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Financial Distress

Financial Distress

For the seasoned adviser who diligently keeps up with developments in the client risk space, there may not be too much new here, but this article provides a snapshot of some of the traditional warning signs and areas of concern together with a reminder about how more recent legislative changes are now impacting your/our clients.

Issues we are seeing this year include:

1. BAS and Activity Statement lodgements – if these are being lodged more than 3 months after the due date, the associated PAYG must ultimately be paid otherwise the ATO will hold the director personally liable for it.

2. Superannuation – effective 1 April 2019, if a company is unable to pay its super obligations, it is critical that they lodge a Superannuation Guarantee Charge Statement with the ATO by the due date for payment of superannuation. Failure to do so will leave the directors personally liable for that superannuation.

3. Servicing Bank debt – is it possible to refinance the facilities or otherwise to consider a sale of property, the business or part thereof to realise some level of goodwill? By the time insolvency strikes, options can reduce significantly especially if loan covenants are breached, default interest applied and mortgagee sales ensue.  Business brokers can be a great litmus test for the market through their advice on an industry by industry basis, valuations and sale programs where the price paid is often the best money that can be spent by clients seeking to manage and mitigate future potential insolvent trading claims.  If after those enquiries the cost is viewed as prohibitive for a small SME business, then it may be worth considering a low/no cost sale options such as Gumtree to source a potential buyer and free market appraisals of property (rather than paid valuations) to quantify likely financial outcomes and as part of selling due diligence to avoid/mitigate against clients and advisers dealing with assets at under value with potential phoenix liability exposure.

4. Bank shortfall – Distressing as these will be, if the debts are limited to bankers, it is prudent to negotiate with the bank/s.  While they have copped a rough time in the recent Royal Commission, for the most part, many of the banks are open to outcomes documented in deeds which give them a return and allows the client to avoid bankruptcy.

5. ATO debt – does a 24 month cash flow forecast indicate ability to meet existing arrears through a payment plan while also meeting current tax obligations incurred over the budget period? If yes, then an ATO payment plan may be the solution.  If not, the ATO Receivables Policy may restrict the ATO officer’s ability to support the payment plan.

6. Caveats – typically these are recorded against the director’s personal residence and investment properties by suppliers pursuant to personal guarantees when the company is not meeting its financial obligations.

7. Lease commitments – are arrears to the landlord hitting a spot where security deposits, director guarantees and termination/eviction rights are about to be exercised?

8. Accessing Super to pay debts – in the right circumstances, super may be used to resolve financial problems however we have seen many instances of it being used as a band aid when a full dressing was required. Even through bankruptcy and subject to limited exceptions, super is protected and intended for the client’s retirement.

9. Asset Protection structures – pty ltd trustee of a family trust may be a sound protection and tax measure but it’s all in the execution. Care needs to be taken to ensure that creditor accounts are entered in the name of the pty ltd and not the individuals.

10. Construction Industry – one of the toughest industries for our clients and so not surprisingly rates highly in ASIC’s insolvency statistics. Risks associated with quality and timeliness of supplies and trades extend right through to indemnity insurance in place to protect the owner of the new build but which almost always has a personal liability for directors if/when things go wrong.


The above is not a comprehensive list of issues to consider when engaging with your client over the risks associated with their business, but is hopefully a useful prompter for a deeper discussion with your local SV colleague about the significance of financial distress and how best to manage that.

If your clients are experiencing financial difficulty or would like to the options and the impact of the above matters further, contact our office for an obligation free discussion.


Article written by Malcolm Field, Director, SV Partners Perth