Case Study 1 - A successful DOCA with funds provided and debt forgiven
A company with many years trading suddenly experiences a downturn in sales
The director doesn’t react and continues the business on, making losses each week supporting the company and keeping it solvent by selling off his personal assets and loaning it to the business.
The director contacts us with the company having the following financial position and says what should I do?
Assets Book Value Realisable Value Liabilities
| Cash at bank | $10,000 | $10,000 | Trade Creditors | $50,000 | |
| Debtors | $250,000 | $250,000 | Staff Entitlements | $50,000 | |
| Stock | $100,000 | $50,000 | Tax Debt | $750,000 | |
| Plant & Equipment | $250,000 | $50,000 | Directors Loan | $1,000,000 | |
| Total Assets | $610,000 | $360,000 | Total Liabilities | $1,850,000 |
We calculated in liquidation the likely return to creditors as follows:
Estimated realisable value of assets if liquidated $360,000
Less liquidators costs $60,000
Available for distribution to creditors $300,000
Payment of staff entitlements $50,000
Amount available for creditors $250,000
Return to creditors in liquidation ($250,000/$1,800,000) 13.8 cents in the dollar
Solution - Appoint a VA and propose a DOCA with the following terms:
The End Result
The staff are paid their entitlements in full.
The director contributes $60,000 and avoids all the drama and stress of his company being in liquidation.
Creditors receive a dividend of 38.7 cents in the dollar much greater than achieved if the company was liquidated. The company returns to the director debt free together with it’s paid tax losses, which are well in excess of the $60,000 he paid. The overall net benefit to the director was $240.000.