Intro
When directors suspect that a company is likely to become insolvent, but that they want to keep their business running, the best option may be to go through a voluntary administration (VA) process. Unlike a liquidation, the goal of a VA is to resolve the company’s future as quickly as possible and allows for a company to continue trading its business. However, trading on a VA is not without its risks to a company and/or its creditors, and does not guarantee that a business will start trading normally again at the end of the VA period. Depending on the complexities that arise when trading on a business, there is also the potential that the costs incurred by a company during a trading VA could be greater than the potential return, therefore, reducing the potential funds available to creditors.
In the unique case of a formworks business, a strategic decision was made to continue to operate the business under a licence agreement, whilst the company was in liquidation…
The situation
A labour hire formwork company (Business) provided services to the commercial construction industry. It was determined that it would be beneficial to creditors to trade the business in order to finish certain projects that were deemed profitable and to preserve the value of the company for a potential sale of the business. However, given the limited cash that was immediately available it was decided that trading the company in a VA would be too costly.
The solution
The company was placed into Liquidation and a Licence Agreement was entered into between the company, its Director and the Liquidator. The Licence Agreement allowed the Director to use the company’s assets for the purpose of operating the Business. As the Liquidator was not directly involved in trading the Business, costs that would normally be incurred during a trading VA were not required to be incurred (including remuneration and disbursements).
The outcome
Trading the Business through the use of the Licence Agreement significantly reduced the cost of trading for the following reasons:
- There was no VA period, therefore, no VA creditor reports or meetings were required;
- The Director maintained control of the Business’ operations (for the purpose approved by the Liquidator), reducing the Liquidator’s fees; and
- The company and the Liquidator were not liable to pay the costs incurred by the Director for the purpose of trading the Business from the date the licence agreement commenced.
As part of the Licence Agreement, the Director was entitled to receive revenue derived from works completed from the date the Licence Agreement was entered into, but was required to pay the company a reciprocal weekly Licence Fee. The Licence Fee generated a significant amount of funds for the company and its creditors that would not have otherwise become available in the Liquidation without trading on the Business. The Licence Agreement was to stay in effect until (subject to some exceptions) the Business was sold by the Liquidator.
Conclusion
Depending on the situation, a licence agreement can provide significant benefits to both the company in question and creditors and ultimately provide a better outcome for all involved parties.
For more information view visit our Creditors’ Voluntary Liquidation page or call us today on 1800 246 801.
Article written by Matthew Hudson (Associate Director) and Victor Mackintosh (Graduate Accountant) – Brisbane