Swift and strategic action produces higher return to creditors.
Our office successfully administered two contrasting cases of voluntary administrations (VA) and its subsequent Deeds of Company Arrangement (DOCA) with a very similar outcome. Both cases detailed to creditors that with their endorsement, they would get a higher return on their debts in a DOCA than in an immediate winding up of the respective entities.
With the assistance of Worrells, both companies have returned to a solvent position—with one of the entities now trading profitably, due to the effective and strategic use of the DOCA process.
As part of a well-known pharmacy brand, the company provided pharmaceutical and associated services to approximately 75 related parties, predominately providing scheduled medication, storage/warehousing, logistics, branding, and advertising services.
Legacy debts, including debts accrued during the peak of the COVID-19 pandemic, resulted in a tax bill of over $6 million. Creditors’ recovery action resulted in a winding-up application, due to be heard a few days prior to the administrator’s appointment.
The administrator worked closely and swiftly with the director and other stakeholders to adjourn the winding-up application, and assist the director provide a preliminary DOCA, which was anticipated to provide creditors with a superior return, compared to liquidation.
The adjournment was subsequently granted and a DOCA was ultimately proposed which provided for an estimated return to creditors of approximately 75 cents in the dollar, to be paid within 3 months. The administrator’s analysis revealed a liquidation would result in a return to creditors between the range of 0-30 cents in the dollar, which was highly contingent upon liquidator recovery actions.
Significantly, due to a restructure of the Group, the Company was no longer trading and accordingly, had no prospects to repay debts in the ordinary course—this process was purely a mechanism to compromise debts to provide creditors with a better return compared to that of a liquidation scenario.
Ultimately, this was a major factor in creditors’ decision to accept the proposal and the debts of the company were compromised as a result.
This mid-sized construction company was severely impacted by the lockdown restrictions and industry disruption as a result of the COVID-19 pandemic, in addition to the failure of a large client. At the time of the administrator’s appointment, the company had approximately 35 full-time employees and a further 25 subcontractors.
The company maintained a better-than-average statutory compliance records with tax lodgments made on-time, however not paid, with a total creditor pool of approximately $1.2m.
The director proposed the DOCA with an upfront contribution of $180,000, which provided for a return to creditors of between 9-10 cents in the dollar. The return available in the DOCA was more superior in comparison to an immediate winding up of the company, as well as other mechanisms to deal with creditors concerns such as timing of lodgments and performance monitoring by the deed administrator.
Current financial reports indicate that the company is solvent and is currently operating profitably, due to the effective use of the DOCA process.
The key takeaways obtained from these two case studies for advisors and their clients are:
The VA/DOCA process can be a great tool to restructure a company’s operations provide a framework to implement a concise and formal plan.
The DOCA process can be successfully implemented to deal with its debts swiftly.
Creditors usually receive a better return and in a timely manner, compared to the risks (and often large costs) associated with recoveries in a liquidation scenario.
Business can be tough. Before throwing in the towel, we help you consider what can be done to turn around a business first, exploring restructuring options that can buy valuable time to get businesses and its owners/directors back on their feet.
Contact us to discuss the options available in dealing with financial struggles and allowing a business to survive. It’s do-able to undo, with turnaround experts.