Government Getting Serious on Super, Good News Stories and Restructuring

Government Getting Serious on Super

“It is not acceptable for people not to be paid their superannuation entitlements.”

The above is a quote from the January 2018 media release of the Honourable Kelly O’Dwyer MP as she introduced draft legislation intended to create severe penalties for the failure to pay employee superannuation on time.

The legislation intends to improve reporting obligations and strengthens arrangements with respect to Director Penalty Notices (“DPN”) and other penalties in an effort to compel greater compliance with companies reporting and paying superannuation.

If the legislation is enacted, from July 2018, the Commissioner can issue a direction to an employer to undertake an approved course of study to reinforce an employer’s understanding of their superannuation guarantee obligations or issue a direction to an employer to pay an outstanding superannuation guarantee liability.

Whilst there are time frames to object to the Commissioner’s directions, and defences, severe and persistent non-compliance with directions can result in terms of imprisonment.

The explanatory memorandum issued with the draft legislation emphasises that directions to pay will be reserved for serious contraventions of the obligations to pay superannuation guarantee related liabilities by employers whose actions are consistent with an ongoing and intentional disregard of those obligations.

It is proposed that there will also be changes concerning the timing of DPN’s with respect to unpaid Superannuation Guarantee Charge (“SGC”).

Currently, a small employer is required to remit superannuation contributions within 28 days of the end of the relevant quarter and if not paid, the employer must lodge an SGC statement. The due date for the SGC for a quarter is the 28th day of the second month after the quarter ends.

The proposed changes mean that if a company fails to meet its obligations to pay an SGC by the due date, the directors of the company will be personally liable to pay a penalty to the Commissioner. The amount of the penalty is equal to the unpaid superannuation liabilities and will be recoverable from the director only after 21 days of a DPN being given.

The ability for the penalty to be remitted after the issue of a DPN will be limited to circumstances where three months from the due date has passed and the company has lodged a superannuation guarantee statement with the Commissioner on or before the due date.

These amendments tighten the timeline for compliance by removing the previous three month period before a Director penalty is locked down and cannot be remitted by placing the company in external administration.

To illustrate the law change, the explanatory memorandum provides the following practical example.

Susie is the director of a company, M&E Pty Ltd. M&E Pty Ltd is an employer of 10 individuals and is subject to superannuation guarantee obligations. M&E Pty Ltd fails to pay superannuation contributions for its employees for the quarter ended 31 March 2017. M&E Pty Ltd fails to lodge the superannuation guarantee statement and fails to pay the superannuation guarantee charge by the due date, being 28 May 2017.

M&E Pty Ltd subsequently lodges the superannuation guarantee statement for the March 2017 quarter on 30 June 2017.

On 15 August 2017, M&E Pty Ltd is placed into voluntary administration. As a director, Susie has failed to ensure that M&E Pty Ltd meets it obligations in respect of the superannuation guarantee charge within the required timeframes.

On 30 August 2017, the Commissioner issues Susie with a director penalty notice for the outstanding superannuation guarantee charge liability. The director penalty notice issued to Susie is not capable of being remitted, despite the company being placed into voluntary administration.

Restructuring comments

In recent newsletters we have talked about the process a director would follow if they wish to maximise the opportunities to avail themselves of a Safe Harbour defence.

The early detection of solvency concerns is critical for directors and in this article we discuss some of the management and director actions we have observed that have contributed to the solvency crisis.

Poor leadership is often present in companies that fail. Common traits of directors/management of companies we see in external administration include:-

  • insufficient focus on creating long-term strategies;
  • being too attached to staff to make tough decisions;
  • not willing to accept advice;
  • failing to delegate and seek to control all decisions themselves; and
  • failing to focus on daily business activities.

Having a lack of capital and an understanding of cash flow is another factor that will always put business on the back foot.

A business with capital can sustain short term trading losses, but without this, trading losses open up a gap in working capital that expose the company’s creditors to loss. A focus on cash flow budgeting and regular and accurate reporting of the financial position helps directors manage tight working capital, but often these actions are missing in businesses approaching insolvency.

An attribute we see in many small businesses is an attitude from the proprietor that fails to distinguish business expenses from private expenses. Many directors of companies in insolvency have overdrawn loan accounts that will be called upon to be repaid in liquidation. Private expenses should be paid from wages not from drawings to avoid these consequences of business failure.

The above are a selection of director/management traits we see all too often in companies that come to us for external administration. As business advisors, we encourage you to observe any of these signs in clients and use those observations to highlight risks that you perceive when you become involved in discussions with directors.

Good news stories from recent matters

It’s not often that insolvency practitioners talk about the positives of the external administrations they have conducted, however in recent months we experienced a number of wins that have helped employees and creditors with their dividend returns.

In one matter, a company involved in the advertising industry, that engaged a number of subcontractors as part of their regular workforce, we were successful in assisting those subcontractors negotiate claims in the Government’s Fair Entitlements Guarantee (“FEG”) scheme. FEG has been established to assist employees with the payment of entitlements where their employers have passed into insolvency and the particular circumstances of these subcontractors enabled us to present a compelling argument to interpret their correct status in the winding up.

In another matter we were appointed to a company that operated a suburban restaurant. We formed the view that a Deed of Company Arrangement (“DOCA”) could be proposed that would assist maximise the value of assets available for distribution to creditors, but more importantly hasten the external administration process, keep the costs of external administration down and enable a differential return to be offered to the creditors. Through this process, unrelated unsecured creditors received a far better return than they would have received in a liquidation.

This particular matter was a textbook study into how a voluntary administration followed by a DOCA can work in the interests of creditors.

Retail Restructuring – Not so easy when you are an SME

In the past months there has been a lot of press concerning struggling large retailers and their approach to restructuring.

In February, the Financial Review reported that Myer Group was experiencing sliding sales and declining foot traffic. Its response was to negotiate with shopping centre owners over what it considered was fair rent and stated that its aim was to cut its total retail footprint by 20 percent by 2020.

Specialty Fashion Group is another company experiencing the same issues and some of its key shareholders are backing calls for an equity raising of $46 million to go towards helping the company exit onerous leases and refurbish other stores.

And more recently, Retail Food Group announced their efforts to turn around the company’s fortunes would result in it slashing store numbers by between 160 to 200 outlets nationally across its brands.

Obviously restructuring any business involves a close inspection of what are the profitable and unprofitable elements of its operations and how to manage significant expense lines, and that is what each of these companies is doing.

In public companies, funding restructuring of this nature can be done through capital raisings and through the application of retained profits. In typical SME retailers, there are no retained earnings, the balance sheet is fully geared and capital raising involves asking friends or family for more money.

Given this lack of liquidity and access to capital, it leaves direct renegotiation with the landlord as the most likely restructuring option. To be successful, such renegotiations are best achieved by the tenant not already being in default with the landlord and being transparent and open with a presentation of their restructured business case for the future. This business case will need to show that long-term viability will be assured with a restructured lease and reinvestment in their business, which will be a better option for a landlord than a vacant shop and unpaid rent.

Businesses that can’t make these changes and achieve these restructurings are likely to be part of what we anticipate will be an increased number of retail failures in the SME market segment over the next few years.