Many people look forward to Christmas all year.
For many industries the end of year is seemingly the only time of year when the world slows down a little bit (at least from 25 December). For some businesses (e.g. retail) it’s the most lucrative time year, while for others it imposes a massive squeeze on their cashflow.
When businesses and industries close or scale back over the Christmas period revenue can be reduced or cut off. During that time staff still need to be paid their annual leave and fixed overheads continue to be incurred. That mismatch can push a business from temporary strain into insolvency if cash reserves are insufficient to meet payroll, rent and supplier bills.
As a result, Christmas can be an extremely stressful time for business owners as they may face a situation in which their business can simply not afford to meet payroll and financial obligations.
Some solutions may involve short-term borrowing to alleviate cash flow.
However, if a business is insolvent then the best course of action may be to consider a formal insolvency option.
Formal insolvency options for companies
Voluntary administration and DOCA
The voluntary administration process is designed to assist insolvent companies satisfy their debts, by ensuring that they can either:
Come to a formal arrangement with their creditors to pay those debts through a Deed of Company Arrangement (DOCA); or
Be placed into liquidation, quickly and without going to Court.
The voluntary administration process maximises the chances of a company continuing to exist by giving it the opportunity to propose a DOCA to its creditors. It offers a collaborative approach to satisfying the company’s debts. It restrains creditors from enforcing their claims and can assist a company to trade out of short-term difficulties caused by cash-flow restrictions or one-off financial problems. When appropriate, it can also provide a way to restructure a business or the company itself to revive it to a healthier financial position.
Small Business Restructure
The small business restructuring (SBR) process allows a small business that has found itself in a precarious financial position to propose a single offer to its creditors seeking to settle its debts for a lesser sum than is owed. The offer is formulated and proposed with the assistance of a registered small business restructuring practitioner. And unlike other types of formal insolvency, the directors remain in control of the business throughout the entire process. However, there is a strict eligibility criteria involved[1]!
Each pathway has different outcomes for employees, creditors and directors; the administrator’s or liquidator’s role is to maximise returns and follow statutory priorities.
Liquidation
In the event that neither VA or SBR is possible, placing the company into liquidation maybe the best option for all stakeholders.
Liquidation is the process of winding up a company’s financial affairs to dismantle the company’s structure by conducting appropriate investigations and enabling a fair distribution of company’s assets to its creditors. Liquidation occurs either because the company cannot pay all of its debts (i.e. it is insolvent), or its members want to end the company’s existence and have it struck off from the Australian Securities and Investments Commission’s (ASIC) register.
In a liquidation employees are priority creditors for certain entitlements, and where a liquidated company cannot pay, eligible employees may be able to claim under the Fair Entitlements Guarantee (FEG) scheme for unpaid wages and leave.
A Christmas Carol
Having these insolvency options available, a cashflow crunch at Christmastime can feel less like a haunting and more like a deep, necessary cleaning of the house—the kind you put off all year until you realise it’s the only way to breathe again. Just as Dickens’ ghosts urged Scrooge to confront what was weighing him down, this time of year can force a business to examine fundamental questions of going concern and profitability.
The options of voluntary administration and small business restructure may not be so much as an ending as an opportunity to reset: an opportunity to tackle 2026 without last year’s liabilities holding the business back.
[1] Practical Guide to Small Business Restructuring | Worrells
