Strategies and measures to gain creditor confidence.

In July, we looked at poor tax compliance and its effect on a company's ability to restructure by being unable to get the Australian Taxation Office's (ATO) support as the largest common creditor in the majority of external administrations. This article looks at how to implement certain strategies to overcome poor tax compliance.

A poor tax compliance history will result in the ATO's lack of confidence in a company's proposed restructuring plan and its implementation. At Worrells, we've seen directors and financial advisors interest in restructuring increase to prevent their client's companies being wound up through a liquidation. Directors and financial advisors must know the critical elements a restructuring plan needs to satisfy the ATO's concerns.

When looking at a formal restructure via a voluntary administration (VA) and its subsequent Deed of Company Arrangement (DOCA), the voluntary administrator must be satisfied that the director's/other party's DOCA proposal is in the creditors' best interest and must provide a recommendation to creditors in this respect. A voluntary administrator considers various factors in recommending a DOCA proposal to creditors, including the following:

  • Value of the potential return to unsecured creditors (cents/$) compared to the return available in a liquidation scenario.
  • Timing and certainty of the expected dividend to creditors (e.g. is the proposed contribution by the director/third party realistic).
  • Continuation of the company's business affairs.
  • Preservation of the company's employees and their entitlements.
  • The plan addresses prior compliance deficiencies.

The voluntary administrator and the company's creditors (including the ATO) must be satisfied the restructure proposed is realistic, and achievable in the period proposed. To address these concerns, the following strategies usually play a large role in determining whether such a restructure is realistic:

  • Detailed future trading and cash-flow projections. If the company's financial advisors are consulted and/or compiled the projections, it's generally viewed as being more accurate and therefore more reliable.
  • Supporting documentation for the current and future workload/projects underpinning the income/profit the company anticipates to generate. These include contracts, tenders submitted, written confirmation from head contractors/suppliers, etc.
  • Support from trade creditors/suppliers for current and future trading (through extended payment terms or other arrangements). Although it's crucial to note that this is not always possible as these creditors may not be entitled to a full dividend in the potential DOCA.
  • A dedicated internal accountant/bookkeeper to consistently monitor the company's performance and address any potential issues swiftly.
  • The external accountant providing additional services such as monthly meetings/reviews of management accounts.
  • Opening an independent bank account to deposit funds for GST, PAYG and income tax obligations to ensure its full payment when due. This strategy safeguard funds and prevent its use on other expenses/commitments.
  • Additional security for DOCA payments such as security registrations on the Personal Property Securities Register (PPSR), personal guarantees, etc.

These are just some strategies that provide both the voluntary administrator and creditors with sufficient confidence that the company has effective tools to address prior deficiencies and restructure the company's business effectively into the future.

Further, creditors-including the ATO-may consider that the company can comply with the restructure terms and continue trading profitably in the future as it is addressing the contributing factors to its financial difficulty.

It's do-able to undo, with turnaround experts. Contact us to find out how we help your clients put difficult financial challenges behind them and put the business on another path.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.