TON (ASX) Ann: Response to Aware Letter

Originally posted by tobyjack ↑

https://www.franchise.edu.au/home/t...plaining-the-voluntary-administration-process

The voluntary administration process was covered by one of the joint liquidators of the Kleenmaid Group (the largest retail franchise collapse in Australian history) and Partner at Deloitte, Richard Hughes at our Franchise Forum 2009.
He explains:

The voluntary administration process

Why companies use voluntary administration

The difference between voluntary administration and a receivership

What happens at the start of the voluntary administration process

The aim of the voluntary administration process

The effect on stakeholders during the voluntary administration process

Possible outcomes of voluntary administration

What is the voluntary administration process?

In short, the voluntary administration process allows a company experiencing cash flow or solvency problems breathing space from its creditors to restructure.

It is generally a short period of approximately one month, whereby the directors hand control of the company to an independent administrator.

In that month, the administrator secures and protects the assets and assesses the business to provide a recommendation to creditors on whether they should:

Liquidate the company, or

Execute a deed of company arrangement (DOCA) – meaning compromise the debts in some way and allow the company to continue in existence, or

Return the company to the control of the directors.

Importantly, the final decision on the future of the company rests with the creditors.

Why do companies use voluntary administration?

Voluntary administration is used regularly by companies in distress, principally because directors are required to take steps to avoid trading whilst insolvent – and trading whilst insolvent can attract severe consequences.

Voluntary administration is specifically used as one of the major defences to insolvent trading in that the director took steps to avoid incurring debt and appointed an administrator.

It is a criminal offence to knowingly incur debts whilst insolvent. The maximum criminal penalty is two years in jail and a $250,000 fine.

In addition, a liquidator can pursue a director for insolvent trading resulting in the amount of the debts incurred after the point of insolvency being paid by the director personally, back to the creditors.

What’s the difference between voluntary administration and a receivership?

To initiate the voluntary administration process administrators are generally appointed by the directors by a board resolution, to take control of the company and represent all creditors’ interests.

A receivership is where a bank or a secured creditor appoints a receiver to recover assets on its behalf.

The principal duty of a receiver is to the secured creditor and he or she does not represent all creditors (all though there are some important safeguards to protect the other creditors).

Importantly, the voluntary administration process allows for a moratorium period whereby creditors, landlords, stock suppliers, personal guarantee holders and most other stakeholders are statutorily barred from taking action against the company until the voluntary administration is complete.

This can be particularly useful, for example, where a landlord on a retail business attempts to evict the tenant, thus severely devaluing the assets available for creditors.

During voluntary administration, generally, a landlord would need to wait until the conclusion of the voluntary administration period before taking action under a lease. Receiverships have no such moratorium period.

What happens when a company starts the voluntary administration process?

The administrator takes control of the company and the directors lose their power to contract on behalf of the company. The debts of trading incurred after the appointment of an administrator then become the personal liability of the administrator.

The administrator has a priority for those debts out of the assets of the company, however, administrators are very cautious about trading if it appears that by doing so substantial losses will be incurred, or they will exceed the assets available to them.

The administrator also communicates with all stakeholders at the start of the voluntary administration process, and advises them of the appointment and the steps they should take to make a claim on the assets of the company.

What is the aim of the voluntary administration process?

Most restructures prior to the enactment of the voluntary administration regime were attempted outside of an insolvency procedure.

As a result, Australia generally had a poor record of restructuring businesses what would otherwise be quite viable businesses as it was always difficult to bind all creditors to the arrangements, and the directors were exposed to insolvent trading.

The voluntary administration process was enacted to allow companies more companies to restructure and survive. It is intended to give the company a short period to restructure without having to deal with the demands of creditors, landlords, suppliers and other claimants.

The aim is to allow companies to restructure and return to health without the need to go through a painful liquidation process.

Any restructure via a DOCA is binding on all creditors, as long as the majority are in favour and hence a small creditor cannot hold the restructure to ransom to advance their interests, as was the case prior to the voluntary administration regime.

What is the effect on stakeholders during the voluntary administration process?

