Coming back from the edge

When a company is in financial distress the difference between recovery and insolvency usually comes down to getting the right advice ASAP.

14 ways to identify a struggling company

There are well-established warning signs that a company is in financial distress. As business leaders, you should always be checking that youraren’t ticking any of these boxes – or expecting to be ticking them soon.

The following list was established in a 2003 court case that examined an insolvent company. It remains the go-to checklist for signs of insolvency or serious financial distress:

  1. continuing losses
  2. liquidity ratio below one i.e. more debt than liquid assets
  3. overdue Commonwealth and State taxes
  4. poor relationship with present bank including inability to borrow further funds
  5. no access to alternative finance
  6. inability to raise further equity capital
  7. suppliers placing the company on cash on delivery (COD) terms, or otherwise demanding special payments before resuming supply
  8. creditors unpaid outside trading terms
  9. issuing post-dated cheques
  10. dishonoured cheques (and now, the more contemporary measure of dishonoured EFT payments)
  11. special arrangements with selected creditors
  12. solicitors’ letters, summonses, judgments, or warrants issued against the company
  13. payments to creditors of rounded sums, which are not reconcilable to specific invoices
  14. inability to produce timely and accurate financial information to display the company’s trading performance and financial position and make reliable forecasts.

If your company meets one or more of these criteria you must take action quickly. Sadly, many companies fail because the owners put their heads in the sand and deny or diminish the distress the business is heading into.

Are you insolvent?

If your company is showing signs of financial distress, it’s crucial to determine if it’s insolvent. Insolvency is defined as the point when you can’t pay your debts as and when they fall due. If you suspect you are insolvent, you need professional advice from a properly qualified Registered Liquidator or a specialist insolvency lawyer.

Registered Liquidators are highly trained insolvency experts who are closely regulated by ASIC. They will usually offer a free initial consultation to gauge your current situation and help you to determine if you are likely to be insolvent and map out a plan for you.

And if you’re not insolvent, here’s the good news: Registered Liquidators and also happen to be some of the very best business restructuring and turnaround advisers in the market. You’re already talking to the right people who can help you.

Beware of false promises

When your company is in financial distress, it’s important to choose your adviser very carefully. Because nowadays there are many unscrupulous and unqualified ‘pre-insolvency’ advisers  spruiking their services on the internet.

It can be difficult to discern between unregulated, unqualified advisers and reputable, legitimate advisers, because pre-insolvency advisers utilise slick advertising and websites that make them appear to be legitimate and trustworthy.

They will often claim to remove the worry of your financial situation and help you avoid legal duties you may owe. But taking their advice may make your situation worse and put you on the wrong side of the law.

The best way to avoid bad advice is to deal with only a Registered Liquidator or a lawyer with additional insolvency law qualifications, and preferably those who are ARITA Professional Members.

ARITA Professional Members are fully qualified in the intricacies of Australia’s complex insolvency laws. Because they’re also experts in restructuring and turning around businesses of all sizes, they can help you understand your financial position, your options and help you set a path forward.

New company turnaround laws

There’s some good news if your company is in distress. Last year, after many years of advocacy by ARITA, the government introduced new ‘safe harbour’ legislation.

The new laws are designed to help protect company directors of businesses who attempt to do the right thing and turn their company around lawfully, even if they are technically insolvent.

There are important steps, which are legal prerequisites, you must take to protect yourself as well as giving your company the best chance to get back to profitability:

1. Get your financial records in order

You can’t get the protection of a safe harbour unless you’ve got your books and records in order. This is vital because unless you know where your money is coming from or going to, you can’t really have a plan to solve the problems your business is facing. It’s also vital to understand where your debts may be and how much you really owe, including tax debts, and this is important in understanding if your business is actually viable or insolvent.

2. You must get expert help

The law requires that you get advice from an appropriately qualified adviser. While the law, unhelpfully, doesn’t define who that is, the most qualified advisers are always going to be ARITA Professional Members. The sooner you seek expert advice, the more options you are likely to have.

You will need to pay for this professional advice and, at a time where money may be hard to come by, this may be challenging. But your investment in good turnaround advice – or professional advice about your options if you are actually insolvent – can save you money in the long run. It’s vitally important that you don’t go to dodgy pre-insolvency advisers that promise things that seem too good to be true. Unfortunately, there’s a lot of that type of advice out there.

3. You must properly inform yourself of your company’s financial position

So, you’ve got your financial records up to date, you’ve taken advice from a qualified adviser and now you must make a decision about where to from here. The law now says you’ve got to decide if what you’re about to do will ‘reasonably likely to lead to a better outcome for the company and the company’s creditors than if it had entered into voluntary administration or liquidation’. And that’s where the advice from a properly qualified professional is vital.

4. Develop and implement a restructuring plan for the company

So, your adviser has told you there’s good options to get the company back to profitability. Great news. But the law – and common sense – says you must have a properly documented restructuring plan for your company. It’s important that it’s documented, not just for you to be able to check off that you are following the plan, but also if the turnaround doesn’t work, this gives a future liquidator comfort that the steps you took, even if they failed, had merit and the right intent and it will help make sure you are protected.

A restructuring plan doesn’t need to be long or complex. As long as it has clear and sensible steps to getting your business back to financial health and, importantly, as long as you follow that plan.

Differences for SMEs & large businesses

The law doesn’t distinguish the treatment of financial distress between different sizes of businesses. While we think that’s a real problem, it’s unlikely to change any time soon. In a practical sense, the main difference is the size of your response to how you handle distress. Engaging a restructuring or insolvency professional doesn’t need to be onerously expensive if you’re an SME. Indeed, the majority of insolvency and turnaround professionals work in small firms themselves.

If you’re an executive or a director of a larger firm, you will likely need a larger, and likely industry specialist, team to work on your turnaround. So, you’ll need to pick a firm that has the resources to cover that.

There are good options to helping you through financial distress. But expert advice is key. And for your own safety, make sure you don’t go to some of the dodgy advisers who may offer their service through Google advertising. Often their only qualification is that they’ve been bankrupt before.

Find out more about how you can have clients the best opportunity to rescue your business by speaking to an ARITA Professional Member today. Expert, qualified advice is key.