Tailor-made solution stitches together fashion business for the future

When a new director, the founder/creative director of an Australian fashion business, found herself in financial distress due to economic constraints and inadequate support from the company’s then-advisers, Jirsch Sutherland worked closely with her during a period of Voluntary Administration to develop a Deed of Company Arrangement (DOCA) that would enable the business to restructure, improve its financial position and allow it to continue.

Background

The Bali Tailor, which sells ready-to-wear leather footwear, accessories, and clothing, was founded in 2015 by Leah Hills, who turned what was originally a side hustle into a fully-fledged online business. The company subsequently opened a bricks-and-mortar store on Sydney’s northern beaches and a pop up (since-closed) store in Byron Bay, and it also provides wholesale stock to a number of other retailers.

In FY2023 the company reported revenue of $2.38 million. It subsequently found itself in financial difficulties due to cash-flow constraints, which affected its ability to meet the substantial unsecured creditor liability, including its existing taxation obligation and accruing tax debt. Other factors that impacted the company included:

• Reduced revenue due to the fall in consumer discretionary spending as a result of the cost-of-living crisis and high interest rates.
• Inability to scale back the operational costs of the business quickly enough to meet changing consumer demand – particularly in the bricks-and-mortar locations.
• Inadequate financial management reporting to identify and track the changing market.
• Reliance on external accountants to provide adequate advice on the financial position of the company, including accrued statutory debt levels.

Administrator Andrew Spring, a Partner with Jirsch Sutherland, says there were also historical issues, particularly given the company’s owner/founder was a novice director, having migrated the business from a sole tradership to a corporate entity. Additionally, the company’s advisers had not provided sufficient support to ensure its statutory obligations were complied with.

Solution

On assessing the business, Jirsch Sutherland recommended it be placed into Voluntary Administration and that a DOCA be developed. The Jirsch Sutherland team, which included Andrew Spring and Aaron Smith, worked closely with the director on a daily basis as part of its investigations, to confirm details associated with trading and associated issues, and to obtain details of business assets.

“The matter was largely straightforward but there were several key considerations, such as whether there would be any issues with the ATO given the company’s poor compliance history and significant director loan account,” says Spring. “We discussed this with the director to fully understand how these issues arose initially and obtained communications in relation to the history with the company’s previous accountant, as well as the purpose of the loan account. We also assessed the viability and commerciality of pursuing the loan account in a liquidation scenario.”

Ultimately, the administrators communicated directly with the ATO to provide further context and reinforce assurances that these issues would not occur again in the future. “During the administration we also overcame various challenges including initial issues around the cancellation of the company’s merchant facility, which required efforts to restore, as well as liaising with the bank to transfer the pre-appointment bank account funds to allow for ongoing trading of the business,” explains Spring.

Results

The DOCA was accepted by creditors – of which the ATO was a major one – and successfully executed, with a return of approximately 20 cents in the dollar being returned to creditors. Employees’ jobs were also saved as a result, and the company was able to be restructured following the review and assistance of the company’s external accountants.

“It has enabled the company to implement new procedures that will not only help it maintain its ongoing compliance requirements with the ATO going forward, but also provide it with the building blocks to enable it to hopefully grow once it has firmly established these, following the completion of the DOCA,” adds Spring.