Liquidation
THE CLIENT
An electrical retail store located on the Sunshine Coast, Queensland. This store was a small business that had been trading for over 10 years.
BACKGROUND
The directors had successfully traded their electrical retail store. However, in the past few years, it had been making losses. The directors were working long hours for no return and just ‘wanted out’.
Almost everything in the store was owned by the suppliers. The fit out had an auction value of about 10% of its actual cost. There were Realise assets of about $50k.
| Assets | Cost Price | Auction Value |
|---|---|---|
| Fit out | $250k | $15k |
| Stock | $200k | $20k |
| Trucks | $50k | $20k |
| Total | $500k | $50k |
| Liabilities | |
|---|---|
| ATO | $300k |
| Trade Creditors | $200k |
| Employees | $50k |
| Directors | $300k |
| Total | $850k |
OPTIONS
The average cost to save a small business via administration is $91K as detailed below:
| Voluntary administration | $31k |
| Deed of company arrangement | $20k |
| Payment to creditors of 5 cents in dollar | $40k ($800k of creditors) |
| Total | $91k |
The costs of a voluntary administration are so prohibitive that only about 5% of the 10,000 companies that become insolvent each year will use a voluntary administration to successfully restructure.
A ‘pre-pack’ sale of the assets of the insolvent company into a new company is almost always the cheapest option for a small business to restructure.
In this instance, a pre-pack sale would have cost about $50k, however the directors felt their business would not be profitable in the medium term.
There is no point in saving a business that will not make a profit in the future. Consequently we recommended the directors liquidate the company.
CONCLUSION
The company’s employee entitlements were paid via the government safety net (known as Fair Entitlement Guarantee or ‘FEG’) in about 4 months. Like approximately 95% of liquidations, no dividend was paid to creditors.
The Australia Securities and Investments Commission (‘ASIC’) did not investigate this matter and it was finalised in about 12 months.
The directors were immediately offered good jobs by other retailers. They reported to us that they were relieved to be earning good money again and being able to switch off at 5pm instead of just working to pay creditors.