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Dealing with Financial Difficulties

Understand your options when things get serious

Daniel Rands has extensive experience in dealing with clients' financial difficulties. He is not a registered company liquidator or a trustee in bankruptcy and so would work with any such qualified professional as you engage.Below are his comments about why you can look to us for help when things get serious.

“I have been helping people with their financial difficulties for over forty years. In the last ten years, I have been involved in working through more serious issues and business restructures than in my previous years of experience put together. The global financial crisis and economic conditions combined to produce some of the most difficult business conditions in memory.

In all instances where I have undertaken this financial crisis management, we were able to improve the people’s quality of life and financial situation. It is true to say, however, that the situation would have been easier to manage, and losses would have been less if I had been involved earlier.

Having supported small business owners for my whole time in public practice, I understand the resilience and independence that is required to be successful in small business. I think it is this approach, however, which prevents business owners needing help from seeking it sooner.

In all instances, the involvement of liquidators or bankruptcy trustees was essential, but my involvement allowed the clients to receive additional information and advice which had regard to their best interests, without the adviser having the legal obligation to creditors that liquidators and bankruptcy trustees carry."

Priorities in a Crisis

When faced with a business in financial crisis, there is a priority of looking at things to be saved. First we would look at the business to see if it can be changed or restructured in some way so that it can return to profitability or positive cash flow. Second, if it is accepted that the business will cease, we would see if personal assets, particularly the family home, could be saved. Often, however, our involvement is only after all personal assets and those of family and friends have been committed to a business in trouble. If major assets cannot be saved because of the situation, we then need to concentrate on stopping the stress of the situation as quickly as possible and then starting the financial and personal rebuilding as quickly as possible.

One of the considerations for clients is that they can have personal liability for business debts. This personal liability can arise from trading as a partnership or sole trader; from the giving of guarantees to financiers or suppliers; from the contravention of certain taxation laws or from the operation of company law where the director has allowed the company to incur debts when it was insolvent.

Directors of companies can be made personally liable for debts incurred by the company at a time when it could not pay its debts as they fell due. While this sounds fairly simple, it is a very complex area and directors should avail themselves of professional advice as soon as problems become apparent.

Directors of companies in financial difficulty should engage a support team of legal and accounting advisers. This would assist you access specialist insolvency expertise to minimise your personal loss, negotiate settlements with administrators or liquidators and assist with your loss limitation and financial recovery. The teams professional obligation would be to you and not your creditors. 

Company liquidators are very knowledgeable of insolvency laws and can provide opinions on the impact of these laws to your situation. You need to appreciate, however, that once they are appointed to your company, their primary duty is to the company creditors and to maximise creditors’ return. This can put a liquidator in the position where they force the directors who appointed them into bankruptcy so that the best return to company creditors can be provided.

Case Studies

All of these examples are based on true events over the last ten years. Some of the details have been changed or have been omitted to avoid identifying our client or to explain something in simple terms which is quite complex.

Mr and Mrs B
Clients operated a business which had severe profit issues and a major cash flow problem. Their family lent them around $200,000 which temporarily got them out of the cash flow crisis. Some six months later, the situation was back where it started and the company went into administration.

My earlier involvement would have identified that the underlying profit problems could not be fixed and that any family contribution was only going to delay the inevitable. At that stage, the family could have made a contribution which could have been part of an arrangement for creditors to receive part of amounts owed in full payment of debts. That would have avoided the ultimate result where the client’s house was sold and creditors received almost nothing. In this case, everyone lost out because the real problem was not addressed in a timely way. 

Our late involvement resulted in the sale of the client’s house to allow them to avoid bankruptcy and we helped them start a new business.

Mr and Mrs E
The clients operated a business which had three operating divisions, one which made good profits and two which lost more than the profitable division made. Because of this, there were large debts to suppliers and the Australian Taxation Office.

We assisted the client establish a new company to acquire the profitable side of the old business. This was done at a market value as agreed by the administrator of the company. There was then an additional amount paid to the company administrator which allowed the client’s house to remain in their ownership.

Mr and Mrs F
The clients were operating a business which expanded into a new area when they saw that the traditional market was slowly disappearing. This resulted in a loss of profitability and the client consulted a liquidator about their difficulty in paying suppliers. They understood the liquidator was acting as an adviser to them with their financial difficulties. 

Six months later the situation had not improved so they appointed the very same liquidator to close the business and pay what there was to creditors. The report of the liquidator said there could be a claim on the director for trading while insolvent as from a time which coincided with the date of the meeting the director had with the liquidator.

While it could be argued the liquidator should not have accepted the appointment, the director clearly misunderstood the role of the liquidator and was unwise in appointing the same one to the company as the one from whom advice had earlier been sought. 

We have helped the director go back into business and negotiate a settlement with the liquidator.

Mr and Mrs J
The clients operated a business with numerous employees and a high cost structure. The business had some profitable areas but others where the low prices from competition and inefficient work practices made it unprofitable overall. It had accumulated significant taxation debts which were being paid by instalments. The clients had also exhausted their own resources by borrowing on their house to inject cash into the business.

My earlier involvement could have seen the business remove unprofitable divisions and scale down to a profitable level. The large amounts of money which were injected into the business could have been avoided or structured differently so that these funds were not lost when the liquidator was appointed.

We negotiated a settlement with the liquidator which resulted in the clients being able to keep their home and a family friend acquired parts of the business at public auction which allowed a scaled down business to profitably service a small number of previous customers.

With any restructure or transfer of assets from a failing company to a new company it is essential that assets are not dishonestly moved or transferred for other than proper value. Directors considering starting a new business in these circumstances need to be aware of their legal obligations and the scrutiny to such transactions which will be applied to liquidators; ASIC and the ATO.