Understand Your Options When Things Get Serious

Daniel Rands has extensive experience helping clients with financial difficulties. Below are his comments about why Rands Advisory Group can help when things get serious.

“I have been helping clients in financial difficulty for over forty years. Since the global financial crisis, I have worked through significantly more serious issues and business restructures than prior to that. The aftermath of the Covid pandemic has seen the most difficult business conditions since the global financial crisis.

In all instances where I have provided financial crisis management, we were able to improve the clients’ quality of life and financial situation. Also in all instances, 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 career, I understand the resilience and independence that is required to be successful in small business. I think it is this approach, however, that prevents business owners from seeking help sooner.

As is appropriate, liquidators or bankruptcy trustees become involved but my involvement allowed the clients to receive additional information and advice regarding their best interests. Liquidators and bankruptcy trustees, of course, have legal obligation to creditors of the client and the clients’ company.”

Business Priorities in a Crisis

When a business is in financial crisis, what can be saved must be evaluated. First priority is the business to see if change or restructure can return it to profitability. If the business will cease, personal assets, particularly the family home, could be saved. Often, our involvement is only after all personal assets and those of family and friends have been committed to a business in trouble. If no assets can be saved, we need to focus on stopping the stress of the situation and quickly starting the financial and personal rebuilding.

One of the considerations for clients is any 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 personally liable for debts incurred by the company when it cannot pay its debts as they fall due. While this sounds fairly simple, it is a very complex area, and directors should seek professional advice as soon as problems become apparent.

Directors of companies in financial difficulty should engage a support team of legal and accounting advisers, like Rands Advisory Group. We can assist you in accessing specialist insolvency expertise to minimise your personal loss, negotiate settlements with administrators or liquidators and assist with your loss limitation and financial recovery. Rands Advisory Group’s professional duty is to our clients and not their creditors.

Company liquidators are very knowledgeable about insolvency laws and can provide opinions on the impact of these laws on your situation. You need to appreciate that once they are appointed to your company, their primary duty is to the company’s creditors and to maximise their 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 client events where Daniel Rands was involved. Some details have been changed or omitted to avoid identifying our client or to explain something in simple terms which is quite complex.

Mr and Mrs B

The clients operated a business with severe profit issues and a major cash flow problem. Their family lent them around $200,000, temporarily easing the crisis. Some six months later, however, the situation was back where it started, and the company went into administration.

Our earlier involvement would have identified that the underlying profit problems could not be fixed and that any family contribution would only delay the inevitable. At that stage, the family could have made a contribution to be part of an arrangement for creditors to receive part of the 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 with three operating divisions, one of which made good profits and two of which lost more than the profitable division made. Because of this, there was a large debt to suppliers and the Australian Taxation Office.

We assisted the client in establishing a new company to acquire the profitable side of the old business. This was done at market value, as agreed by the company administrator. An additional amount was then 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 that 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 was owed to creditors. The liquidator’s report said there could be a claim against the director for trading while insolvent as from a time that coincided with the date of the director’s meeting with the liquidator.

While it could be argued that 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 were unprofitable because of low prices from competition and inefficient work practices. It had accumulated significant taxation debts, which were being paid in instalments. The clients had also exhausted their own resources by borrowing against 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 that were injected into the business could have been avoided or structured differently so that these funds would not be 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.

Important Legal Considerations

In any restructure or asset transfer between a failing and a new company, the process must be handled and documented properly. Assets must not be transferred for less than market value. Directors intending to start again must understand their legal responsibilities and be prepared for the scrutiny of liquidators, ASIC and the ATO.

At Rands Advisory Group, we can assist business owners in navigating these difficult transitions with support which adheres to the law and works with company administrators. Early advice is often the key to minimising losses.