Client Journey: Who do business people call when they face insolvency?

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Many small business owners and directors who are struggling don’t call anyone until it is too late. This means they are forced into insolvency when there they might have been able to turnaround the business, if they had had the right advice. 

The Government has recognised that there is a market failure in the delivery of competent viability reviews for businesses that turn over up to $10 million:

In September 2020, Kate Carnell, then the Australian Small Business and Family Enterprise Ombudsman commented:

“Small businesses need access to an accredited professional adviser such as an accountant or bookkeeper to judge the viability of the business now. This is the critical first step that the small business owner needs to take so they can make an informed decision about the future of their business.”

In this article we take a deeper look into this issue: Who exactly should a business turn to? We consider some of the most common advisors, in turn. 

The business accountant

This is the one professional that a small business is most likely to already have an existing relationship with. Not only that, the accountant should already know the ins and outs of the company’s finances — the crucial information for determining whether the company is insolvent. 

Unfortunately regular accountants may know little about insolvency and pre-insolvency advice. On a day-to-day basis, they are likely to have no experience with turning around a business or restructuring. 

However, the business account is likely to be the starting point for company directors. They will have a good grasp of the business’s financials or at least have ready access to information that will inform them. They will also have a sensible perspective about how to deal with financial difficulties because they have had other clients that have gone through similar situations.

Insolvency practitioner

Insolvency practitioners (i.e., registered liquidators) are well-qualified to advise on potential options for turning around a business. However, insolvency practitioners rarely advise during a pre-insolvency stage in order to preserve their independence: In other words, they cannot take a formal appointment if they have given advice to a board prior to the appointment. 

It is worth noting, however, that the industry body for insolvency practitioners, the Australian Restructuring, Insolvency and Turnaround Association (ARITA) has suggested that a process be introduced to allow insolvency practitioners to have a more prominent role in pre-insolvency advice. 

In many situations with large corporates one firm of insolvency accountants is engaged to provide advice to the board and another firm is engaged to potentially take on a formal appointment as voluntary administrators. This approach deals with any conflict of interest issues but it may not be practical for small businesses.

Financial advisors

General financial advisors may be familiar with various options to turn around the business, especially when it comes to accessing capital/rescue finance. 

When seeking advice from a financial advisor it is crucial to check that they are not an illegal phoenix operator: That is, an advisor that arranges for assets to be transferred out of a company for free or for less than market value. This can get both the insolvent business and the advisor in serious legal trouble.

Lawyers

Lawyers can also provide advice relevant to insolvency. There are the experts when it comes to advising on:

• Ownership interests, such as the effect of security interests on a struggling company
• Contractual matters, such as the impact of ipso facto clauses if the company is in difficulty. 
• The duties of directors and any potential liability in insolvency (such as liability for allowing the business to trade while insolvent). 

A benefit of engaging a lawyer is that they have a fiduciary duty to act in the interests of directors (their clients), something that isn’t the case for insolvency practitioners and other advisors. 

It is worth advising however, that they may not always have same knowledge of financial aspects of restructuring. 

Seeking advice

A good first step for companies in financial difficulty may be to get a viability review from a specialist restructuring firm like Sewell & Kettle. 

In a submission to the Parliamentary Inquiry into Corporate Insolvency in Australia the new Australian Small Business and Family Enterprise Ombudsman commented on the uncertainty small businesses have in knowing whether they are viable:

“The perceived negative stigma surrounding insolvency and a lack of accessible information regarding individual business performance, industry benchmarks and insolvency processes, means small and family businesses may not realise they have viability issues,”

Our firm Principal, Ben Sewell, explains that in the past lawyers have failed to address the need for a viability review:

“When I worked in a large law firm as a junior insolvency lawyer I would sit in on meetings with business owners who were petrified about their troubled business collapsing. They would leave the meeting disappointed after getting a lecture about insolvent trading and being handballed to a corporate undertaker. In other professional fields, treating a distressed client this way is unthinkable. It would be like an oncologist lecturing a smoker about their “bad” habit and then telling them to euthanize rather than exploring the process of fighting cancer. At that critical time the business owners would have been better served by obtaining a holistic review of the viability of their business and also advice about whether their personal assets were at risk.”

After a viability review, it will become clearer what you next steps should be and the kind of professional you should seek out for advice moving forward.