Copter,
It is highly probable the banks have already assessed the liquidity options available (including indicative cash flows) and have moved on to a complete evaluation of the business model. Trading has not been suspended indicating both banks and company are happy enough with progress to date.
Not sure what happens to the files - surely this would only happen if a legal firm ceased trading altogether.
Interesting to read the history of a listed company (Forge) going down the gurgler:
What happens to shareholders of an insolvent company?
26 MAR 2014 05:30 PM | Filed Under:
Strategies
Melanie Timbrell
[email protected]
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
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Column 1 |
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| 1 |
4 Nov, 2013
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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.
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| 2 |
28 Nov, 2013
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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.
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| 3 |
4 Dec, 2013
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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.
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| 4 |
A short reprieve? |
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| 5 |
17 Dec, 2013
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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.
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| 6 |
10 Jan, 2014
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Shares in Forge enter a trading halt at the request of the company.
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| 7 |
14 Jan, 2014
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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.
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| 8 |
24 Jan, 2014
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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.
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| 9 |
Financiers retreat |
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| 10 |
11 Feb, 2014
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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.
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| 11 |
12 Feb, 2014
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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”.
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| 12 |
13 Feb, 2014
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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.
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| 13 |
Shareholder action looms |
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| 14 |
20 Feb, 2014
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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.
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| 15 |
21 Feb, 2014
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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.
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| 16 |
18 Mar, 2014
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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 liquidation.
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What is voluntary administration?
Usually voluntary administration comes about when directors of a company decide that it is insolvent or likely to become insolvent and appoint an external, independent person to take full control of the business.
The external administrator’s job is to investigate the company’s affairs, to report to creditors and to form a recommendation on whether the company should form a
deed of company arrangement, which is a binding agreement between a company and its creditors to try and sort out a restructure to allow all or part of the business to go on.
The other options available and which the administrator must give an opinion on are:
- to end the voluntary administration if it is found that in fact the company is not insolvent, in which case the company gets handed back to directors; or
- to wind up the company and appoint a liquidator.
What is a liquidation?
In the case of a liquidation, the liquidator will sell the company assets and operations and distribute the proceeds to creditors.
First the receivers, administrators and liquidators take their fees, then secured creditors get paid – these are creditors to whom the company provided some collateral in exchange for money. An example is a mortgage where the property itself is held as collateral over the loan.
Employee entitlements such as outstanding wages and superannuation are considered priority claims which are paid before unsecured creditors and, depending on the kind of asset being sold, some secured creditors.
Any money left over then goes to unsecured creditors. An example of an unsecured creditor might be a supplier which had issued an invoice for services but was yet to be paid.
Shareholders sit below all of these.
What is a receiver?
A receiver is appointed by a secured creditor. Their role is to collect and sell enough company assets to repay the debt owed to the secured creditor which has appointed them.
Where can shareholders get information?
None of the above parties has any obligation to shareholders. The administrator is not required to report to shareholders on the progress or outcome of the administration and shareholders don’t get to vote on the future of the company.
Shareholders who are seeking information, however, can go onto the administrator’s website and typically look at the creditor’s reports there.
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.
