GM Advisory works with directors to help them mitigate risk. This ususally involves a restrucutring process of one sort or another and key to our approach is keeping directors informed about costs and benefits. As with many elements of business, restructuring and mitigating risk involves choices; understanding the cost of doing or not doing one thing in favour of another. We understand that restructuring or ceasing a business can be daunting.
The terminology in this highly specialised area can be confusing – what is small business restructuring or voluntary administration? What is the difference between an illegal phoenix and a legal phoenix; what is the consequence of a voluntary or involuntary deregistration of a company? Am I liable for Insolvent trading, unfair preferential payments and the list goes on. There are some helpful links here to explain these terms and many others.
Protection given to Directors when there is a possibility of financial distress looming so as not to trigger the unnecessary appointment of an insolvency practitioner. Can give the directors the green light to continue trading.
Formal or informal processes where a Company maximises its chances of continuing in existence; or if that isn’t possible, restructuring can involve solutions that are better for the company’s stakeholders than liquidation. Small business restructuring.
Director Duties & Advocacy
Not every director is accross their responsibiliteis when it comes to the Corproations Act. An extra set of eyes is helpful – especially when dealing with insolvency practitioners who put other stakeholder interest’s ahead of directors.
There are various ways to cease operations and careful consideraiton is necessary depending on the underlying entity structure.
Whether its the ATO or any creditor, understanding your options and whether a repayment plan really is the best option for you is crucial. Over extending family finances needs to be carefully considered. Knowing the tipping point matters.
Capitalisation of your company’s operations is crucial. Finding finance can be difficult. Consider all options including private finance.
The Insolvency Landscape
Where is it all heading?
In July 2020, the Insolvency Inquiry Report (‘IIR’) set out how small businesses were treated during the insolvency process – before and after entering a formal external administration. On the back of the IIR, Parliament made amendments to the Corporations Act in 2021, including introducing a new category of liquidation referred to as a simplified liquidation.
The IIR was critical of the insolvency process, noting that where
‘…businesses do need to be wound up, there is a concern that the cost of the process far outweighs any benefit to creditors, even where liabilities are small, and a business structure is simple’.see Insolvency Report
A majority of small businesses (63%) which had been through an external administration process considered that, once a registered liquidator was appointed, the focus of the liquidator and the creditors was on winding the business up, rather than considering a restructure. There was confusion amongst those surveyed as to what they expected and what occurred once a registered liquidator was appointed. Many did not realise that once a liquidator was appointed, they took full control of the business and made all business decisions: ‘That’s why we appointed them to help restructure. They promised (to help) but sold everything.’
What does experience tell us?
Over 50% of small business owners felt ‘locked out’ of their business from the start, with no involvement in the process whatsoever.
‘Once our accountant highlighted the potential issue and we consulted a lawyer, it all happened pretty quickly afterward… effectively we were sidelined quickly.’ ‘(We were) not allowed any involvement in the insolvency process. We were prevented from entering all properties by security guards, including being locked out of our house.’
The report also highlights concerns that the chosen registered liquidator held no understanding of their industry.
‘The receivers appointed by the bank had absolutely no experience with agriculture. We frequently had phone calls from the receiver asking ..
where would I sell the wheat? What does the boom spray look like, again?’
They re-negotiated longstanding contracts to purchase the grain and hay harvested that were paying market price, to contracts that would pay approximately half the market value but pay within three days not the industry standard of 30 days. We had our machinery listed with specialist dealers, located in the area, yet the receiver withdrew the machines from sale and placed them in an auction in an area where there was no broadside cropping.
No machine realised more than 50% of its value. To view our operation, the receiver drove the 400km to meet with us on the farm bringing along three other people. The receiver charged us travel costs at $200/hr for the junior accountant.
The investigations and the fees
In response to allegations of high fees (where many surveyed found the actual cost and the time taken significantly exceeded initial estimates), liquidators submitted that their statutory obligations to investigate the company’s affairs was primarily to blame.
Liquidators did not want to see a compromise of the thoroughness of this investigative process despite there being a commonly held perception that liquidators extend an external administration process as long as there are assets that can be realised to reimburse their fees.
GM Advisory Comments
Most observations from the report were only perceptions. However, it is clear and certainly not uncommon that there are issues with the insolvency process. There are many reasons for this including a lack of transparency and poor communication (quick guide to restructuring terms).
GM Advisory will work with directors to ensure they understand the process and the possible outcomes. Keeping directors informed and safe at all times.
Corporations Act 2001 (Cth) Section 453C ELIGIBILITY CRITERIA FOR RESTRUCTURING To be eligible for a small business restructuring, a company must satisfy the following criteria: total liabilities of t…
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