Being lost in the insolvency industry

The insolvency industry is complex and poorly regulated. Find out how to forge a path out of insolvency.

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 proprietors of insolvent businesses lose all goodwill value through a liquidation fire sale.

Being lost in the insolvency industry

Being Lost in the Insolvency Industry – explained

Firm Principal Ben Sewell takes you through an explanation of who gets lost in the insolvency industry and why

Takeaway for business owners:

Don’t hire any professional adviser without up-to-date knowledge of insolvency law and turnaround strategy. Your accountant or commercial lawyer may be good at taxation or transactional work but they won’t have the time to work on a crisis or the skills to analyse your options.

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, proprietor sickness, management deadlock, large projects that drain cash flow or losing a principal customer.

The proprietors of the business (who also manage the business as directors) consult their tax accountant and usually get referred to an insolvency practitioner first. The insolvency practitioner recommends a voluntary administration but the stigma associated with failure means the proprietors get stuck about what to do. If this were the medical industry it is like your GP referring you to an undertaker when get diagnosed with a serious illness. Because there is no generally accepted process for restructuring of SMEs, business owners get lost. This is in contrast to the United States where a bankruptcy attorney is always the first adviser sought by business owners.

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. 

Takeaway for business owners:

Call our firm before putting your business into voluntary administration and undertake careful due diligence of your insolvency 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
  • Option 3: Shut down or break up the business through a liquidation

The process of analysing what is feasible for proprietors 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 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 owner should get their bookkeeper to ensure that your accounts are written up into your accounting software and reconciled (if you can’t measure it you can’t manage it)
  3. Network: Speaking to other business owners who have been through a voluntary administration process. This will help you to understand the pressures that they faced and it is likely they will encourage initial decisiveness

Why hire an insolvency lawyer?

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

  1. Dealing with creditors
  2. Restructuring businesses
  3. Protecting confidentiality

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 product 
  • 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