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13th December, 2022

Restructuring Case Study: Civil Engineering Business

Michael Shabani, Senior Manager

On 5 August 2022, Stephen Dixon and Trent Hancock were appointed as Joint and Several Administrators of two (2) entities operating within the civil engineering industry. The entities’ business operations extended across Victoria and Queensland and were respectively managed by the Companies joint directors. The entities operated alongside other entities within a group structure and were responsible within the group structure to manage the trading and employment divisions of the business.

The basis for the appointment of the Administrators was attributed to the accumulation of a sizable debt to the Australian Taxation Office with respect to unremitted statutory tax comprising of unpaid GST and PAYG in excess of $2 million dollars. In addition, the Companies also had trade creditor liabilities of $363,806 and related entity liabilities of $1.3 million dollars. The Companies were unable to discharge their respective liabilities with their available financial resources and were therefore deemed to be insolvent.

The factors contributing to the Companies financial predicament and accruing financial obligations were attributed to the following factors:

  • The COVID-19 pandemic, which slowed and disrupted the construction industry and inhibited the ability of the Companies to acquire new business projects and progress existing projects;
  • The ensuing lockdowns and site restrictions impeded the Companies ability to productively deploy staff to the various project sites between their interstate operations. Several project sites were temporarily shut down or projects placed on hold; and
  • The Companies did not qualify or receive the JobKeeper subsidy for a period of six (6) months, however kept the same staffing levels and meeting payroll obligations.

The Directors also attributed the following factors to the financial difficulties and eventual external administration of the Companies:

  • Poor financial management of the Companies financial affairs by the former financial controller, which contributed to statutory tax lodgments not being lodged on time and intercompany and other financial transactions not being properly recorded amongst the entities within the group structure, therefore contributing to inaccurate and misleading financial information.

Due to the financial predicament of the Companies, the directors sought the assistance of Hamilton Murphy Advisory and proceeded to place the Companies into Voluntary Administration with a view of restructuring the Companies debts through a Pooled Deed of Company Arrangement (“Pooled DOCA”) as an alternative to liquidation.

As part of maximizing the return to creditors and secondarily achieving the desired outcome of the directors, we continued to trade the business of the Companies during the administration period in order to preserve the business and complete existing projects which had been determined to be profitable. This was in collaboration with the directors and existing staff who were retained an played an instrumental role in this process.

It was also necessary to bring up to date the Company’s internal management accounts and rectify existing transactions which were misrepresenting the Companies financial position and performance. We were also required to lodge outstanding tax lodgments including Business Activity Statements, Installment Activity Statements and Income Tax Returns. These were undertaken with the assistance of the internal bookkeeper, a consultant bookkeeper and the external accountants.

During the administration period it was apparent, having reviewed the Companies internal controls and processes, that significant changes were required to be implemented to maximize the likelihood of success of the Companies moving forward. These changes centred around corporate governance, statutory compliance, management of cash flow, introducing policies and procedures to ensure regular internal oversight of the Companies financial position and performance and introducing external oversight over the Companies finances and compliance obligations through a consultant bookkeeper and the external accountant.

The introduction of these measures was intended to facilitate the ongoing monitoring of the financial health of the Companies and their compliance obligations and ensure that any potentially unfavourable financial deviations could be identified and remedial measures introduced to promptly deal with the issue before they could pose a risk to the financial viability of the Companies. These measures were also intended to provide confidence to the general body of creditors and more particularly the Australian Taxation Office, the Companies largest creditor, that significant changes had been made toward mitigating a situation in which the Companies would fail to comply with their statutory reporting obligations and would lead to the accumulation of a statutory tax debt to the Australian Taxation Office.

Our confidence in supporting the Directors proposal for a Pooled DOCA was supported by a healthy trading profit generated during the five (5) week administration period, coupled with a twelve (12) month projected cashflow prepared by the Company’s external accountant, which reflected projected profits and a viable business into the future. The projected return to creditors pursuant to a Pooled DOCA was anticipated to provide a better return to creditors than the alternative of liquidation. Accordingly, the Pooled DOCA was recommended to creditors by the Administrators.

The second meeting of creditors was convened and held on 9 September 2022 at which creditors in attendance passed a resolution in favour of executing a Pooled DOCA. The Pooled DOCA was subsequently executed on 16 September 2022, following which control of the Companies reverted to the directors. The Pooled DOCA was subsequently effectuated in December 2022 and the administration process concluded within four (4) months of commencement.

Through this administration process Hamilton Murphy Advisory was able to restructure the Companies business and its debts and preserve the future of the Companies and establish a viable business for the future. The administration process also achieved a beneficial outcome for all stakeholders.

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