Navigating COVID-19 Insolvency Without Loss of Control
AXM Law was approached during the Covid-19 pandemic by a major hospitality venue operator whose two venues were insolvent as a result of ongoing lockdowns, with more than $1 million owed to the ATO, as well as other liabilities. The operator had been approached by other lawyers and numerous “pre-insolvency” and restructuring advisors, who promoted costly solutions including immediate voluntary administration and liquidation of one or more group companies.
The Challenge: A Superior Alternative to Liquidation
The client faced a critical situation common during the pandemic, with significant ATO debt and advice suggesting expensive external administrations. Instead of these knee-jerk solutions, AXM Law utilised superior expertise in insolvency, trusts and tax law. By using the owner's existing trading trust structure, the client was able to carefully, inexpensively and efficiently restructure the group's affairs.
Our Approach: Efficiency through Expertise
A far superior outcome was achieved compared to a standard liquidation, at a fraction of the cost. AXM Law’s services and strategy included:
- Market Valuations: Obtaining two independent market valuations for one of the businesses (at depressed covid prices).
- Trust Restructuring: Changing trustees of a trust to facilitate the transition.
- Market Value Sales: Selling both businesses at market value, including one to a new, ‘clean’ trustee company still owned and controlled by the original owner.
- ATO Negotiations: Formally objecting to and successfully writing off six-figure penalties and interest with the ATO.
- Final Liquidation: Ultimately liquidating the old corporate trustee but which, by then, was an assetless shell, with the liquidator having no legal recourse to any of the businesses in this situation.
The Outcome: Preservation of the Business
The result of this sophisticated restructuring was that the owner never lost control of his businesses. By avoiding a knee-jerk liquidation and using a tailored approach, the venue operator was able to move forward with a clean slate while preserving the underlying value of the assets.
Key Principles for Restructuring
This case demonstrates that traditional insolvency paths like voluntary administration are not always the most efficient option. Key principles include:
- Utilising existing trust structures to provide a foundation for a legal restart.
- Obtaining independent valuations to ensure all asset transfers are defensible and at market value.
- Engaging in formal ATO objections to significantly reduce liabilities related to penalties and interest.
