CREDIT managers attending a conference last week had to deal with the fallout from a struggling telecommunications company.
The telco business, Adrenalin Rush, revived memories of the failed One.Tel, but thankfully it wasn’t a real business.
It was part of a hypothetical developed by accounting firm Norgard Clohessy for the Australian Institute of Credit Management’s WA conference.
But the issues put before the assembled credit managers were very real.
The hypothetical involved Adrenalin Rush, a wholesale band-width supplier, falling deeper and deeper into financial trouble.
Conference delegates had to put themselves in the shoes of the credit manager of expatcommunications, the major supplier to Adrenalin Rush, the credit manager of eWallabies.com, a potential new supplier, and the directors of Adrenalin Rush.
Norgard Clohessy director Matthew Woods said the hypo-thetical showed some of the difficulties of detecting insolvency.
“It’s not simple enough to look at the accounts or the balance sheet or the cash flow statement and decide if a company is solvent,” Mr Woods said.
He said the directors of a battling business normally had a range of options available to them, including renegotiating supply terms or raising extra debt or equity.
One of the panelists, AMCAP credit manager Frank Vredenbregt, said a constant issue facing credit managers was pressure from the sales department to approve credit.
He added that credit managers often had to rely on ‘gut feeling’ because of a lack of hard financial information.
“Unfortunately, the majority of creditors erroneously see the provision of trade credit as different from borrowing from a bank and refuse to provide even basic financial details,” Mr Vredenbregt said.
“If you press for what is perceived as too much information, your client will simply get his supplies elsewhere.”
A second panelist, Phillips Fox partner Alison Robertson, highlighted some of the risks facing credit managers who seek some form of security.
A recently granted floating charge, for instance, could be voidable against a liquidator of the customer, while a director’s guarantee would probably be unenforceable in voluntary administration.
“It is important for credit managers to obtain careful advice before taking security to ensure that security will be protected if the customer becomes insolvent,” Ms Robertson said.
Mr Vredenbregt said one of the useful options for existing creditors of the struggling business was to arrange an informal meeting of creditors “so you can gauge their intentions and get commitments from them”.
“It is no good taking further risk if someone else decides to instigate recovery action.”
True to form as a lawyer, Ms Robertson pointed out the risk of this course of action.
“If credit managers arrange an informal meeting of creditors, they could lose any defence they might have to an unfair preference claim, because they may then have knowledge of the customer’s insolvency,” Ms Robertson said.
The possibility of Adrenalin Rush obtaining a $1 million capital injection was one of several events put forward in the hypothetical.
As credit manager of eWallabies, Mr Vredenbregt was unmoved by this turn of events and would continue to oppose advancing credit.
“The offer …looks promising but until such time as confirmation of the offer is sighted and the offer is accepted it cannot be relied upon,” he said.
“It is not unusual for principals of businesses to grasp at straws and present any offer or even enquiry as complete and unconditional regardless of the stage of negotiations.”
As credit manager of expat, which already had a large exposure to Adrenalin Rush, Mr Vredenbregt said he would seek to conduct due diligence on the potential offer.
He would also assess the impact of the capital injection.
Would it simply provide a short-term cash flow boost or would it boost the long-term prospects of Adrenalin Rush?
Ms Roberston said the potential capital injection could be crucial for directors who worried about insolvent trading.
“In some circumstances a director can have a defence to insolvent trading if he or she can show that, at the time the company incurred debts, the director had reasonable grounds to expect the company was solvent,” she said.
A “reasonable expectation” of future financial support from a third party could constitute a defence, Ms Roberston said, but not “groundless optimism”.
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