A light at the end of the tunnel for financially distressed companies

A tale of three tax debts.

The small business restructuring (SBR) process helps financially distressed small businesses with debts under $1million restructure their debts, whilst retaining control and keeping the doors open.

These three recent cases handled by our Gold Coast & Northern NSW offices are examples of where we have helped guide company directors through a successful SBR process.

Case 1

We assisted a company which provides nationwide electrical contracting services. The company was going through a phase of significant growth by taking advantage of increasing demand in renewables.

However, their growth was significantly impacted by the COVID-19 pandemic. In particular, the company suffered from significant increases in the costs of materials, but also lengthy state border closures prevented them from being able finalise their projects on time leading to cost overruns.

As a result, they fell behind on their taxes and the ATO commenced further action by firstly issuing garnishee notices to the company’s debtors followed by further demand notices claiming a debt of $982,000. This was ultimately too much of a strain to the business and the company commenced the SBR process.

Proactive involvement from the directors and the company’s accountant enabled us to collectively draft timely cashflow forecasts, a report on the company’s financial position and a SBR plan, which was approved by the ATO and other creditors.

Fast forward six months and the final contribution by the company under the SBR plan has been received, and creditors were paid a final distribution of just under 30 cents in the dollar.  With the ATO the primary creditor, an amount of $294,000 was paid to the ATO with $687,000 in tax debt saved by the company.

Case 2

This company commenced operations just six months prior to the outset of the COVID-19 pandemic offering grooming and pet day care services.

Whilst the company was in its startup phase trying to gather a loyal following of customers, it suffered from unforeseen forced closures either due to outbreaks in the community or not having enough staff (due to illness) to take care of its customers’ pets.

As a result, they fell behind on their taxes and the ATO commenced further action to recover $657,000 owing. To address the mounting debt, the company entered into the SBR process.

By working together with the director and company accountant, we collectively collated a report on the company’s financial position and a SBR plan, which was approved by the ATO and other creditors.

Fast forward just three months and the one-off contribution (paid by the company director) under the SBR plan was received, and creditors were paid a distribution of just over 10 cents in the dollar.

Again with the ATO the primary creditor, an amount of $65,700 was paid resulting in the company saving $591,300 in tax debt.

Case 3

We were approached by a premium clothing manufacturer whose products are sold both online and through traditional retail stores.

Due to the impact of the COVID-19 pandemic, the company sales suffered from widespread shutdowns of retail stores, decrease in consumer demand for their premium products and significant increases in the costs of shipping their goods. 

As a result, they fell behind on their taxes and the ATO took further action by issuing director penalty notices to pursue debt of $350,000 owing by the company.

To deal with the director penalty notices, the company directors promptly appointed our office to put forward an SBR plan. After which the directors and the company’s accountant assisted us to collate a report on the company’s financial position and a SBR plan, which was approved by the ATO and other creditors.

Fast forward just three months and the one-off contribution (paid by the company directors) under the SBR plan was received, and creditors were paid a distribution of just under 20 cents in the dollar.

With the ATO owed $350,000 they received a payment of $105,000 allowing for a tax savings to the company of $245,000. 

Key takeaways

Our key takeaways for advisors and their clients are:

• The SBR process is a cost-effective strategy to quickly turnaround a company’s financial uncertainty and give directors the opportunity to enjoy future success.

• The SBR process is a debtor-in-possession model, meaning that the director stays in control and continues to run the business while the proposal is formulated and being considered by creditors

• Early and proactive involvement from the directors, advisors and restructuring practitioner will more likely lead to sustained and positive outcome.

With the ATO chasing more than $34 billion worth of debts owed by small businesses that was put on hold during COVID,  the SBR process is one option for you or your clients to consider to keep the lights on and to enjoy future success.

For more information on the SBR process, click here to download our complimentary guide to small business restructuring.

Alternatively, if you or your clients have any questions about the SBR process, please get in touch with our office.