Voluntary Administration – Cleaning Company Case Study

Cleaning company reduces its debt by 80% through Voluntary Administration

Australian Debt Solvers assisted a commercial cleaning company – who perform cleaning services for a number of high end hotels and serviced apartments throughout Melbourne and Brisbane – with their financial issues in 2017.

The cleaning company provides a one-stop commercial housekeeping solution that not only involves cleaning services, but also encompasses every aspect of housekeeping management from the hire and supply of linen and bathroom amenities to paper products, coffee, tea and other consumables.

The company’s direct yearly turnover was initially estimated at approximately over $4 million, and they had approximately 200 full time, part time and casual employees, along with subcontracted services through other entities.

The director of the cleaning company contacted Australian Debt Solvers after realising the company was in financial difficulties. This included debts in excess of $2 million, over $1 million of which was owed to the Australian Taxation Office and $786,000 owed in employee entitlements.

Australian Debt Solvers were appointed by the company as Voluntary Administrators. Voluntary Administration is a formal process where an external Administrator is appointed to take control of the company while its financials are being reviewed.

Upon examining the company’s financial position, Australian Debt Solvers found that:

• While the company was experiencing significant growth, they had difficulty managing their trading due to a variety of issues, including insufficient profit margin measurement (cost recovery), insufficient working capital, and poor management and accounting systems.
• Ongoing trading losses of $620,000 had been incurred in the year prior to the Voluntary Administration appointment, meaning there was a significant risk the company would be eventually wound up and the director would be held liable for insolvent trading.
• Had the company ceased to trade, it was very likely that all employees would have had their employment terminated and unsecured creditors would have been unlikely to receive any recovery of debts owed to them by the company.

Australian Debt Solvers immediately recognised the need for the company’s business operations to be immediately restructured in order for trading to be able to continue in the longer term. This included the priority re-assessment of how management quoted for current and ongoing customers, and improved budgeting systems to meet all costs incurred with the assistance of
the director and other parties.

As Voluntary Administrators, Australian Debt Solvers allowed for trading to continue while a Deed of Company Arrangement (DOCA) and several restructuring initiatives were implemented. A DOCA is a binding arrangement between a company and its creditors which aims to maximise the chances of the company continuing to trade and/or to provide a better return for creditors than they would otherwise receive if the company was immediately wound up.

Under the 18 month Deed of Company Arrangement, the company proposed to meet its creditor debts in the following manner:

• Secured creditors would be unaffected and monies owed would be continued to be repaid in full.
• Company employees would retain their employment and their entitlements, including ongoing entitlements.
• Customers would remain unaffected with regard to the provision of services by the company.Unsecured creditors would receive a distribution of approximately 20 cents in the dollar at the end of the DOCA.

The outcome of this process was that the company was able to reduce their debt by a
staggering 80%, and to continue trading profitably as a result.

The director of the cleaning company stated that the Voluntary Administration and the team’s
expert advice saved the business.