There’s a number of effects on suppliers, landlords, creditors and other stakeholders.

Generally, all action to recover debt, or possession of assets is frozen, pending the resolution of the administration process

If you are a creditor your debt is frozen pending payment from assets realised or from any deed that may be proposed

If you are a landlord you generally cannot take action to evict the administrator of the company during the voluntary administration period, unless that action has already commenced

If you have supplied stock under a Retention of Title arrangement you cannot seek to repossess those goods (although your claim is taken into account by the administrator)

Banks cannot exercise any rights under their security after a certain period

What are the possible outcomes form the voluntary administration process?

The company’s destiny is in the hands of the creditors. The administrator recommends the course, however, the creditors are the body with the ultimate power to vote the resolutions at the meeting.

There are three possible outcomes that the creditors can resolve:

The company can be returned to the directors – however, this rarely occurs in practice and generally would only be if for some reason the company was solvent.

The second is liquidation. If the company is insolvent and there’s no other option, or if there is a deed, but it does not provide for a superior return than liquidation, companies will often go into liquidation.

The third possible outcome is a Deed Of Company Arrangement (DOCA). A DOCA is a compromise of the debts due by the company. It is a very flexible arrangement, and as a result, the possible arrangements put forward are many and varied. For example, the following types have been regularly used in practice:

Payment of a lump sum to meet all debts due

Payment of a series of instalments

Trading and paying either instalments from profits or a lump sum from final sale

The sale of an asset and payment of proceeds (which may not be known)

DOCA’s have also been used to re-list insolvent companies on the ASX.
- See more at: https://www.franchise.edu.au/home/t...y-administration-process#sthash.O10sAJDj.dpuf

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What happens to shareholders of an insolvent company?

26 MAR 2014 05:30 PM | Filed Under: Strategies
[email protected]

Melanie Timbrell

Last month, the directors of ASX200 engineering company Forge Group (FGE) appointed voluntary administrators and suspended shares from trading. The announcement followed an anxious few months for all company stakeholders, featuring trading halts, profit warnings and a plummeting share price.

Here, MyWealth looks at what happens to shareholders when their company is found to be insolvent.
Where do shareholders rank in an insolvency?

Shareholders rank behind debt holders and other parties to whom the company owes money in the event of an insolvency.
According to the Australian Securities and Investments Commission (ASIC), this means shareholders are “unlikely to receive any dividend in an insolvent liquidation”.
This is the reason why being a shareholder carries a higher risk than holding debt securities such as bonds, because in the event of the company being wound up you are the very last in line to be paid.

The Forge insolvency timeline

Column 1 Column 2

0 4 Nov, 2013
Forge shares are placed in a trading halt at the request of the company pending a market announcement. Two days later shares are suspended from quotation. This suspension is extended twice.

1 28 Nov, 2013
The company requests an end to its voluntary suspension and announces a $127m profit writedown for the 2014 financial year related to two power station projects – West Angelas and Diamantina. It also announces net cash outflows expected in November and December resulting in a “challenging liquidity position in early December 2013”.
Shares in Forge plummet from $4.18 to $0.75.

2 4 Dec, 2013
In a written response to an ASX query, Forge director Glen Smith said that at the company’s routine financial project review meetings on the power stations in late September 2013, the impact of cost overruns and delays at the projects was raised and a process implemented to identify the impact of the issues.
In late October management briefed the Board on the possible project writedowns. Forge then entered into mediation with the customer and subcontractor in the hopes of negotiating a favourable settlement that would avoid a profit downgrade.
“It was not until the outcome of negotiations from the mediation session was clear that management considered it likely that a material downgrade of the Entity’s expected profit would result and an announcement to address a material difference from market expectations would be required,” Smith wrote after the ASX requested an explanation for why information was not released to the market at an earlier time.

3 A short reprieve?

4 17 Dec, 2013
Forge announces new contracts for work in North America and confirms on 30 December that it has received notification to proceed with Phase 3 works for the $1.47bn contract at Roy Hill iron ore project.

