CFO Centre’s CEO David King: I would like to take us through a case study and then ask Colin and Paul a couple of questions around its, again it’s just to bring what we have been talking about today to life. So this is a company that traded through the pandemic that has had to adapt to the challenges posed by the lockdowns and the subsequent recovery period that we are still in.
It is a homewares brick & mortar retailer, growing but in the very early stages of its online presence:
So with that. The directors are obviously faced with a number of issues and some of them seem rather quite urgent so one at a time,
what should they be doing to protect their business right now?
CFO Centre NSW Principal Paul Gunson: I think this business falls into the first two categories that I mentioned previously.
So part of it the revenues increased, parts of it are in decline but clearly alright its facing perhaps some working capital questions. I think the directors should immediately involve their advisors, their accountant, their lawyers you know professionals that can discuss with them the options for the business and help them make the right decision for the future.
Timings normally of the essence in these circumstances so they need to speak to them quickly and perhaps go to the professionals that have the necessary commercial experience and when I look at the facts of the case study I go, well probably there is some potential insolvency experience needed there to.
Here at the CFO Centre, we find that each business requires quite tailored strategies that encompasses not only the options identified for the business but also owners objectivise, and we would normally follow a high-level formal SWAT analysis looking at their strengths, weaknesses, opportunities, threats in the market etc and then do scenario planning to look at for the feasibility of each of the options.
Directors can then make a decision, the best one for the business going forward and we would then assist creating action plans, time frames that are then supported by profit and cash flow forecast.
When I look at the retail part of this business I see there is probably some opportunity to improve cost structures through renegotiating contracts with landlords and supplies. We are seeing in the market that where the conditions are right this is becoming more and more common in business.
That supply pressure concerns me and we would probably be investigating the company’s ability to sell some non-core assets or part of the business that will allow them to pay down the debt and perhaps fund some longer term operational cost structures.
Competitor opportunities, well I think thanks going to need some debt finance and we find that many businesses welcome our assistance when they have to go and negotiate with either their current bank or a new bank or financier where that is their only option.
It’s an interesting case study David. Did you see anything that I have missed there Colin?
Corporate & Commercial specialist Group Principal Colin Miller: I think that the key point about seeking appropriately qualified advises is critical because its suggested here that the company may be in the insolvency grey zone and f advice is sort, and it should be sort as a matter of priority, directors need to act on that quickly.
Directions do have lots of obligations and legal obligations under the corporations act in terms of their obligations to the creditors and to the company and it can be sometimes easy for directors to come unstuck by firstly ignoring the issue or taking decisions that in hindsight were the wrong ones. A key instance obviously is trading while insolvent which is prohibited under corporations law. It’s not always easy to determine whether the company is solvent or not, there are certain protections for directors to allow them to trade while insolvent but a company should never explore those opportunities or avenues without appropriate, qualified insolvency practitioners, CFO centre experts or lawyers with an insolvency practice.
We would also probably do a quick legal health check on the business before looking at any expansion or alternative ecommerce businesses as an additional revenue stream. I think that list of legal health check is quite long, but a couple of the key things would be to look at the current financing loan documents that the business has, were any terms of extension or moratorium agreed to during the previous period coming to an end? how likely would the financing Banks be prepared to renegotiate at this point in time? Look at lending agreements as well, you know one of the options for exiting a shopping centre, relocating, or exiting the bricks and mortar business altogether. Have another look at what COVID support is still available at a Federal and State level, there have been changes and it is important to keep on top of that. And I guess getting the business with a clear understanding of where it stands legally in terms of its payment obligations, its customers as well making sure that its revenue streams are protected, possibly secured by registration under the PPSR if required, that’s very important.
I guess there’s a couple of things that the business should absolutely not do at this point in time, and occasionally directors might here there are opportunities for winding down businesses and forgetting about creditors, that’s not the case at all. If the companies unsure of its solvency status it should get that expert advice rapidly and then make a decision based on that a device. It should ne be taking any actions designed to defeat creditors such as asset striping, entering into Loan Agreements or funding with associated parties, or uncommercial rates or simply thinking of walking away from the company, taking the assets and leaving a shell company effectively with debts.
Those are all prohibited under the Corporations Act as we know, and it will also lead to potential criminal and civil liabilities for the directors. So, that’s something very important for directors who may have heard about ‘Phoenix’ schemes and may have been lured into arrangements to defeat creditors, that’s the absolutely no-go area, it would lead to significant issues. For most businesses of course directors will act and take on the advice of experts with the view to a resolution which hopefully I positive and the business can move forward. If in this scenario the ecommerce platform is going to take too longs, the pressures on the business, the income streams are not there, then you know it may be there is an insolvency avenue that the company would have to look at. But again that’s not the end of the game, there are opportunities for companies in administration to recovery and return to business its not always doom and gloom that insolvency may be on the horizon but the key point is that the directors don’t ignore the problem, they act on that advice and make sure they are protected, the company is protected and particularly the creditors of the company are protected as well.
