Welcome to Harbour Masters, where we offer insights and updates on the expertise and guidance available for the Directors of companies in need of advice in the face of stiff trade winds. Our updates focus on the critical business topics of restructuring, turnaround, and the availability of the new 'Safe Harbour' provisions, all designed to help companies renew, restructure, and rebuild.
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Since 1998, Ocean Informatics have been in the business of developing information technology (IT) for the health industry. They have clients in both the public and private sectors in Australia and overseas. Their focus is on developing best practice systems for sharing health records at local, national and international levels. The aim of their platform is to support clinicians to deliver improved patient care.
Ocean Informatics operates from offices in Australia and the United Kingdom. The company has an annual turnover of around $3 million. It employs around ten people, including experienced IT engineers with a strong clinical background.
Ongoing trading losses led to internal disputes
The company had a history of trading losses, not uncommon with IT development businesses. Its high cost structure was disproportionate to turnover, where the payroll and overhead costs were unsustainable. This, combined with a lack of strategic management of the operational and financial aspects of the business, led to the company being placed into voluntary administration in late 2017.
To keep the company trading, the management team sought relief from related-party creditors by way of debt to equity conversions on various occasions.
In mid-2017, disputes arose between the board of directors and senior management and contractors. This led to the resignation of key senior management and the termination of certain contractor agreements. The debts owed to these parties were subsequently called up causing an acute cashflow shortage and the appointment of a Voluntary Administrator.
In addition, an application to wind up the company was in progress upon the appointment of the Administrator.
The key issues
With severe cashflow problems, the company was likely insolvent and could not continue as is.
Pending litigation threatened to cause the company to cease trading and be wound-up.
The recent loss of senior managers meant that the organisation lacked strategic and financial direction.
The Company was in desperate need of restructuring, both financially and operationally.
Working with BRI Ferrier, Peter Krejci, John Keenan and their team, sought to restructure and save the business via a sale or a recapitalisation using a Deed of Company Arrangement. They negotiated a limited indemnity funding arrangement to overcome the lack of cashflow and support the company’s operations while the restructure was explored during the Voluntary Administration period.
Using the Voluntary Administration process followed by a Deed of Company Arrangement, the BRI Ferrier team explored a sale of the business and then introduced a strategic partner through which the business was recapitalised and management restructured.
Based on this injection of funds, the following actions supported the business during this process:
- a new share capital structure was created;
- some of the existing creditors converted their debt for equity;
- new management was appointed in the business; and
- a range of cost reduction measures were actioned.
Also, compared to a likely negative outcome under a Liquidation strategy, the estimated return to creditors was substantially improved under the Deed of Company Arrangement.
“BRI Ferrier did a good job, it was crisp and clinical. We now have a recapitalised and restructured business with reduced overheads moving forward.”
Dr Sam Heard - Clinician & Director, Ocean Informatics
Listed/disclosing entities need to disclose ‘safe harbour’ issues, but not necessarily ‘safe harbour’ itself
Since the launch in September 2017, there has been considerable debate among professional advisors about the availability of Safe Harbour to Listed and disclosing entities, that is, those with obligations to keep markets informed of information about their securities (shares, units etc.) that a reasonable person would think likely to be material to the price.
Sydney-based Principal Peter Krejci contributed an article in the February 2018 edition of the Governance Institute's membership magazine, 'Governance Directions', published last week.
A Deed of Company Arrangement (“DOCA”) can be the perfect instrument to facilitate a commercial settlement between parties where there are no other viable options available, as demonstrated by the recent matter of Brightwater Engineering Solutions Pty Limited (“the Company”).
As covered in previous posts, the new Safe Harbour provisions were enacted to encourage directors to seek professional assistance in the early stages of a company’s financial distress (or foreshadowed distress), so as to seek a better outcome. The words usually brought up when mentioning positive outcomes for a financially distressed company are “restructuring” and “turnaround”. But what do these terms mean, what does a restructure encompass, what do we have to go through to “turnaround” a company?
With the official start date of Amazon Australia's operations locally being today, the reported fears and apprehensions of Australian retailers over the past decade have now been realised. As the media have built-up talk of the negative impact upon retailers, having seen Amazon's effect upon similar businesses in the US and the UK, we look ahead to the likely benefits to retailers set-up as companies in Australia using the Safe Harbour provisions in the Corporations Act.
The Australian Restructuring Insolvency & Turnaround Association (ARITA) has released their one-page fact sheet on Safe Harbour for Company Directors, encouraging ARITA members to use this document for the promotion of their services.
Safe Harbour laws effectively provide protection to directors from insolvent trading liability if they pursue a plan that is reasonably likely to achieve a better outcome than an immediate appointment of an Administrator or Liquidator.