You, our accountant, lawyer and other colleagues are trusted professional advisers to organisations in financial distress. Sometimes your clients are keen to undertake a DIY approach to asset/financial restructuring or to do so with your counsel and absent our shadowy presence. We get it.
While we may say it is analogous to obtaining health advice from google, with lots of background reading to rule out one scenario from another, to formulate a diagnosis and best treatment path, I think we can at least give some do’s and don’ts to help form some preliminary views and which may lead to a constructive conversation with a liquidator or trustee and put some pub logic alongside reality.
- Prepare a three (3) month cashflow to determine where the financial holes are and consider what related party or external funding may be available to cover these.
- Prioritise payments toward employee entitlements including superannuation and wages. Care also needs to be given to bank and similar facility terms.
- Compile a one page summary of assets and liabilities as a guide to what the net asset position is and which assets are subject to claims by financiers and suppliers (PPSR search). Consider what assets can be converted to cash to support operations and otherwise to pay down debt.
- Ask an auctioneer/valuer to inspect plant and equipment to provide a valuation – typically on a market and also an auction basis. Their charges are often a lot less than you may expect!
- Strategise whether the business/assets may be saleable to an existing industry player or a new entrant. The best business brokers will give a back of the envelope (but ask for a letter) guide as to whether the business is saleable, at what price, give a timeline and advise whether they have a list of potential buyers. The buyer may take the whole enterprise (including liabilities) but it would be more normal to have the assets go to the buyer and the liabilities remain with the seller (if they can’t be cleared from sale proceeds).
- Try negotiating with creditors a deal that reflects the financial circumstances. Ideally all creditors are treated equally, though some exceptions will be appropriate such as employees.
- If a deal cannot be locked in with all creditors within 3 months, then consider liquidation and bankruptcy implications. The limitations to these are often overstated and they both have potential to create clean slates. There may also be better outcomes available from voluntary administration, a small business restructuring or a personal insolvency agreement.
- Consider implications for key contracts and seek legal advice.
- Related party sale of assets – particularly useful if there are no independent third party buyers. Potential to keep the business alive in the short to mid-term, but ask whether the cause of the financial trouble has been resolved or is just being passed on. Careful also to avoid phoenix scenarios referred to below, so make sure the numbers make sense and the agreement is properly documented with financier approval where required.
- Lodge the Business Activity Statements and other ATO lodgements on time. It makes a huge difference later. BAS lodged more than 3 months late leave directors personally liable for the GST and PAYG. Any deals with the ATO will also require a “good compliance history” … that is, timely and honest basis of BAS, income tax returns and other lodgements.
- Review reliable websites such as ASIC, AFSA, ARITA and SV Partners and take some legal/accounting advice and ask about “safe harbour” to mitigate against a possible insolvent trading claim.
- Consider sound asset protection measures (such as discretionary/family trusts) when financial times are good and all debts are readily paid.
- Take advice from “untrustworthy advisers”. The ASIC and AFSA websites have explanations on this. Those sort of advisers are rarely around later when their advice is truly “put to the test”.
- Hide. Running away from debts does not solve them, though this strategy is recommended by some untrustworthy advisers including to change your phone numbers and drop off social media for 6-7 years. The debts remain owing and a formal insolvency may have even started by court order. These things are better to get the paperwork dealt with sooner rather than later. In bankruptcies spanning 15-20 years, we have seen bankrupt people buy multiple properties even while bankrupt, losing a lot of capital growth that would otherwise have been theirs had the slate been wiped clean at an earlier time.
- Phoenix your business or personal assets. Transfer/disposal of assets for less than market value may trigger claims against the business owners and their advisers. A few accountants and lawyers have lost their livelihood as a result of overzealous advice and the recipient of the assets has to deal with legal claims against them. The laws in this area have become even tighter in recent years.
Next time, some best ways to work with liquidators and trustees after they are appointed. For now though, please consider the width of your PI cover and don’t hesitate to reach out to your trusted SV adviser for a no-cost, no-obligation consult.