Pope Joan Hospitality Pty Ltd t/as Pope Joan (“Pope Joan”)
Creditors
ATO winding up application on foot
ATO debts of over $600,000
Total participating creditors - $933,000
Unpaid Superannuation paid - $150,000
SBR Plan
Creditors accepted 13.66 cents in the dollar
Variation of plan approved in Court (first SBR plan to be varied in Australia)
Plan fully effectuated and liquidation avoided
Background:
Pope Joan operated a well-known café in the Sofitel forecourt in Collins Place Melbourne, which is synonymous with its famous reuben sandwiches.
Unfortunately, Pope Joan suffered considerably throughout the pandemic as a result of the extended lockdowns and work from home directives issued by the Victorian Government. Business activity in the CBD has remained subdued due to a fundamental shift in workplace culture and ongoing work from home trend. The business could not meet its significant debts which accrued during the pandemic, since turnover reduced considerably as a result of a 40% decline in CBD foot traffic (on pre-pandemic levels).
The directors approached Andrew MacNeill of SMB Advisory early in 2023 to seek advice regarding how to deal with the company’s considerable tax debts. The directors determined that it was no longer feasible to continue to operate the Pope Joan business which was corporate weekday focussed, in the CBD, and concluded that it would be in best interest of the Company’s employees and creditors for the business to be sold as a going concern. Whilst the directors were actively marketing the Pope Joan business for sale as a going concern so that creditor debts could be repaid, unfortunately the ATO lost patience due to the significant quantum of the debt and issued a winding up application on 24 April 2023.
On the day before the winding-up hearing the directors managed to negotiate the sale of Pope Joan’s business and assets as a going concern and SMB Advisory were immediately appointed as Small Business Restructuring Practitioners (SBRP) to stave off the impending liquidation and protect arm’s length sale. The new Small Business Restructure (SBR) process provided the perfect mechanism to seek an urgent adjournment of the ATO’s winding up application so that the sale of the business could be completed, as it meant that the directors could stay in control of the business, under the supervision of the SBRP, whilst the sale of business and restructuring process could be undertaken. This outcome would not have been possible under the Voluntary Administration process, since the costs and risks associated with running the business throughout the Voluntary Administration process and subsequent settlement period would have outweighed the benefits.
SMB Advisory’s role in the SBR process was to investigate the affairs of the company and assist the directors in proposing a plan to Pope Joan’s creditors (which totalled approx. $930k). The SBR plan that was presented to creditors provided for all of the net sale of business proceeds being paid to creditors under the plan, resulting in a proposed distribution to creditors of approximately 13.6 cents in the dollar at settlement. The directors were committed to saving the business and jobs and were personally required to meet approx. $150k in unpaid superannuation to ensure the company was eligible for the SBR process (before making the plan) and had also agreed to personally pay rental arrears of circa $60k to facilitate an assignment of lease to the purchaser.
While the overwhelming majority of creditors voted in support of the Plan (including the ATO), unfortunately, the Landlord subsequently indicated that it was not prepared to assign the lease to the purchaser, given the SBR plan relied on settlement of the business occurring, it was looking likely that the SBR plan would fail, and the company is wound up. After discussions with SMB Advisory regarding the options available, the directors advised that they would be prepared to immediately advance funds equivalent to those provided under the SBR plan to ensure the SBR could proceed. Unfortunately, due to inflexibility with the new SBR process, creditors were unable to approve any variation to the SBR plan, and an urgent application to the Court was required to vary the Plan, in order to save the SBR.
Given that the SBR process is relatively new, there were no precedent cases to rely on to understand how the Court would decide on the proposed variation. Thankfully, the Court agreed that the proposed course of action to vary the SBR plan was consistent with the objects of the SBR process (since the proposed SBR plan was in the best interests of the creditors) and made orders approving the proposed variation.
Creditors have now all received a distribution of 13.6 cents in the dollar and the SBR plan has been fully effectuated, leaving the directors of the company free to look for new opportunities to continue the Pope Joan business in another form.
This matter is a fantastic example of how the new SBR process can lead to better outcomes for creditors and business owners. This was quite a complex scenario that required the deferral of an ATO winding up application and subsequent court application in order to allow the restructuring to proceed (i.e. without the variation, the restructure would have failed and the company placed into liquidation). Whilst this demonstrates some inflexibility in the new process, largely brought about by the rushed nature in which the legislation was brought in and implemented, in response to the COVID-19 pandemic, it also demonstrates how the new SBR process can assist directors in avoiding liquidation and restructure their significant tax debts. We are also hopeful that the Parliamentary Joint Committee review into corporate insolvency will lead to the Government making some meaningful improvements to the SBR process.
Please contact the Team at SMB Advisory if your business is experiencing financial distress and/or have unmanageable tax debts and we can consider if SBR is right for you.