On 10 July 2018

In this case, Worrells was appointed in time to avoid a business closure and liquidation. This case study highlights that if proactive action is taken before a business’s financial position becomes inevitable, business survival is possible—no matter how bleak the financial position may appear at first glance. Our early appointment in this matter meant that there was sufficient time and working capital to enable a restructure. The ultimate result was a far better outcome for the creditors, employees, and the community.

Background

The Frankston Football Club (FFC) had a history dating back well over 100 years. The FFC not only had the ‘Frankston Dolphins’ competing in the Victorian Football League (VFL) but its facilities were also used as a key meeting centre for the local community.

FFC was run through an incorporated association structure and its Board of Management comprised of volunteers, which were elected by the club’s members. The nature of the voluntary board position meant that there were frequent changes to the board’s composition; particularly in the few years prior to our appointment. Over time, it appears that the club’s focus fell away from revenue generation and cost cutting—complacency had set in.

In the few years prior to our appointment the club had begun suffering trading losses. Those losses intensified because game patronage and membership reduced, due in part to poor on-field performance by the club’s football team.

To try to curtail the financial issues, it was decided to revamp the club’s facilities—funded largely by the landlord (the Frankston City Council). While the updated facilities expected to generate more revenue in the years to come, the construction works severely interrupted the club’s usual operations throughout 2015. This further impacted on sales and patronage, which compounded the already overwhelming financial pressure.

The poor financial position was well-known and often discussed by the board and FFC members, but none of the difficult decisions had been made. During January 2016 however, the majority of the board was replaced with new members prepared to proactively contribute to club operations. The new members’ initial enquiries raised a number of alarm bells. In particular, the board found the club’s poker machines were in fact losing some $1,600 per week—far from the revenue generator they were expected to be. In April 2016, it was decided to relinquish the club’s rights to the poker machine licences. Other initiatives were also implemented but it became abundantly clear: the financial position was far worse than anticipated.

By August 2016 the FFC had due and payable liabilities of:

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If the club were to close however, its liabilities would substantially increase due to, among other things, crystallised employee redundancies and leave pay-outs. In addition, the club had committed to paying $10,000 per month, until 2020 (three and half years) in a kitchen fit-out lease. If the club was to cease trading, that full lease liability of some $420,000 would also crystallise.

On the assets side, the club’s only real assets were:

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Trading position

Importantly, while the liabilities well outstripped the assets, the day-to-day trading position was far more positive. Forecast budgets projected that the club’s cash-inflows were likely to well exceed its cash-outflows. And there was also plenty of room for improvement if the club had a clearer focus on generating revenue and decreasing its costs. The business fundamentals appeared to be there—the issue however, was the club’s inability to service its poker machine debts.

Options available

When we met with the board, the club had received a formal demand from the Minister of Consumer Affairs, Gaming and Liquor Regulation for a part of the poker machine-related debt (some $475,000). The club had a short window in which it needed to either repay, or come to an arrangement on that debt. The board could not see how the club could deal with that liability given its magnitude.

The board sought our advice on the options available, which included:

1. Ceasing trade

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, upon our assessment, the asset sale proceeds would be insufficient to pay employee/player liabilities let alone any other creditors’ debts.

2. Do nothing

Eventually, a creditor would apply to wind up the club to recover its debt and this action (or inaction) would result in liquidation (i.e. option 1). We also explained to the board their personal exposure if they allowed the club to continue to trade-on in the current circumstances (i.e. trade while insolvent).

3. Appoint a voluntary administrator with the aim to propose a Deed of Arrangement (DOA) (similar to a Deed of Company Arrangement for companies) to continue to trade.

As voluntary administrators, we would take control of the management and operations of the club. If satisfied the club had a future and a DOA was deemed viable, the administrators (in conjunction with the board) could present a DOA proposal to creditors for approval. If accepted, control of the club would pass back to its board.

In August 2016, the board decided on option 3 to appoint us as administrators. This was a difficult decision for the board but one with the club’s best interests in mind.