David: Great, thanks very much gents. Just a final question, just going a little bit further, how should a company and directors respond when receiving this pressure from its landlords, suppliers or the ATO?
Paul: I can’t stress the importance of communicating with this people.
I know each will want to know when they can get paid, but if you ignore them I find that in the case of suppliers essential supply with cease, in the case of the landlord you might turn up on Monday morning and find out your locked out and in the case of the ATO , if you ignore them you will probably find a legal recovery action commenced without your knowledge. So it is so important to communicate with them. Its going to really assist that communication if the company has up to date forecasts showing profitability and cashflow because that’s going to be able to allow the directors to give some sort of indication to those creditors as to when payment might be expected and how much that might be. And to talk to that with confidence is going to give the directors a far greater chance of coming to a resolution in that area. So simple communication.
David: Absolutely. Colin?
Colin: Yeah Paul I absolutely agree with that.
Don’t ignore these letters, demands, communications. There is a big incentive obviously to put it in the bottom draw and pretend that they are not there but that’s not a reasonable strategy. A couple of items, in relation to statutory demands the minimum debt for creditor statutory demands has returned to $2,000 and for judgement debts in bankruptcy its $5,000 and debtors have 21 days to respond to a creditors statutory demand. So those numbers and amounts are back to the pre-covid legislative amendment playing field.
The key point about responding and responding appropriately is again if there is a concern as to what the response should be or you are not certain about the consequences of the demand or communication from the ATO, creditor or Bank, speak to the CFO Centre, speak to us. Tts always easy just to tailor that correspondence, that makes it clear what the dialogue is going to be. The party filling that Claim or that notice will respect the fact that you respond to it quickly and you’re taken professional advice. It also enables any negotiated extension plans for example to be property documented and in doing that you’re going to protect the interests of the directors and the company by making sure that you’re not prejudicing any future rights of the company or the creditors. It’s also very important to remember it only take one of those secured creditors, if there are secured creditors to the company, to appoint a receiver and it business over. So, take those claims, notices of demand very seriously, get on top of them and again get the appropriate support from the CFO Centre, Nexus, your other professional advisors, and deal with situation as best as possible.
David: Wonderful, thanks very much. So gents just in terms of wrapping up any final thoughts for today that you would like to leave with our listeners. Paul?
Paul: look, whilst the Australian economy is recovering our future does nook uncertain, and I think a company needs to have confidence to work with its professional advisors because planning the business can understand potential future outcomes. This is going to assist directors to better manage their businesses and to act with agility when they see unforeseen change, because there is going to be unforeseen change in the short to medium term, because when I see businesses plan they often turn adversity into opportunity to grow and expand and here at the CFO centre that’s what we’re all about, assisting owners and directors to achieve those positive outcomes.
Colin: I fully support what Paul said certainly in terms of the obtaining of advice as early as possible and it may be that the business is looking to their professional advisors, CFO Centre, Nexus for a significant problem that they may not have the perspective that could be turned into something positive, an actual business opportunity. So seek professional advice as soon as possible, it may lead to a positive outcome, it may lead to an outcome that wasn’t expected, which may also be a positive outcome but you want the support of your professional advisors at any time, we’re always available to have a discussion around a specific or general issue and I think that way everybody’s going to be coming through this emergence from COVID all the better.
David: Wonderful. Well thank you so much Paul and Colin for your contribution and insights today, I think there is some great stuff for business owners to take away. Your details are there on the slide for people to note and get in contact with you if they feel that one or both of you can help, Thanks again and we’ll wrap it up. All the best to our listeners out there as you continue to negotiate what we hope is a post covid recovery phase. Thanks again.
As part of an ongoing webinar discussion series, the CFO Centre and Nexus Law Group discuss key economic, financial and legal issues impacting Australian SMEs. In this episode, the CFO Centre’s CEO David King, NSW Regional Director Paul Gunson and Nexus Corporate & Commercial specialist Group Principal Colin Miller discuss current client business sentiment and structuring options available for SMEs in this new post Job Keeper economic environment.
You may have heard of the concept of a business succession or “buy/ sell” that deals with the exit of a business proprietor in the event of an event such as death or disablement. Here is how it works based on a case study and solution.