05 Dec The Fallout from JM Kelly Group
The Liquidation of the JM Kelly Group (a large building construction group based in Rockhampton) has been a serious blow to Rockhampton and the central Queensland construction industry with the direct loss of approximately 250 jobs and debts estimated to be $20m.
With unemployment in the Rockhampton region at 8% (as at June 2018) and with the population falling by 1% (compared to June 2017) the real impact of this collapse is yet to be determined as it will affect many other businesses and sub-contractors who in turn have to pay their own wages and suppliers.
The Latest Update.
At a meeting on 21 November, the Creditors resolved to place the company in Liquidation and approved three sets of fees for the Liquidator (PWC Australia) totalling $740,000.
Derrik Vickers of PWC Australia said “We will now focus on continuing our investigations into voidable transactions, intercompany loans and possible breaches of director duties.” The Liquidators will continue to conduct a sales program to realise value from the Company’s assets.
With a number of unfinished projects (including the Aldi supermarket and the Rockhampton Base Hospital wing) the Liquidators need to move quickly, adopting a co-operative approach with the bank and sub-contractors to complete these projects in order to realise funds for creditors.
Voluntary Administration Vs. Liquidation.
We have been following the media coverage of this matter and there seems to be some confusion between a Voluntary Administration (VA) and Liquidation. If the Directors know the Company is insolvent they have a duty to prevent further debt from being incurred, and can either appoint an Administrator or a Liquidator.
The Administrator’s role is to ensure the business is protected whilst a Deed of Company Arrangement (DOCA) proposal is formulated and presented to creditors (which will result in a better return to the Company’s creditors than Liquidation). The VA period could run for a number of months and the accompanying moratorium would prevent creditors from taking action to sue the Company or guarantors or from repossessing assets during this period. This strategy is there to protect the business and if approved by the creditors and properly implemented could see a decent return to unsecured creditors.
On the other hand, the role of the Liquidator is to ultimately cease trading, realise the Company’s business/assets and wind up the company. It also allows the Liquidator to pursue claw back type transactions (such as preferential payments and uncommercial transactions) and insolvent trading actions against the Directors. If the Company owes employee entitlements, it also allows those entitlements to be paid through the Fair Entitlements Guarantee Scheme.
SV Partners Commercial Risk Outlook Report.
The last SV Partners Commercial Risk Outlook Report released in August 2018, identified one company for the Rockhampton region in the $10m to $50m turnover bracket that was in the severe risk category, i.e. likely to fail in the next twelve months.
The report also identified four construction companies in the turnover bracket of $1m to $10m that are in the high to severe risk category. Time will tell as to whether those failures eventuate; for the sake of the Rockhampton construction industry, we hope not.
As with JM Kelly, the report also comments on the main causes of business failure including:
1. Poor strategic management of the business;
2. Inadequate cash flow or high cash use; and
3. Trading losses.
Where to now?
The collapse of JM Kelly and a number of other construction companies in Central Queensland earlier this year will leave a number of sub-contractors and small family companies hit hard with debts they won’t recover.
If any of your clients have suffered losses from these collapses, they may be at risk and, because of the QBCC Net Tangible Asset (NTA) requirements, their building licence may also be at risk. If they do not have sufficient working capital or access to external finance to cover those losses, we strongly recommend they seek urgent advice from their accountant or legal adviser. In some circumstances, advice from a qualified Insolvency Practitioner may be warranted.
If you have any questions about the above article and how this may impact you or your clients, please feel free to contact one of our Expert Advisors on 1800 246 801.