5 10 Jan, 2014
Shares in Forge enter a trading halt at the request of the company.

6 14 Jan, 2014
Forge announces an additional $23m-$28m profit writedown in the 2014 financial year related to the West Angelas Power Station project with an additional $14m-$19m net cash outlay required to complete the project. The company says that this amount will be funded from existing cash and facilities and says that financiers including ANZ remain supportive of the group.

7 24 Jan, 2014
Shares in Forge are again placed in a trading halt at the request of the company pending an announcement which the company makes on 29 January. The announcement informs the market that the FY2014 loss is now expected to be between $20m-$25m.

8 Financiers retreat

9 11 Feb, 2014
After ANZ withdraws its support, Forge’s directors appoint Martin Jones, Andrew Saker and Ben Johnson of Ferrier Hodgson as voluntary administrators of the company, while financiers appoint Mark Mentha and Scott Langdon of KordaMentha as receivers and managers.

10 12 Feb, 2014
In a joint release Ferrier Hodgson and KordaMentha announce that 1,300 Forge employees have been retrenched after principals on construction jobs had exercised contractual rights.
In the announcement, Mark Mentha says that “against a backdrop of material movements in cash flow and EBITDA [earnings before interest, tax, depreciation and amortisation] projections, the Company’s financiers did everything possible to give the Company time to find a solution to repair its balance sheet”.

11 13 Feb, 2014
Ferrier Hodgson writes a letter to shareholders telling them that while shares in Forge will remain listed on the ASX, trading is suspended and shareholders are unable to transfer shares without the administrator’s consent.

12 Shareholder action looms

13 20 Feb, 2014
Litigation funders Bentham IMF announces that it is exploring claims of certain Forge shareholders for a possible class action against Forge and/or its directors relating to misleading and deceptive conduct and alleged breaches by Forge of its continuous disclosure obligations in relation to the two power station projects.

14 21 Feb, 2014
The first meeting of Forge’s creditors is held. The purpose of the first creditor’s meeting is to determine whether they want to form a committee of creditors and whether they wish for a change in voluntary administrator.

15 18 Mar, 2014
The second meeting of Forge’s creditors is held to decide the future of the company.
Ferrier Hodgson reports that based on preliminary investigations, Forge may have been insolvent as early as November and recommends winding up the company.
Listed as the preliminary view on the likely causes of Forge’s failure are: the change in business model following the company’s January 2012 acquisition of CTEC which exposed the Group to greater contractual risks; reliance on debt funding for capital acquisitions leading to high leverage in a market where there was a decline in capital raising opportunities and low margins on contracts where cost blowouts then consumed profits.
Creditors vote to put Forge into liquidatio

When can you write off your shareholding as a capital loss?

A capital loss is the loss that’s incurred when an investment decreases in value. While it cannot be claimed against your income, you can use a capital loss to reduce a capital gain in the same financial year.
If your capital losses exceed your capital gains, you can carry the loss forward and deduct it against capital gains in future years.
Read more: How do I manage capital gains on my investments?
As a shareholder of an insolvent company, ASIC says you can realise a capital loss if:

a liquidator or administrator makes a written declaration that they have reasonable grounds to believe there is no likelihood of shareholders receiving any distribution in the course of the company being wound up; or

no declaration is made, then the deregistration of a company at the end of the liquidation also allows shareholders to realise a capital loss.

https://www.mywealth.commbank.com.a...lders-of-an-insolvent-company--hottopic201403

(20min delay)
Last 0.9¢		Change -0.002(18.2%)		Mkt cap ! $14.11M

Open	High	Low	Value	Volume
1.0¢	1.0¢	0.9¢	$259	26.13K

No.	Vol.	Price($)
4	1280209	0.009
6	770529	0.008
4	492850	0.007
2	416660	0.006
2	899995	0.005

Price($)	Vol.	No.
0.011	122784	2
0.012	491367	5
0.013	1538461	1
0.014	200000	2
0.015	1333333	1