Administrators’ role and actions

Our role as the appointed administrators included:

  • Ascertaining asset values and verifying any asset securities;
  • Supervising and managing the club’s trading;
  • andForecasting and assessing its future trading and profitably to determine its prospects of restructure.

Above all, to gauge and gain support for the club’s survival, we consulted with the football players, employees, creditors, club sponsors, the Australian Football League (AFL), the local council, members of parliament, and the local community. Given the strong support from stakeholders, we promptly determined a restructure of the club may well be feasible.

As a result, trading of the business continued during the voluntary administration period. Naturally, certain controls to minimise trading expenses were strictly implemented—for example, reducing bar operating hours and enforcing strict profit margins for future event functions.

Assets and Securities

Reviewing the validity of securities over assets is a complex area and requires consideration of the provisions of the Personal Property Securities Act 2009 (PPSA). If a party provided goods to the club without a registered security interest on the Personal Property Securities Register (PPSR), or it was incorrectly registered, then in most situations—there is no security and the party who supplied the asset/property would become an unsecured creditor.

Our investigation identified:

  • The security interest registered over the kitchen fit-out was defective ($420,000 claimed). This financer had inadvertently registered their interest as a “transitional security interest” (i.e. they ticked the wrong box on the PPSR form). Although this did not become a live issue in the administration, it potentially rendered the security interest defective. This example illustrates how careful creditors must be when registering securities on the PPSR.
  • The lessee of several coffee machines (and associated equipment) used by the club did not register a security interest on the PPSR, with the creditor advising that they had never even heard of the PPSA. Without a valid registration, the result was again a demotion of the creditor’s rights to that of an unsecured creditor.

The board’s efforts

The club was fortunate to have a board prepared to work with us to restore the club’s profitability. The board members proactively approached members of parliament seeking support, and enlisted the local media to engage and make the public aware of the club’s plight. The board also assisted to gain support from Frankston City Council and other key creditors through a restructure. While the AFL independently resolved not to allow the Frankston Dolphins to compete in the 2017 VFL season, the board engaged with AFL representatives to determine what was required to ensure a licence would be granted in 2018, if the club could continue through a restructure.

Proposed restructure

After lengthy consultation with our office and key stakeholders, the board proposed a DOA on the following broad terms:

  • The club would be given a clean slate in that all existing creditors would be locked-down and unable to pursue the club for their debt (i.e. their rights would be limited to a claim in the administration).
  • We, as administrators, would retain cash at bank and debtors, but the plant and equipment—which was integral to future trade—would revert to the club.
  • Of the funds collected, the administrators would provide the club with sufficient working capital to see through its initial trading period.
  • Over a five-year period, the club would make contributions to the administrators totalling more than $400,000. The administrators would use contributions, and all other administration recoveries, to discharge the club’s quarantined liabilities.
  • The club would appoint a new and experienced board and implement a raft of changes to increase profitability and re-focus the club on its finances.
  • The club would report their management accounts each quarter to the administrators over the five-year period to ensure club operations continue profitably.

If the club were to be placed into liquidation, the players and employees would receive, at best, a partial return on their entitlements, and ordinary unsecured creditors would have a zero return. Under the DOA it was expected that all player and employee entitlements would be paid in full and unsecured creditors would have a material return as well.

As a result, we recommended that creditors accept the proposal.

Creditors vote

The creditors voted overwhelmingly in favour of the DOA. Shortly after the vote we signed a formal agreement and passed control back to the board and management team. The DOA was formalised in mid-November 2016, some three months after our appointment.

Outcome

In the few months following the DOA being implemented, the FFC is trading positively and is no longer shackled by its historical debts. A raft of changes have, and continue to be implemented, to ensure the club’s financial position is viable into the future. Several key and experienced personnel have also been appointed to the board to oversee the club’s operations.

While creditor’s debts have been quarantined and they will need to wait for payment, those parties will receive a materially greater return if the DOA is successful than would have been the case if the club had simply ceased trade—or been liquidated.

This administration case study illustrates how working with insolvency practitioners can assist a failing business to return to profitability, particularly when management actively embraces change. It also shows the urgency to act early as there are significantly more options to turnaround or restructure a business.

 

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