior to/without an insolvency appointment.
Of particular relevance to restructures prior to/without an insolvency appointment is the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 which came into effect on 18 February 2020. This Act, amongst other things, improves the mechanisms available to combat illegal phoenixing and thereby tightens the manner in which a business may be legitimately restructured.
The Act creates a new type of voidable transaction – creditor-defeating dispositions (transfers of company assets for less than market value (or the best price reasonably obtainable) that prevent, hinder or significantly delay creditors’ access to the company’s assets in liquidation). Essentially, it is cracking down on the undervalued transfer of businesses or assets among related parties (although the law does not only apply to related parties) and the advisors that enable such transactions.
A common restructuring tool where an insolvency appointment is utilised, is the Deed of Company Arrangement (DOCA). Commencing with a Voluntary Administration, a proposal is put to creditors, typically by the current directors, whereby a return is made available to creditors in exchange for regaining control of the company. The return typically will need to be better than what could be obtained within a liquidation scenario to gain creditor support.
Whilst a DOCA is a very useful restructuring tool, it is certainly not the only option available to an insolvency practitioner. Other, often cheaper, options may include a sale of the business or business assets during either a liquidation or voluntary administration which will generally not require creditor approval, can be done quickly and is often a less-expensive process than a DOCA.
The current economic environment may provide somewhat favourable ingredients for a restructure to occur, providing timely value to creditors and enabling a business to survive. Such factors include:
- Cash is king – creditors will entertain proposals that result in some return now;
- Many asset values may currently be low which may improve the chances adequate funding/capital can be obtained to acquire those assets;
- Appetite in the marketplace to acquire businesses is generally low which can make the ‘best available price’ clearer to stakeholders;
- Time is on your side – due to the temporary increase in the threshold at which creditors can issue a statutory demand / bankruptcy notice (to $20,000) and the time with which companies or individuals have to respond (to six months).
I could probably throw into the above list that not many businesses are currently doing this (based on current insolvency statistics), which may change come September/October and that may alter creditors’ attitudes to such proposals.
If any of your clients are at risk of being the person poking their business with a stick in the coming months wondering why it is not waking from hibernation (there I go pushing the metaphor again), then it might be worth giving the client a poke now to consider whether a restructure, in some form, would assist.
It is absolutely critical the right people are engaged to give restructuring advice, and that may include accountants, lawyers or insolvency practitioners who operate in the space regularly.
Article written by Matthew Bookless
Director – SV Partners Gold Coast