Ann: Response to Aware Letter, page-95

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	Column 1	Column 2
0	4 Nov, 2013	Forge shares are placed in a trading halt at the request of the company pending a market announcement. Two days later shares are suspended from quotation. This suspension is extended twice.
1	28 Nov, 2013	The company requests an end to its voluntary suspension and announces a $127m profit writedown for the 2014 financial year related to two power station projects – West Angelas and Diamantina. It also announces net cash outflows expected in November and December resulting in a “challenging liquidity position in early December 2013”. Shares in Forge plummet from $4.18 to $0.75.
2	4 Dec, 2013	In a written response to an ASX query, Forge director Glen Smith said that at the company’s routine financial project review meetings on the power stations in late September 2013, the impact of cost overruns and delays at the projects was raised and a process implemented to identify the impact of the issues. In late October management briefed the Board on the possible project writedowns. Forge then entered into mediation with the customer and subcontractor in the hopes of negotiating a favourable settlement that would avoid a profit downgrade. “It was not until the outcome of negotiations from the mediation session was clear that management considered it likely that a material downgrade of the Entity’s expected profit would result and an announcement to address a material difference from market expectations would be required,” Smith wrote after the ASX requested an explanation for why information was not released to the market at an earlier time.
3	A short reprieve?
4	17 Dec, 2013	Forge announces new contracts for work in North America and confirms on 30 December that it has received notification to proceed with Phase 3 works for the $1.47bn contract at Roy Hill iron ore project.
5	10 Jan, 2014	Shares in Forge enter a trading halt at the request of the company.
6	14 Jan, 2014	Forge announces an additional $23m-$28m profit writedown in the 2014 financial year related to the West Angelas Power Station project with an additional $14m-$19m net cash outlay required to complete the project. The company says that this amount will be funded from existing cash and facilities and says that financiers including ANZ remain supportive of the group.
7	24 Jan, 2014	Shares in Forge are again placed in a trading halt at the request of the company pending an announcement which the company makes on 29 January. The announcement informs the market that the FY2014 loss is now expected to be between $20m-$25m.
8	Financiers retreat
9	11 Feb, 2014	After ANZ withdraws its support, Forge’s directors appoint Martin Jones, Andrew Saker and Ben Johnson of Ferrier Hodgson as voluntary administrators of the company, while financiers appoint Mark Mentha and Scott Langdon of KordaMentha as receivers and managers.
10	12 Feb, 2014	In a joint release Ferrier Hodgson and KordaMentha announce that 1,300 Forge employees have been retrenched after principals on construction jobs had exercised contractual rights. In the announcement, Mark Mentha says that “against a backdrop of material movements in cash flow and EBITDA [earnings before interest, tax, depreciation and amortisation] projections, the Company’s financiers did everything possible to give the Company time to find a solution to repair its balance sheet”.
11	13 Feb, 2014	Ferrier Hodgson writes a letter to shareholders telling them that while shares in Forge will remain listed on the ASX, trading is suspended and shareholders are unable to transfer shares without the administrator’s consent.
12	Shareholder action looms
13	20 Feb, 2014	Litigation funders Bentham IMF announces that it is exploring claims of certain Forge shareholders for a possible class action against Forge and/or its directors relating to misleading and deceptive conduct and alleged breaches by Forge of its continuous disclosure obligations in relation to the two power station projects.
14	21 Feb, 2014	The first meeting of Forge’s creditors is held. The purpose of the first creditor’s meeting is to determine whether they want to form a committee of creditors and whether they wish for a change in voluntary administrator.
15	18 Mar, 2014	The second meeting of Forge’s creditors is held to decide the future of the company. Ferrier Hodgson reports that based on preliminary investigations, Forge may have been insolvent as early as November and recommends winding up the company. Listed as the preliminary view on the likely causes of Forge’s failure are: the change in business model following the company’s January 2012 acquisition of CTEC which exposed the Group to greater contractual risks; reliance on debt funding for capital acquisitions leading to high leverage in a market where there was a decline in capital raising opportunities and low margins on contracts where cost blowouts then consumed profits. Creditors vote to put Forge into liquidatio

Ann: Response to Aware Letter, page-95

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