02/02/2015 - 05:00

Time the enemy when things go pear shape

02/02/2015 - 05:00

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According to recent figures, bankruptcies across Australia fell almost 13.7 per cent in the three months to December 2014, to 4,179 from 4,844 for the corresponding period a year earlier.

Time the enemy when things go pear shape

According to recent figures, bankruptcies across Australia fell almost 13.7 per cent in the three months to December 2014, to 4,179 from 4,844 for the corresponding period a year earlier.

Bucking the trend, however, was Western Australia, where the number of people entering debt agreements increased to 2,655 up from 2,589 over the same period.

Insolvency practitioners have announced 2014 as one of their most lucrative periods for many years, with failures across a number of industries steadily growing. But what should you do if your business is showing signs of financial stress and you're not sure if you can pay your bills?

There are a number of options open to you, but all have consequences; and time is your enemy in achieving the best outcome for you, your business, its staff and creditors.

The other asset you must not underestimate is control. Too easily this is handed over by an owner who believes this is the easy way out, or is too overwhelmed to cope.

If you are unable to meet your commitments, bills and expenses from available cash flow, debt facilities or other funding sources, then you are likely to be insolvent. A company in this position is in breach of the Corporations Act and can be prosecuted by ASIC. In this situation, directors can also be prosecuted if they knowingly allowed the company to trade while insolvent.

It is for this reason that a number of companies have recently appointed administrators to wind-up and/or sell the company and/or its assets to clear outstanding debts when cash flows dried up.

But is this always the best decision for your business and what are the consequences?

The board of directors or business owner will appoint an administrator to act on your behalf in regard to the business operations. Although possible, it is less likely that they would actively operate the business on your behalf on an ongoing basis. In the majority of cases they are there to wind up the business, lay off the staff, sell assets and realise what value they can from the business – and clear as many creditors and loans as possible.

However, they cannot operate without your input and they only deal with creditors of the business, not all creditors of the group and debt holders. They are also legally obliged to do the best by the company, not its owner, and if they feel that there may have been insolvent trading then they may need to investigate.

If there are personal guarantees in place then these are still enforceable, and you as an owner will need to deal with these matters personally.

Banks, for instance, will still look to exercise their rights under their security documentation and as such are quite within their rights to appoint a receiver immediately upon you appointing an administrator. On this basis your decision to ease the path to wind-up may be hijacked by a bank's receiver. Time frames, controls and of course costs are then taken out of your hands.

To save a business that is in crisis there is a need for cash or credit lines that will allow the payment of creditors. This could be sourced from shareholder funds, private/bank funding or the sale of assets. Another option is to enter into a Part 10 deed of arrangement or debt agreement, whereby arrangements are made to pay back outstanding debt in full over a deferred period or only pay back a portion of the debt in full and final payment.

The business owner and/or their accountant/solicitor can handle all these functions without the need to appoint an insolvency practitioner. In any arrangement with creditors you need to keep open and honest communication to achieve the best outcome. You also need appropriate time to sell assets in an organised fashion that allows you to achieve the best possible sale price.

However, there are business owners who have come to the end of their strength or ability to manage the business and they are looking for the easier option. Often they see the administrator as the answer and that the fee they pay them is justified in taking away all the time, hassle and unpleasantness of winding up a business and selling assets.

Unfortunately there is no magic wand to magic away the necessary arrangements, so my best advice is to surround yourself with some trusted advisers, friends and loved ones. Be open with them and try to make the best of a bad situation with courage and dignity – and a good glass of red.

 

Paul Rowe

The Business Squad

Managing director

paul@thebusinesssquad.com.au

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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