Beyond surviving, three months on—it’s thriving
In this case, Worrells were appointed in time to save the business. This case study shows how if positive action is taken, before a business’s financial position becomes irretrievable, business survival is possible no matter how its financial position appears. Our early appointment allowed time and enough working capital to devise a successful plan to enable the Club to trade out of its financial problems and provide a far better outcome for its creditors.
This case study involves a major Community Club that had been operating for some 50 years. As with all community clubs, its Board of Management comprised of volunteers elected by its members.
Three years prior, the Club was profitable and its board members felt it was time for new blood to replace the Board to run the Club.
Under the new Board’s control, with most members having no experience in this role, the strict discipline and accountability required of management fell away, in part due to complacency and lack of management skills. As a result, the Club started trading at a loss.
The Club’s new financial position caused the Club’s auditors to report concerns about the Club’s viability, and its ability to continue as a going concern.
At the Club’s Annual General Meeting held in August 2015, the majority of the Board were replaced by members prepared to take a proactive role within the Club’s operations. These members gave an advantage, as they knew how the Club could and should be run. Their detailed enquiries uncovered the true financial position, which was far worse than they were led to believe. The Club owed:
Australian Taxation Office – $800,000
Other liabilities – $507,000
Employee superannuation – $193,000
Total – $1,511,000
However, if the Club closed, then its total liability position would increase to—$2,700,000—due to crystallised employee redundancies and lease payouts.
The Board sought advice on the options available, which included:
1) Cease trading
This would mean entering into liquidation, the Club’s closure, and selling its assets—and unfortunately, the end of an era for the community.
More importantly, the sale of its assets would be insufficient to pay employee liabilities let alone any trade creditors’ debts.
2) Do nothing
The Australian Taxation Office (ATO) potentially would apply to wind up the Club to recover its $800K debt. Failing that, some other creditor would have taken action against the company.
Obviously, this action (or inaction) would result as per option 1 above.
3) Appoint a voluntary administrator with the aim to propose a Deed of Arrangement (DOA) to continue to trade.
In this scenario the administrators would take control of the Club and its operations. If satisfied the Club had a future and it was determined a DOA was viable, the administrators (in conjunction with the Board) could present a proposal to creditors for approval. If accepted, this would then pass control of the Club back to its Board.
The Board decided on option 3 to appoint administrators and we were appointed in June 2015.
Incidentally, the Club’s structure as an entity registered under the Queensland Incorporations Act 1981 required us to be appointed as liquidators initially. This Act does not provide for the direct appointment of administrators, rather, only a liquidator can appoint an administrator.
As administrators we reviewed:
- The assets’ value and verified any securities over the assets.
- Supervise and manage the Club’s trading to ensure it could trade profitably.
The independent valuation was structured under two options:
- Forced Sale—the asset’s value if the business was to be sold item by item.
- Going Concern Basis—where assets are valued if the business was sold as a going concern.
The valuer advised in their report that if the assets were sold under option one, a forced sale, the value would be significantly less than option two, going concern basis—by less than 50 percent of the assets’ value.
Assets and Securities
The review of valid securities is a more complex area under the provisions of the Personal Property Securities Act 2009 (PPSA). If the party provided goods to the Club without a registered security on the Personal Property Security Register (PPSR), or registered it incorrectly, then in most situations—there is no security.
This was the situation for the providers of many pokie machines leased by the Club.
Thirty-five of the Club’s 112 pokie machines were supplied under business finance arrangements. Of those financed, we found only 13 machines had valid PPSR registrations. The other 22 machines, which were provided by three different financiers, lost entitlement to ownership and therefore those machines vested in the Club.
To show how the PPSA applied in this case, the issues encountered were:
- One financier of eight machines simply had not registered a ‘notice of holding security’ on the PPSR.
- The financier of eleven machines, while having a registration in place, did not register in the Club’s correct legal name, which as a material mistake it rendered the security void. Conversely, they had a valid security (separately) over the Club’s telephone system, courtesy bus, and dishwasher.Those creditors with invalid PPSR registrations became unsecured creditors in this administration.
- As for the final three machines, while the financier held a valid PPSR security, they failed to register the security at the appropriate time, under the PPSA provisions, and were deemed void.
These examples illustrate how careful creditors must be when registering securities on the PPSR.
Club trading and operational restructuring
We found the cash-flow position was far more critical than the Club Manager had advised us. The cash at bank only remained after our appointment, as we immediately froze all withdrawals except with our written approval. Without this freeze, the funds in the bank would have been ‘swept’ by the Office of Gaming on account of outstanding gaming taxes, on the evening of our appointment, leaving zero funds to trade with.
As the Office of Gaming was unpaid, the Club’s gaming license was suspended. However, following some persuasive discussions explaining we could not pay the debt and trade on, and furthermore, without the gaming license we would be forced to close the Club, the Office of Gaming thankfully relented. The license ban was removed and therefore enabled trade to continue.
We then conducted a comparison of various key performance indicators of the Club’s financial affairs with industry benchmarks that showed the Club had historically performed well-below industry standards. These included a disproportionally high level of staff costs, and one of the lowest gaming machine revenue per machine rates in the state.
After some weeks improving the Club’s trading operations and reporting, and implementing appropriate internal controls, we:
- replaced certain staff (appropriately experienced and qualified)
- organised new trading accounts (with suppliers)
- negotiated more preferable rental terms (with the landlord)
- instilled greater control over purchases
- changed kitchen operations and offerings
- introduced incentives to attract patrons
- commissioned a workplace compliance report, which highlighted serious hazards (which were ultimately rectified).
These actions vastly improved the Club’s trade to an acceptable profit level. And two and a half months after our appointment, the trading significantly turned around from trading losses of about $70,000 per month to profits of $35,000 per month (approximately).
These changes brought the Club back into line with industry standards.
The Club was fortunate to have a new Board prepared to work with us to implement these critical changes. They proactively approached members of parliament seeking support, and convinced the local press to run promotional stories about the Club. And, notably, the Board gained council approval (on its leased premises), to carry out major building improvements.
Once it was assessed the Club could confidently trade profitably into the future, the Board proposed a Deed of Arrangement (DOA) with our recommendation that creditors accept (note, all secured creditors were paid in full prior to this proposal). Upon the Deed’s execution, full control of the Club was passed back to the Board in September 2015, some three months after our appointment.
The DOA terms provided:
- Employee superannuation and redundancy paid in full.
- Unsecured creditors valued at less than $12,000 paid in full.
- ATO paid 16 cents in the dollar.
- Trade creditors (other liabilities) paid 16 cents in the dollar.
This administration illustrates how working with insolvency practitioners can assist a once failing business to return to profitability, particularly when management actively embraces change.
It also shows the urgency to act early as it significantly increases the options available to turnaround a business.
If positive action is taken before a business’s financial position becomes irretrievable, business survival is possible no matter how its financial position appears.