Beyond surviving, three months on—it's thriving.
Recently Worrells was appointed to a club at a time early enough to result in the business not only surviving, but thriving.
This is an example of when if positive action is taken, before a business's financial position becomes irretrievable, business survival is possible no matter how its financial position appears. The 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.
Background
This appointment involved a major Community Club in northern Brisbane that had been operating for some 50 years. As with all community clubs, its Board of Management comprised of volunteers elected by its members.
Approximately three years ago the Club's members elected a new Board to run the Club. Under this new Board's control 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 incurring substantial trading losses.
The Club's 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 May 2015, the majority of the Board were replaced by members prepared to take a proactive role within the Club's operations.
The incoming Board's detailed enquiries uncovered the true financial position, which was far worse than they were led to believe. The Club had very little in the bank and owed in excess of $1,500,000, including employee superannuation of $193,000 and taxation debts of $800,000. Further, if the Club had to close, then its total liability position would likely increase to approximately $2,700,000 due to crystallised employee redundancies and lease payouts.
Options available
The incoming Board sought advice on the options available, which included:
- Cease trading and entering into liquidation. This would mean the likely end of an era for the community. Also, the sale of the Club's assets would likely be insufficient to pay employee liabilities let alone any trade creditors’ debts.
- Do nothing. This would likely see the ATO and/or another creditors take action against the Club to pursue the debts and potentially would apply to wind up the Club. The Office of Gaming may also have something to say about the Club's position. Obviously, this action (or inaction) would result in the same outcome as option 1 above.
- 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.
Decision taken
The Board decided on option 3 to appoint administrators. To do so the Club's structure as an entity registered under the Queensland Incorporations Act 1981 required the appointment of liquidators as a first step. This Act does not provide for the direct appointment of administrators, rather, a liquidator can appoint an administrator.
Worrells were appointed as provisional liquidators on 10 June 2015 and, after a short period of assessing and stabilising the Club's viability, were subsequently appointed as administrators on 29 July 2015.
Club trading and operational restructuring
As liquidators and later administrators we reviewed the Club's asset value, verified any securities over the assets, and supervised 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.
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.
Initially we found the cash-flow position was far more critical than the Club Manager had advised us. Some relief was provided by the Office of Gaming in respect of outstanding gaming taxes and licences, and some other creditors in respect of critical supply accounts, which allowed us to continue trading.
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 which brought it back into line with industry standards.
The Club was fortunate to have an incoming 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.
Successful turnaround outcome
Once it was assessed the Club could confidently trade profitably into the future, the Board proposed a DOA with our recommendation that creditors accept.
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.
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.