Issue 37 - September 2022
IN THIS ISSUE 01 Restructuring 101 Anyone? 02 How Trustee Law Works 03 Trading a Business During an Insolvency Appointment - Can it be done?
Restructuring 101 Anyone?
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Do’s •
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.
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Prioritise payments toward employee entitlements including superannuation and wages. Care also needs to be given to bank and similar facility terms.
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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.
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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!
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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).
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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.
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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.
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svpartners.com.au 1800 246 801
ou, 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.
04 Accountants - Don’t Wait for Halloween to Call an Insolvency Practitioner
Malcolm Field - Director | Perth
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Consider implications for key contracts and seek legal advice.
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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.
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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.
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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.
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Consider sound asset protection measures (such as discretionary/family trusts) when financial times are good and all debts are readily paid.
Don’ts •
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”.
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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.
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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.
How Trustee Law Works Matthew Hudson - Associate Director | Brisbane
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semi-recent case from the NSW Supreme Court provides some timely reminders about how trust law works, even if a trustee of a trust is replaced by a new trustee. 1.
A trust cannot incur a debt, only the trustee can.
2.
Assets of a trust are held for the benefit of beneficiaries, but those assets are subject to the trustee’s right of indemnity to cover its costs and debts incurred in performing its duties/obligations for the trust.
3.
A former trustee of a trust is generally entitled to this indemnity, but it depends on the terms of the trust deed and any relevant trust legislation in your jurisdiction.
4.
This right of indemnity may be in the form of a “right of exoneration” (ie the right to be covered for debts incurred on behalf of the trust).
5.
Or it may also be in the form of a “right of recoupment” (ie the right to be covered by trust assets for debts/costs paid for by the trustee from its own monies).
6.
This right of indemnity is a proprietary right, which
confers an equitable lien in favour of the former trustee over the trust. This lien may likely elevate the former trustee to a position higher than, for instance, a secured creditor of the successor trustee. 7.
A new or successor trustee owes a fiduciary duty to the former trustee, including not to deal with the assets of the trust in a way that might “destroy, diminish or jeopardise” the former trustees’ right of indemnity.
8.
A creditor of the former trustee is subrogated to the right of the former trustee to not only the right of indemnity, but also to enforce that fiduciary duty.
9.
To the extent the successor trustee breaches this fiduciary duty, that creditor may take appropriate legal steps to impugn any unlawful dealings/transactions by the successor trustee.
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Trading a Business During an Insolvency Appointment Can it be done? Daniel Luckman - Senior Manager | Sunshine Coast
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t is not uncommon for business owners to have made significant improvements to their business and its profitability unfortunately for it to be too little, too late. Usually, all attempts to turnaround and improve the viability of a business have been exhausted and the business owners themselves are running out of steam and cash to keep on going, succumbing to the mounting pressures of debt. But does a formal insolvency appointment always spell the end for a business? A formal insolvency appointment (e.g. voluntary administration, liquidation and bankruptcy) does not always mean the end for a business. Sometimes a formal appointment creates interest and opportunity for a business to continue with a view to it being sold; and if that occurs, more often than not, it results in a better outcome for all stakeholders. Whilst an external administrator (e.g. receiver, voluntary administrator, liquidator, controlling trustee and bankruptcy trustee) is able to trade a business during an appointment, it is often practical and commercial limitations that stop a business from trading, such as the loss of key staff, clients, contracts, licences, supplier issues or insufficient funds being available to continue trading. The Small Business Restructuring process (introduced in 2021) also allows the ongoing trading of a business; however, directors and management remain in control of the company and its business under the supervision of a restructuring practitioner. Some of the main advantages and benefits that may be gained from trading and selling a business during an insolvency appointment include: •
Continuation of employment for staff and as a result, less employee entitlements being owed (particularly redundancy payments).
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Preservation and realisation of intangible assets which may not have been sold if the business did not continue (e.g. business name, contact numbers, customer list, goodwill / branding, trademarks, patents, etc).
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A lower amount of debt being owed to creditors – particularly with respect to contractual obligations under leases, finance agreements and other third-party contracts being taken over by another party.
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Usually, a higher sale price being obtained for the Business’ assets, including physical / tangible assets – the whole is worth greater than the sum of its parts ~ Aristotle.
