Liquidation is often seen as the worst possible outcome for a business.
That is understandable.
By the time a company enters liquidation, creditors are usually unpaid, cash flow is tight and directors are under pressure. Employees, suppliers and landlords may all be looking for answers.
But liquidation is not always a failure.
In the right circumstances, it can preserve value, provide certainty, and stop the position from getting worse. A recent matter is a good example.
The starting point: small business restructuring
The company operated a hospitality business with an established trading history and a recognisable local presence. When we were first contacted, the initial question was whether the company might be suitable for small business restructuring. That was the right question to ask.
SBR can work well where a company has built up historic debt but still has a viable business underneath it. The directors remain in control of the day-to-day trading. The restructuring practitioner reviews the company’s position and assists with putting a proposal to creditors. If creditors accept the proposal, the company may be able to compromise its debts and continue trading.
But it has to be supported by the numbers. It is not enough that the director wants the business to survive. The company still needs to pay its ongoing trading costs, remain compliant with its tax and superannuation obligations and generate enough surplus cash to fund a meaningful proposal to creditors, unless funds are coming from a third party. That was the problem in this matter.
Once the numbers were properly reviewed, the business did not appear to be generating enough profit to meet its ongoing obligations and fund a realistic proposal.
SBR can deal with historic debt. It cannot fix a business that is not making enough money going forward.
The ATO position and DPNs
As the matter progressed, the tax position became more urgent. The ATO issued director penalty notices. DPNs can expose directors personally for certain company tax debts, including PAYG withholding, GST and superannuation guarantee charge liabilities.
Once a DPN is issued, timing is critical. The 21-day period runs from the date the notice is issued, not the date the director receives it. The options available will also depend on the type of DPN and whether the company lodged its returns and statements within the required timeframes. Directors need to get advice quickly.
Waiting can reduce the options available and increase the risk of personal liability. At that point, the issue was no longer just whether the company could restructure. The question became what process would produce the best practical outcome while also dealing with the DPN position.
Why liquidation became the right option
Once the restructuring option had been properly considered and found not to be viable, liquidation became the appropriate path. The liquidation allowed the company’s position to be independently reviewed. Assets could be identified. Secured creditor claims could be assessed. Employee and creditor claims could be dealt with in the proper order. The company’s affairs could also be investigated.
Most importantly, the remaining business assets could be sold in an orderly way. There was still value in the plant, equipment and operating setup. The issue was how to realise that value commercially.
In hospitality matters, equipment can be difficult to sell for a reasonable return once removal, transport, storage and auction costs are taken into account. Those costs can quickly reduce the amount available to creditors.
In this matter, a private sale was pursued. That avoided unnecessary costs and produced a better result than a break-up sale or auction. The sale generated funds that may not have been available if the company had simply stopped trading and walked away.
The practical result
The liquidation did not save the old company. But it did preserve value. That point is sometimes missed. A good outcome does not always mean the same company continues trading. Sometimes the best outcome is that the directors act, the losses stop, the assets are sold properly, creditors receive clear reporting, employee claims are dealt with, and the company’s affairs are brought to an orderly end.
That is a better result than allowing the company to drift, continue incurring debt and lose what value remains.
The lessons
There are a few practical lessons from this matter.
First, SBR is a useful process, but only where the underlying business is viable. The company needs to be able to meet its ongoing obligations and fund a realistic proposal. Otherwise, it is likely to end up in the same position again.
Second, DPNs should not be ignored. Once the ATO issues a DPN, directors need to obtain advice immediately. Delay can reduce the available options and increase personal exposure.
Third, liquidation is not always the worst outcome. In the right circumstances, it can provide structure, independence and certainty. It can also preserve value that may otherwise disappear.
Finally, timing matters. The earlier directors seek advice, the more options are generally available. That may be SBR, voluntary administration, liquidation or another course entirely
For more information contact a Worrells Principal.
Author: Paul Nogueira, Principal at Worrells Sunshine Coast and Bundaberg.