Viable options for businesses struggling through COVID!


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Viable options for businesses struggling through COVID!

As a good friend of mine used to say, ‘there is a solution to every problem”.

Many businesses have been repeatedly challenged over the last few years.  Some may be irretrievably beyond rescue, whilst others may be able to be salvaged.

Is there value in the business?

To understand the future of a business, business owners must firstly be able to differentiate the business from the legal structure.  If the business is viable, then even though the company may be hopelessly insolvent, the business may have some value that could be realised, and a dividend paid to creditors.

This value could be realised either through a sale of the business for a valuable consideration or deciding to trade on the business and coming to terms with paying existing creditors a dividend through future profitability.

The sale of a business is straight forward with the proceeds being applied to creditors pursuant to the Corporations Act.  This is best executed by a liquidator.  This results in the legal entity being wound up and creditors getting the maximum possible return.

Trading on – a viable solution

However, most often the value in a business is best realised by the incumbent owner through trading it on.  In such instances, the law allows for the appointment of a Voluntary Administrator and the putting to creditors of a Deed of Company Arrangement (DOCA) to compromise debts.  This allows the company and its business to continue trading, subject to meeting the conditions in the agreed Deed.

This is a statutory process and binds all creditors if the majority by value and number agree to the proposed terms.

This is a useful tool/strategy that allows a company and its business to survive adverse conditions which do not fundamentally affect the ongoing viability of the business.  COVID has been such an occurrence.  Many businesses that were viable pre-COVID could find themselves in a financial bind because of outstanding liabilities, such as rent, supplier commitments and unpaid taxes.

Maximising asset value & creditor return

The benefit of doing this is to give the business a chance to survive as well as achieve a better outcome for creditors.  The DOCA allows different arrangements to be agreed upon, including the possible sale of the business.

In summary, if the fundamentals of the business are still good, it may be worthwhile considering such a regime to help maximise asset value and a better return to creditors.  Such an alternative is often better than just avoiding the decision or giving up and liquidating.

There is no one simple answer to what should be done, as each business is different, and their unique circumstances must be considered.   It is therefore paramount to obtain expert advice and work with an experienced and reliable insolvency practitioner.

Should you wish to discuss the right solution for your business, please contact Riad Tayeh on 02 9633 3333 or mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business strategy, turnaround, forensic investigations, and insolvency (both corporate and personal).