Right knowledge and business structures can help avoid problems

LIQUIDATION, receivership and administration can all be bad news for a business — but with the right knowledge and business structures in place the worst can be avoided.

David Lombe, Deloitte partner and president of Australian Restructuring Insolvency and Turnaround Association. Photos: Chris McKeen

LIQUIDATION, receivership and administration can all be bad news for a business — but with the right knowledge and business structures in place the worst can be avoided.

The Australian Restructuring, Insolvency and Turnaround Association says part of the problem is it is too easy to become a company director, and more education is needed for those taking on that role.

“One of the problems in Australia is that you don’t have to do a director’s course,” says ARITA president and Deloitte restructuring services partner David Lombe.

“There needs to be some sort of education process that directors have to undertake before they start being directors of SMEs, but that would be very unpopular.”

A requirement of company directors is to monitor the solvency of the company and ensure it is not committing the offence of trading while insolvent, Lombe says.

Where directors believe a company is insolvent or likely to become insolvent — that is, unable to pay creditors — an administrator is appointed.

Following an investigation, the administrator may decide there is no future for the company and it needs to be liquidated, or a restructuring plan — known as a deed of company arrangement — may be put in place.

“Liquidation is really the death of a company — the company’s affairs are to be closed down,” Lombe says. However, administration does not always mean the end of a company.

Austin Taylor, partner and insolvency expert with Meertens Chartered Accountants, says the first thing to do when owners realise their business is in trouble is “take a deep breath and don’t panic” — then seek professional advice.

“Entering administration, receivership or liquidation is probably the biggest step a business owner will take and it’s important they get all the facts together and fully understand the decision they make.”

Taylor says it is important that owners and directors do not do anything “dodgy” when they realise they are in trouble — no matter how tempting that may be.

The decision whether to enter into administration, liquidation or receivership — where a secured creditor such as a bank appoints a receiver to realise a defaulted debt — depends on individual circumstances.

LegalVision chief executive officer Lachlan McKnight said the best way to understand the difference between the three is by looking at the stages of an illness:

“Administration means you’re sick and are seeing your GP. A receivership means your business is in intensive care in hospital, liquidation means the business is terminal — it’s like palliative care,” he says.

“One of the key indicators of insolvency is when your business bills are 90 days overdue and you can’t pay them. Other indicators are when liabilities outweigh your total assets, or if your bank won’t lend you money.”

Minter Ellison partner Mark Montes says it is vital for small businesses to be aware of the processes of administration, receivership and liquidation.

“Companies are going into administration every day,” he says.

“I would be surprised if at least half didn’t go into liquidation from that process.”

Montes says avoiding these situations means “managing your business properly and making sure you have a business plan and that you do have a good source of finance which is flexible and which can give you the cash flow you need”.

Amelia Taplin, senior accountant in corporate advisory with William Buck Chartered Accountants and Advisors, says reasons businesses find themselves in these situations may be poor market conditions, a major customer going into liquidation, failing to monitor their own financial performance closely and trying to grow too fast.

“Many businesses find themselves in financial strife by trying to expand their operations too rapidly,” she says.

“Rapid growth puts pressure on cash flow — growth should be well planned and carefully managed.”

Taplin says some of the common alarm bells for companies are things like having to extend credit terms with customers, or being behind in superannuation and tax obligations.