Is your business beyond rescue?

Understanding the viability of your business is important when considering restructuring options.

The small business restructuring (SBR) process allows a company to compromise its debts through a restructuring plan to maximise the chances of the company’s business continuing as a going concern.

Likewise, the voluntary administration (VA) process allows a company to compromise its debts through a Deed of Company Arrangement (DOCA), which is expected to provide a better outcome to the company’s creditors than if the company were placed into liquidation. The SBR and VA/DOCA process have their differences, however both can be an effective way to restructure a business. More information found here.

A proposal under a restructuring plan and DOCA can take many forms, however, generally the proposal provides that the company will make a monetary contribution over a period of time, usually through monthly instalments. Where a restructuring plan or DOCA is accepted, the company has a future commitment to meet the contributions in accordance with the terms of the restructuring plan or DOCA. This is in addition to committing to ongoing liabilities the company will be incurring from its future trade.

Directors looking to utilise the SBR or VA process should consider the viability of the business to continue trading and meet its future commitments, both under the restructuring plan or DOCA, and ongoing liabilities.

This should be considered prior to commencing an appointment, and this may involve directors:

• considering whether any actions beyond the restructuring plan or DOCA can be taken to address the company’s financial issues (e.g., to increase revenues and/or decrease expenses); and

• preparing a cash flow forecast to depict the company’s cash position and whether the company can realistically meet its future commitments.

Considering the viability of the business is important for directors looking to utilise the SBR or VA process, as there are consequences if a company fails to meet the contributions:

• In a restructuring plan, if the company contravenes its obligations under plan and does not rectify the contravention, the restructuring plan terminates. The termination of the Restructuring Plan does not automatically place the company into liquidation, however, as the company is essentially placed back into the position it was prior to the SBR appointment, the company would likely face the same financial difficulties it was prior to the SBR appointment, and a liquidation may be the most appropriate option for the company.

• In a DOCA, if the company defaults on its obligations under a DOCA and does not rectify the default/s, then the deed administrators may take appropriate action in accordance with the terms of the DOCA, which may include enforcement action under the DOCA (e.g., against any security provided by the company and/or the director), seeking approval to vary the DOCA (if proposed by the director), or terminating the DOCA, which has the effect of placing the company into liquidation immediately. This will likely result in an increase in the costs of the administration and erode any potential return to the company’s creditors.

Additionally, if the company is experiencing financial difficulties during the restructuring plan or DOCA, the company may also be failing to meet its ongoing liabilities and may be accruing post-appointment liabilities that it is unable to satisfy. If so, the company’s financial circumstances may not be any better as a result of the restructuring plan or DOCA being accepted.

Whilst there is the opportunity for variations to be made to a restructuring plan (via a Court application) and a DOCA (via a resolution of creditors), the process to seek a variation will incur additional costs and delay the process, and it is not guaranteed that the proposed variation will be approved.

Understanding the viability of the business is important for directors to consider when determining which external administration option is best suited for the circumstances of the company.

We understand that the decision to place a company into an external administration appointment can be a difficult decision for directors, and at Worrells, we provide tailored advice on the options available to your company based on your company’s circumstances to help you make an informed decision.