Maintaining Control of a Small Business Under Pressure

It has been said that to succeed in small business you don’t need to be an expert in everything, you just need to know how to access that expert at the appropriate time.

That axiom holds true when a small business is facing financial pressure to survive.

As insolvency practitioners there are two main frustrations when providing advice to a small business owner facing difficulties.  They are:

1. Failing to seek professional assistance early enough, or;
2. Obtaining early professional advice but failing to take heed of that advice.

One of the greatest skills held by an experienced insolvency practitioner is the ability to predict the future!

Throughout years of advising SME directors and owners, we have built up a knowledge bank of the attributes of directors that are required to turn a business around and those that simply do not have the capacity to do it.  In its simplest form, we can identify very quickly the decisions that could/should be made to turn a business around and then assess whether the current director/s are capable of executing the professional advice.

In other situations the business cannot be saved but there are still steps that can be taken to maximise the return to the stakeholders.  Similar challenges can be faced by directors even when the eventual outcome is termination of the business via liquidation or a voluntary administration process.

This blog seeks to highlight how quickly the options available to a director can narrow when threatened with wind up proceedings.

As foreshadowed at the start, taking advice early is the key to maximising the chances of saving a business that has had a hiccup.

An external accountant will generally have the ability to identify early warning signs that a client may face difficulties specific to its business.

Probably the most widely regarded summation of the indicators of insolvency was established in ASIC v Plymin (2003) 46 ACSR 126.  We detailed these in our earlier blog entitled “Am I Insolvent?” https://dyeco.com.au/am-i-insolvent/ Those indicators include:

1. Continuing losses.
2. Liquidity ratios below 1.
3. Overdue commonwealth and state taxes
4. Poor relationship with Bank, including inability to borrow further funds.
5. No access to alternative finance.
6. Inability to raise further equity capital.
7. Suppliers placing company on COD, or otherwise demanding special payments before resuming supply.
8. Creditors paid outside trading terms.
9. Issuing post dated cheques
10. Dishonoured cheques
11. Special arrangements with selected creditors.
12. Solicitors letters, summonses, judgements, 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.

Many of these indicators cohabitate and the more that exist at the one time, the more challenging it is to turn a business around or restructure it.

Time is often an essential ingredient to any form of restructure or managed termination of a business.  For example, a director that could source external funding by pledging the assets of a related party will need time to access the funding that may be required to repay creditors pressing for payment.

To highlight the need for early detection of problems, we will explore the implications of creditors that issue a Creditors Statutory Demand for payment of debt (“statutory demand”) followed by a wind up petition.

Prior a creditor issuing a statutory demand, directors and the shareholders have a period of time untarnished with the adverse publicity of a wind up petition to identify and implement a turnaround strategy.  Alternatively the directors may wish to pursue an immediate sale of the business to maximise returns to stakeholders.

Tasks facing a director include:

• Identify and negotiating with secured and unsecured creditors.
• Dealing with changes in trading terms with suppliers, eg being placed on COD.
• Addressing legal proceedings commenced by creditors.
• Re-negotiating terms with a landlord.
• Identifying contract terms with customers and creditors that are triggered by a defined insolvency event.
• Preparing a business for sale as a going concern.

We have seen many examples where all of the above tasks are required to be addressed.

Once a creditor issues a statutory demand the most common question we are asked is how long before the creditor issues a wind up petition?  This is important because once a wind up petition is lodged with the Court and ASIC it becomes public knowledge.  As a guide a Court hearing date is usually approximately four weeks after lodging of the petition.

The following are some of the additional challenges faced by a director trying to restructure a business after a creditor has lodged a wind up notice:

• Many different contracts become terminable at the option of the other party,
• The time available to a director to complete restructure transactions ends upon the appointment of the Court liquidator.
• Secured creditors become nervous about their capacity to retain security and ranking over business assets.
• The option to appoint a voluntary administrator remains as an alternative where a Deed of Company Arrangement or similar arrangement is foreshadowed.
• If there is no apparent case to appoint a voluntary administrator, the members of a company cannot appoint a Liquidator whilst the wind up petition is on foot.

We are frequently brought in to provide advice to a company facing imminent and sometimes insurmountable collection activities by creditors to provide directors with an outline of the various options available.

Whilst external accountants are usually the front line of advisors when the warning signs and insolvency indicators start to appear, timely expert insolvency advice is a key step in rescuing a client.