Restructuring a Specialised Machinery Manufacturer in Financial Distress

Episode 1 – Background:

The client (“the Company”) is a specialized machine manufacturer based in Australia, with over 20 years of operation. The Company designs and builds high-end machinery locally, offering integration, training, and ongoing support to their customers. Despite a solid market reputation and technical capability, the Company faced severe financial distress with total debts amounting to $3.8 million, including $1 million owed to the ATO and $1.8 million related party creditors. Company assets included $200,000 in debtors, a $500,000 debit asset loan from the director personally, and a range of encumbered and unencumbered plant, equipment, and vehicles.

The Company struggled to recover from the impact of COVID-19 even after all these years, due to severe and prolonged supply chain disruptions, which delayed production and fulfillment timelines well beyond initial expectations. As operating costs mounted and income remained inconsistent, the business faced significant working capital challenges. With limited external financing options, the director and shareholders were forced to borrow additional funds from their spouses just to keep the company afloat.

The director had also received a Non-Lockdown Director Penalty Notice (DPN) from the ATO amounting to $671,000, placing him at personal risk unless action was taken within 21 days. This was one of the leading reasons that made the director act.

Once we obtained financial information it was clear the balance sheet had been carrying signs of financial distress for several years. The Company’s financial analysis revealed a negative quick ratio for the last 5 years.

The Company’s working capital deficiency when introduced to us was $3.5 million. This meant the Company needed at least $3.5 million to recapitalise and reach a 1:1 quick ratio. In addition, the spouses were not prepared to invest additional funds, as the financial strain had already exceeded their comfort and capacity.

After initially seeking the Small Business Restructuring (SBR) framework, the Company was deemed ineligible due to its debt levels. At this point, the Company was referred to us to evaluate alternative solutions.

Usually, the businesses that are referred to us are at some stage of the business decline curve. We are engaged at various stages during the timeline, it is undoubtedly the case that the earlier the assistance is sought, the longer the runways are and the better we can serve the company and the director.

In this scenario, if no action was taken:

The Company would not have had the resources to recapitalise.
The ATO would follow the debt collection process and eventually be forced into creditor driven insolvency.
The director would remain personally liable for $671,000 of DPN (plus personal guarantees) and would likely go bankrupt.
44 employees would have lost their jobs.
Work in progress customers would have lost their deposits, and their machine orders cancelled.
Financiers would reposses assets.
Creditors would receive very little suffer the effects of their bad debts.

We didn’t consider the above outcomes to be advantageous to any stakeholders of the Company. Despite the precarious situation, the director, shareholders and senior management were confident of the future orders and viability of the business – provided they could deal with the legacy issues.

We moved quickly to develop a restructuring plan with the following goals: