What do you do when the Merry-Go-Round stops?

With the stimulus and protection measures introduced by the Federal Government coming to an end, companies may face pressure from creditors once again. Any prudent director of a company facing financial difficulties should seek the advice of their accountant or solicitor before taking any steps to address financial difficulty. Where appropriate, the expertise of a suitably qualified insolvency professional may be required.

When experiencing financial difficulties, we suggest:

Viability Assessment

The first step in navigating the way through any financial difficulties is to consider the viability of the underlying business and whether there are any changes to the business operations that can be made to ensure that the business can be viable into the future.

A business that is not viable will likely fail at some future time. A director who puts their personal assets into the business without a well-advised plan, may limit the options available to them at a later stage.


Restructuring Viable Businesses

Where the underlying business is viable and the directors wish to work out of the financial difficulties, the following restructuring options are available:

Informal arrangements

These can take on any form and are simply negotiations between the company and its creditors as to repayment of all or part of the debts owing.

Informal agreements will only bind those creditors who enter contractual arrangements with the company. If a creditor does not participate or is not included, they may be able to take steps to wind up the company and undermine the informal restructuring process.

These informal arrangements may be combined with the Safe Harbour provisions in order to potentially protect the directors from any insolvent trading claim should the arrangements fail, and the company is wound up.

Voluntary Administration (VA)

A VA (read Voluntary Administration – What is it and how does it work? here) has been the most commonly utilised method for restructuring in the last 20 years. It involves an Administrator being appointed and taking control of the company and its business, including trading the business.

During the Convening Period (usually 20 business days), an interested party (usually the directors) may submit a proposal for a Deed of Company Arrangement (DoCA). The Administrator is also required to investigate the affairs of the company and at the end of this period, convene a meeting of creditors to consider the proposal along with a report which:

    • reports on the company’s history, cause of failure and financial affairs;
    • considers the recovery of transactions in the event the company is wound up;
    • provides details of the proposal to creditors; and
    • provides the opinion of the Administrator as to whether the proposal is in the creditors’ best interest to accept.

Creditors have the option of accepting the proposal, winding up the company or terminating the VA.

If the proposal is accepted and the DoCA signed, control of the company usually reverts to its directors who may continue the company’s trading operations. Once the terms of the DoCA are complete, all claims bound by the DoCA are extinguished.

Small Business Restructuring

The VA process can be costly depending on the circumstances of the company and smaller businesses may not have the funds available to utilise this restructuring tool. Accordingly, the Government has implemented a new Small Business Restructuring (SBR) regime.

There are certain eligibility criteria that must be met in order to utilise SBR, however the main one is that a company must have less than $1,000,000 in creditors.

The SBR process involves the appointment of a Small Business Restructuring Practitioner (Practitioner), who assists the company with preparing a plan usually within 20 business days to be put to the company’s creditors.

A key difference between a VA and the SBR appointment types, is that in an SBR, the directors retain control of the company and subject to certain controls, may continue the trading operations without the Practitioner’s input.

Once the plan has been provided to creditors, the Practitioner will provide a report on the company’s ability to comply with the plan, which is then voted on by creditors. Further differences between the SBR and VA process is that related parties are not able to vote on the SBR plan and the plan must be completed within 3 years (a DoCA does not have any time limitation).

If accepted, the Practitioner assists the company with implementing the plan and the creditors are then paid in accordance with that plan. If the proposal is rejected by creditors, there is no obligation on the directors to do anything further (e.g. place the company into liquidation).

Like the VA, unsecured creditors who do not participate in the process are caught by the plan and their debts are extinguished at the completion of the plan.


Unviable businesses

As noted above, unviable businesses may fail at some point in time, depending on the financial resources at the disposal of the directors. It should be noted that where a company is insolvent, a director is required to consider the company’s creditors as part of their duties. In addition, directors may be exposed to an insolvent trading claim and/or a breach of director’s duties claim in the event that the company continues to trade whilst insolvent and is later wound up.

Similar options exist for a company facing financial difficulties with an unviable business. They include:


Types of Proposals

We are often asked what types of proposals can be put to creditors and what will creditors likely accept. We have sought to answer these questions in this article. Information regarding the various types of proposals are set out in an article located here https://svpartners.com.au/proposals-to-creditors/


Time is of the Essence

Time is of the essence when advising your client experiencing financial difficulties.

A typical example that we see is where a director fails to act on a winding up application in a timely manner and attempts to appoint a VA the day before a winding up hearing. In such circumstances the Courts are likely to terminate the VA and wind up the company.

Seeking advice at the earliest opportunity can provide the best outcome for your clients by way of providing multiple options that may exist should they eventually require it. In addition, seeking advice should enable you to advise your client with the worst-case scenario in mind.

We offer free, confidential, no obligation advice regarding the insolvency options available to your clients. Given the unique nature of each company’s financial situation and the complexities of the legislation, please contact us to discuss these options.

Please note that similar options exist to individuals facing financial difficulty. If you have any clients that may require advice in this regard, please feel free to contact us.


Article written by Travis Olsen (Associate Director) and Stuart Otway (Director) – Adelaide

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