Why the best restructuring outcomes often happen outside the courtroom
Brendan Richards
Founder & Senior Advisor, Rebound Advisory
There is a deeply ingrained assumption in corporate advisory that when a company cannot pay its debts, the next step is a formal insolvency process - Voluntary Administration, a Deed of Company Arrangement, perhaps liquidation. These processes exist for good reason. But they are not the only path, and in many cases they are not the best one.
At Rebound Advisory, we have seen too many businesses pushed into formal insolvency that destroyed the very value it was supposed to preserve. The business had a viable core. The creditor problem was solvable. But the moment "Voluntary Administration" appeared on the public record, the damage was done.
A Voluntary Administration is a public event. It is notified to ASIC, appears on the company's record, and in many industries, word travels fast. The consequences are predictable and almost always underestimated.
Customers hear the company is "in administration" and begin making alternative arrangements - they do not wait to see whether a DOCA is proposed. Revenue starts declining at precisely the moment the business needs it most. Suppliers tighten terms or cut credit entirely. Key employees start looking for other jobs.
The combined effect is that the business entering VA is materially worse than the business that existed the day before the appointment. This is the paradox of formal insolvency for a viable business: the process designed to facilitate a restructuring can itself undermine it by destroying stakeholder confidence at the worst possible moment.
An informal creditor compromise involves the company - typically with a restructuring advisor - approaching creditors directly and negotiating revised terms outside any formal statutory process. There is no ASIC notification, no public record, no administrator taking control. The directors remain in charge, the business continues to trade, and the market does not know the company is in distress.
The typical structure involves preparing an honest assessment of the company's financial position, identifying the creditors who need to accept a compromise for the business to survive, developing a proposal that demonstrates why a compromise delivers a better outcome than formal insolvency, and negotiating creditor by creditor until the necessary agreements are in place.
The most successful informal compromises we have been involved in have been characterised by radical transparency. Directors who front up, share the numbers honestly, and present a credible plan find that creditors are far more pragmatic than expected. Most creditors are commercial operators - they do not want to push a customer into administration and recover 5 cents in the dollar two years from now. Given the choice between a reduced but certain recovery and a formal process with uncertain timing, most will take the deal.
A Voluntary Administration, even a straightforward one, will typically cost $50,000 to $150,000 in practitioner fees. A complex VA with trading-on and a contested DOCA can run well into six figures. Every dollar spent on the process is a dollar not available to pay creditors. An informal compromise involves advisory fees, but they are typically a fraction of the formal cost - with no statutory reporting, no creditor meetings, no court applications.
If a company owes $1.2 million and has $400,000 available, a formal VA costing $120,000 leaves $280,000 for creditors - roughly 23 cents in the dollar. An informal process costing $40,000 leaves $360,000 - roughly 30 cents in the dollar. That is a materially better outcome for every creditor in the room.
But the real advantage is preservation of the business as a going concern - the company continues to generate revenue and may ultimately pay creditors in full over time, rather than at a discount through a one-off distribution.
The Australian Taxation Office deserves separate treatment because it is unlike other creditors. The ATO cannot formally agree to write off a debt through an informal arrangement - its powers are governed by statute, and the Commissioner has limited discretion to compromise assessed tax liabilities outside a formal insolvency process.
However, the ATO can and regularly does agree to payment arrangements structured around the company's cash flow capacity. A director who approaches with a comprehensive financial analysis, a credible forecast, and a demonstrated track record of recent compliance is in a fundamentally different negotiating position from one who simply calls and asks for more time. The ATO responds to professionalism and credibility. It does not respond well to vague assurances.
Formal processes are sometimes the right tool. The most common situation is where the company is bound by onerous contracts that cannot be renegotiated informally - property leases being the classic example. A VA allows the administrator to reject such contracts, which can fundamentally change the cost structure of the business.
Even then, many landlords will negotiate when presented with a genuine alternative analysis. We have negotiated lease compromises outside formal processes many times. Other situations requiring formal processes include debt disputes that can only be resolved through a statutory mechanism, cases where a moratorium is needed to prevent creditors seizing assets, and situations where the number or hostility of creditors makes an informal process impractical.
But these are specific circumstances, not default positions. The starting question should always be: can this be resolved informally? Only if the answer is genuinely no should the conversation move to formal options.
The success of an informal compromise depends heavily on advisory quality. The advisor's role is threefold: conduct a rigorous financial analysis that establishes the company's true position and viability; develop a proposal that is credible and commercially realistic; and manage the negotiation process - including the sequencing of creditor approaches, information flow, and resolution of objections.
Sequencing matters enormously. Securing agreement from the largest or most critical creditors first creates momentum. Approaching a difficult creditor after others have already agreed changes the dynamic entirely. These are tactical decisions that require experience and judgement.
The case for informal creditor compromises is not ideological - it is practical. In the right circumstances, an informal process preserves more value for creditors, protects the business from the destructive effects of public insolvency proceedings, avoids significant process costs, and gives directors a genuine opportunity to turn the business around.
It requires transparency, preparation, and the confidence to have honest conversations about difficult realities. But directors and advisors who are willing to do that work consistently achieve better outcomes than those who default to the formal process because it feels safer or more familiar.
At Rebound Advisory, we assess whether an informal compromise is viable, develop the financial analysis and proposals to support it, and manage the negotiation from start to finish. Where formal insolvency is genuinely necessary, we will say so. But we will always explore the informal path first - because in our experience, it is where the best outcomes are found.
Brendan Richards
Founder & Senior Advisor, Rebound Advisory
Brendan has spent over 25 years in corporate restructuring and turnaround advisory, including senior roles at PwC, KPMG, and Ferrier Hodgson. He has advised directors across construction, manufacturing, retail, agribusiness, and professional services on informal creditor compromises, debt restructuring, and business recovery.
Considering your options? Talk to us first.
A free 30-minute call with Brendan or Claire will clarify whether an informal compromise is viable for your situation - and what it would take to make it work.