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As a result of the higher sale price, more funds being available to pay creditors – including secured creditors, employee entitlements (priority creditors) and unsecured creditors
Trading a business during an insolvency appointment comes with its own unique challenges and requires specialist knowledge and skills and the cooperation of key stakeholders. Sometimes though, it can be well worth it. SV Partners has extensive experience trading businesses during insolvency appointments and a track record of achieving high quality results when the right situation presents itself across a variety of industries: • • • • • • • • • •
Agriculture Building and Construction Health Services Hospitality, Accommodation and Food Services Information Technology Manufacturing and Wholesale Trade Professional and Administrative Services Real Estate Retail Transport and Logistics
If you or your client’s business is facing financial difficulty, contact your local SV Partners’ office today to discuss whether trading on a business during an insolvency appointment is the right option. It may be the case there is some hope for the business to continue, even if a formal appointment needs to occur urgently.
svpartners.com.au 1800 246 801
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Accountants Don’t Wait for Halloween to Call an Insolvency Practitioner Matthew Bookless - Director | Gold Coast
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hilst you don’t need to say our name three times in front of the mirror, fall asleep so we appear in nightmares, or drag out the Ouija board to conjure a meeting with an insolvency practitioner (IP), the IP can still be effective in scaring your client (or more accurately, giving them a reality check) when there are some business failure warning signs which need to be addressed. Accountants understand they have an obligation to their clients (whether it be ethical, moral or professional) to identify warning signs of business failure and, importantly, act on that by assisting the client with the underlying issues or introducing an IP, if necessary. Accountants want to add value to their clients. It’s the overarching principal in everything you do. Facilitating an introduction of a client to an IP can be mistaken as a role not adding value. This could not be further from the truth. By identifying the early warning signs, speaking to the client about the issues and associated risks to them, and making an introduction to an IP to discuss these things, it has the potential to preserve value, protect assets and stop the bleeding, not to mention the mental health benefit for the client that can come with avoiding a slow decline. You will have heard this a lot; when it comes to insolvency advice, the earlier the better. Sometimes the biggest challenge accountants face, however, is to get the client to listen and face reality, or accept they need to take some action. It can also put the accountant in a difficult situation, not wanting to damage a relationship by labouring about the client’s ‘issues’. Often the client has a perception that taking action means cost or a journey down a path where there is no coming back. This is wrong, of course. But what should a client expect from a meeting with an IP?
What to expect in contacting an IP: Once you have reached out to the IP about a client presenting with some warning signs, the next stage may see the client meeting one on one with the IP, speaking with the IP over the phone (or the numerous other electronic means we’ve become acquainted with recently), or meeting with you and the IP together. The latter can be really useful for a range of reasons but is not essential if you are keen to exit stage left from the process at this point. The IP will look at the financial information available and listen to the client and accountant about what they see the issues to be. The IP may also ask what the client sees as being a good outcome or what they want to achieve out of the process. From here, the IP may well be able to make some recommendations on the spot and discuss these with the client. Importantly, when considering a corporate insolvency, the IP will consider the consequences of any of these recommendations, not just on the business, but also the directors and other related parties. It is a myth that an IP acts exclusively in the interests of creditors prior to even taking on a formal appointment. Whilst an IP will not advise a client to do anything contrary to their statutory obligations or the law, they certainly can, and should, identify risks or exposure to directors in conducting their assessment and, where necessary, suggest they seek specific advice prior to proceeding with an appointment. The IP will guide the client as to the most suitable course of action to resolve their financial issues, as well as the timing and strategy to execute that course of action. You should expect the IP to keep you abreast of this, even if you have ceased to be involved by this stage. It will be important to the IP that your relationship with the client is preserved
throughout this process, so thoroughly communicating what the client should expect moving forward is a critical component of the IP’s role. Some things not to worry about when considering contacting an IP: 1.
Whether you think the client is able to fund an insolvency. The IP can assess this in due course, if necessary, including considering alternate funding solutions;
2.
Whether the client is ‘too far gone’. IPs deal with ‘too far gone’ cases all the time. The options on the table may be fewer, but it is often preferable to voluntarily make a formal appointment than wait for the courts to do it;
3.
Whether you think the client will ultimately turn things around. That’s great! A reputable IP should not try to push a client toward an insolvency process that they are not ready for, or can be avoided through a turn around. Furthermore, if trading out is the tonic, an IP can assist with this and even offer Safe Harbour advice which could protect directors from insolvent trading liability exposure during the turnaround;
4.
Losing a client. Whilst this may be perceived as the beginning of the end for the accountant/client relationship, this is often not the case. Typically, a client requiring some form of insolvency support will carry on, in some form or another, as a client of the accountant.
Halloween is a month away, but the warning signs for many clients are here now. So for those that need a ‘scare’, think about making contact with an IP today to assist you and the client in finding solutions to their issues. To learn more about our range of services and expertise across a variety of industries, visit us at svpartners.com.au or contact us on 1800 246 801 today.
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