Voluntary Administration – Security Company Case Study

An 85% reduction in debt gets company through a major trading and cash flow problem

Established in the 1990’s, this Brisbane-based security company specialises in the design, installation, maintenance and monitoring of electronic security solutions. With clients ranging from small boutique businesses to large companies such as IGA, McDonalds, RACQ and Subway, they design CCTV, alarm and access control systems for every commercial requirement.

Recently the security company took on several large customer contracts that, while attractive at the initial engagement, ultimately contributed to the company incurring significant working capital difficulties and unsustainable trading losses.

This can easily happen if terms and deliverables are not clearly defined in a contract. Large projects frequently blow out beyond agreed time frames, so negotiating smaller, more frequent payments for well-defined deliverables and a longer timeline to allow other work to flow in and out of the business are important ways to prevent cash flow from drying up before a large contract is completed.

For this particular company, their financial difficulties led to non-payment of their tax obligations and other creditors. The company was trading insolvent with over $2 million owing to unsecured creditors and suppliers were not providing credit, which was impacting ongoing trading. Some $387,234 of employee entitlements were also owing, including annual leave payments and outstanding employee superannuation contributions.

The state of being insolvent is not being able to pay all debts when they fall due and, under Section 588G of the Corporations Act 2001, directors can be held personally liable if they knowingly allow a company to continue trading whilst insolvent, so the decision was made to appoint a Voluntary Administrator to try and save the company and to improve the outcome for its creditors.

The company contacted Australian Debt Solvers and, within a short time frame, our team were able to stabilise the business through the Voluntary Administration moratorium process. Among other things, this involved focusing on smaller but more profitable customers and reviewing customer terms, service profit margins, and business trading costs.

While some people might see the appointment of a Voluntary Administrator as an extreme action for a company to take, this is generally not the case as a restructure of operations, creditors and assets often needs to take place to make the company financially sound again. It is normally a fairly short process, lasting no more than four or five weeks, and during this time the company continues to trade normally while the Administrator looks at ways to make changes for the better.

As part of the Voluntary Administration process, a Deed of Company Arrangement (DOCA) was entered into for Kudos Security Solutions. A DOCA is effectively an agreement between a company and its creditors which sets out how the affairs and assets of the company will be dealt with. A DOCA is created to find the best possible solution for all involved – not only the company but also its employees and creditors, and the DOCA agreed upon in this case ensured full payment of employee entitlements and an estimated dividend of 6 – 22 cents in the dollar to creditors.

As a result of the Voluntary Administration moratorium, the company was able to reduce around 85% of its debts, and today the security company is continuing to trade and – in fact – exceeding all expectations, so much so that the company’s management are now planning for future expansion.

The director of the security company claimed that while initially hesitant about beginning the Voluntary Administration process, it was ultimately the best option for the business.