Being lost in the insolvency industry

Are you lost in the insolvency industry?

The insolvency advice industry for small to medium sized businesses (SMEs) is poorly regulated. Anyone can provide corporate restructuring advice to SMEs and there are lots of people including accountants and lawyers without specialist knowledge and experience that do so.

So many SMEs get bad quality and conflicted advice that it is almost expected. The result is that the owners of insolvent businesses often lose all goodwill value through a liquidation fire sale rather than having a successful restructure.

Who gets lost and why?

These are SMEs in the construction, retail, transport, mining services and professional and technical services areas that are zombie companies tipped over the financial edge. Zombie companies are indebted businesses that, although generating some cash, after covering running costs and fixed costs (wages, rates, rent) they don’t make an economic profit. These zombie companies are usually mature (>10 years old) but they become insolvent because of management issues, key person sickness, management deadlock, overwhelming litigation, large projects that drain cash flow or losing a principal customer.

The owners of the business (who usually manage the business as directors) consult their tax accountant and often get referred to an insolvency practitioner first. Insolvency practitioners often recommend that financially distressed companies should appoint a voluntary administrator but business owners see this option as a last resort because of the stigma of failure associated with voluntary administration. If this were the medical industry it would be like your GP referring you to an undertaker when you get diagnosed with a serious illness. The problem with voluntary administration is that it is seen as the same as liquidation in the market. The Small Business Restructuring Process, on the other hand, has been more successful in delivering restructuring plans that save companies from a liquidation fire sale than the voluntary administration procedure.

Our main complaint about when clients call us

About half of our clients call us after they have put their business into voluntary administration and they face a liquidation fire sale of our business. They are told by an insolvency practitioner and their accountant that voluntary administration is their best option but no one has undertaken proper due diligence of the options. 

What are the immediate options for an insolvent business?

The first job of your professional adviser is to help you to analyse your options:

• Option 1: Informal restructure through the safe harbour
• Option 2: Formal restructure through a voluntary administration or the Small Business Restructuring Process
• Option 3: Shut down or break up the business through a liquidation

The process of analysing what is feasible for business owners requires significant due diligence. When this analytical process is undertaken by our firm we visit your business and spend at least a month on the project. It is impossible to evaluate whether the whole or what parts of a business are viable without careful consideration.

What steps should a business owner undertake when they suspect that their company is insolvent?

1. Shop around: Speak to different advisers about their skills and experience and think about whether you are comfortable working with them
2. Get financials up-to-date: The business owners should get their bookkeeper to ensure that their accounts are written up into your accounting software and reconciled (if you can’t measure it you can’t manage it)
3. Network: Speak to other business owners who have been through a voluntary administration process, small business restructuring or an informal restructure. This will help business owners to understand the pressures that they face and it is likely others will encourage initial decisiveness. rather than procrastination (a poor plan well executed is better than a good plan that is never executed).

Why hire an insolvency lawyer?

The key problems in business insolvency that insolvency lawyers solve is:

1. Dealing with creditors
2. Developing restructuring plans
3. Protecting confidentiality
4. Evaluating the legal risk of a restructuring plan
5. Representation in litigation

The key skills that insolvency lawyers have are:

1. Litigation experience
2. Technical knowledge of the Corporations Act
3. Insolvency industry experience
4. Practical turnaround experience

What should owners of businesses expect from their insolvency adviser?

• Conflict free advice: They shouldn’t be worried that their professional adviser is paying a referral fee or is steering the client towards an inappropriate solution
• Knowledge: The adviser should have sufficient knowledge about insolvency law and accounting to understand the technical issues 
• Experience: The adviser should have experience with insolvent companies to properly advise clients about what to expect and to develop an effective turnaround plan 
• Pricing: The pricing of the services should be transparent and appropriate for the size of the business 
• Values: Finding a professional adviser with values that match your own is critical or else you will find that a trust deficiency develops