Business insolvency

Closing/Selling your business

Learn about insolvency issues for small business including your rights, responsibilities and legal obligations when planning for business insolvency.

Learning outcomes:

  • What is the role of an insolvency practitioner?
  • What are some key warning signs of distress
  • The importance of My Gov
  • The process of formal insolvency

Presented by Shaun Reeves, SRJ Walker Wayland, and Lee Crosthwaite, Worrells Insolvency

Please note: the content in this module is presented by industry professionals, and designed to raise awareness and develop basic knowledge. If you are looking to take any significant action for your business we recommend speaking with a professional so they can offer advice specific to your circumstance.

Video Presentation: Business Insolvency

Business Insolvency

SHAUN: Hello welcome. Well, I'm Shaun Reeves, director of SRJ Walker Wayland, business advisors, and accountants. Welcome to the session on business insolvency and joining me for the session is Lee Crosthwaite principal at Worrells Insolvency. Before I pass across to Lee to tell us a bit about himself and to take us through insolvency issues for small business, I should introduce myself.

I'm a director of SRJ Walker Wayland and have been for the past 27 years. I've got more nearing 35 years in business accounting experience. I'm a parochial Moreton Bay resident, a community participant. And have a family that are brought up in the region as well. A husband and father of five, grandfather of two.

That's enough about me. Let's go to the important guy today, which is Lee Crosthwaite. Could you tell us a bit about yourself, who you are and what you do like.

LEE: Thanks Shaun, yes, as he said, I'm a principal at Worells Insolvency and forensic accountants. I'm a qualified accountant by trade and a registered liquidator.

We are so principally, we help out people who are in financial distress and need assistance to work through their problems. Worrells is a national firm, but very much with a local based focus. I'm the partner who leads up our North lakes office on Flinders parade, with two local staff and we aim to service the broader Moreton Bay council region.

SHAUN: Thanks Lee. Can you tell me this insolvency practitioner thing or not ever been in that space? I'm just wondering what a normal sort of work week would look like for you.

LEE: Okay. Yes. Well, typically I spend my time, uh, meeting with clients, meeting with, uh, accountants, such as Shaun to help assist and discuss with clients, their financial difficulties, where they're heading with their business and what, perhaps we can help out with that.

The second part of my role is I take formal appointments. So as a liquidator or administrator or receiver, so I wear a number of hats. Some of those are voluntarily appointments. So that's following on from those initial meetings that I just said, or I get appointed by the court. Literally I step into the shoes of the director or the individual in those particular cases.

So I might be trading on a business. I might be realizing and selling assets. I might be dealing with aggrieved party stakeholders and creditors employees. The other part of my role is then conducting investigations and forensic accounting into what's happened with those businesses. What outcomes there could be reporting to regulators such as the ASIC, ATO, and what other recoveries might be able to be made for those creditors, ultimately to return some money back to those who have lost out.

Very often what I have planned Shaun during my day or week is I walk into the office, can be turned on its head in an instant, someone like Shaun may give me a call and to deal with a very urgent matter with a client, or I'm might get ordered by the court to go and take some action. And that might mean I need to be out on site within a matter of minutes or hours.

SHAUN: Yeah. Okay. So. If you're going to get a call from somebody like me, or from another business, I'd guess that normally it's a situation where the business is in some sort of distress. Can you tell me, and share with the audience, what the warning signs are for distress, because sometimes I know that that can creep up on you and you can't spot it coming if you haven't got all your eyes and ears open. So with all eyes and ears open, what should people be looking for and listening for?

LEE: Well, I think you're right, Shaun. A lot of the signs are there. It's just when, as a business owner and we deal predominantly with this small to medium families type sort of businesses, when you're in the business heads date, some of those warning signs, oblivious to advisers accountants might be able to pick them up.

But when you're working in the business, you don't always see that sometimes you've got the blinkers on. So some of the key ones that crop up - cashflow cashflow is often the big factor, particularly with those size businesses and a lot. So looking for issues in terms of money is not there for when you need to pay creditors or bills and things like that.

It might be that the money and revenues that are coming in are not enough to pay your suppliers, employees let alone then overheads and things like that. So there's those telltale signs, you know, there's delay in payments to suppliers as well asking for timeframes and things like that. So the cash flow is often the key point in relation to identifying them.

Another one is then the longer term continuing losses, which is often the accumulation of those cash flow difficulties, also eroding equity in terms of value of assets and things like that. So they're more your balance sheet items. Just on that point, talking to, or, and knowing a lot of small businesses nowadays reporting, and the processing of bookwork is getting a lot more efficient with the assistance of apps and so forth. But traditionally, a lot of small business people get stuck running their business. And as you say, not realize that things are going on because they're trying to deal with a number of issues in a number of places, not necessarily bad ones, but maybe orders or customers or staff issues and the like, This thing of regular losses, often people don't know they've got regular losses.

SHAUN: Do you find that a fair bit with the businesses in distress? Are they as familiar with their numbers as they should be?

LEE: Uh, short answer probably no. You know, they're there, as you said, and we often say there's a lot of working in the business rather than on the business and then not looking at them.

Yes. Technology has helped a lot where they've got more real time as opposed to waiting until the end of the month or the quarter or interview, you know, to have their financials prepared. So there are those and with a lot of the apps. Yes. There's some good signals, you know traffic lights were red, green, blue, those sorts of things, as to where different debt is credit levels are indicators.

But often it's them having the time to actually be looking at what the business is doing and where things are at. And also then just drilling down into different areas as well. You know, actually looking at when they're quoting on work, for example, where the profit and the actual margins, whether that's the actual costs, but then allowances for overheads and profit as well.

SHAUN: Okay. So a lot of the warning signs then are around how easy is it for you to pay your bills? How well do you know your numbers and what do they look like? Do you have arrangements, with, for example, the idea which is a very common one, all would imagine what we're talking about. Signs of distress at the moment. What do you typically see as far as warning signs in relation specifically to the ATO stuff?

LEE: Okay. Long debt. That's been sitting there for long-term, accumulation of those taxes, use of monies without them being set aside for the actual payment times, and then the payment arrangements, some, and then the terms of those payment arrangements, you know, depending on what the ATO is willing to give, the longer those are often that's the more, you know, signs of distress that, that the money is not available.

SHAUN: Okay. So, and in relation, I'm drilling in here to the ATO, because it's a very important part of all of this whole picture. When we're talking about warning signs, are there warning signs that come directly from the ATO that we should be aware of if you're an individual or trading through a company or any of the above?

LEE: Yeah. Look the ATO, as with a lot of those government agencies, they're very good at pushing out notices. So you'll receive notices along the way. Notices that you haven't lodged a return or a bass. Then notices that you've lodged and you've got a debt, then notices that you've got to come to some arrangement or make the payment.

So they're very good at pushing those out inherently. The, a big issue is just the human nature of people willing to open the mail and actually read it and take the steps that are suggested in it.

SHAUN: And sometimes those notices would come through an advisor depending on how the addresses are set up. But now with this migration to the My Gov system, a lot of those notices would come via that account.

LEE: Yes. So the multiple, so as you said, a lot of them are sent if they're formal notices, demands and things like that, they'll often go through the registered office, which is often the accountants or solicitors, depending how that's set up.

Plus then yes. With the, My Gov and others, they'll be sending them the direct to the, um, the directors or the business individuals themselves.

SHAUN: Okay. Cause that's a, that's a really important point too, is to make sure that your, my gov account is live and you're accessing it on a regular basis, not just for the ATO, but for, for a bunch of other, um, government interactions.

And I do know that, uh, I have clients, who've had some frustration in that the, my gov accounts haven't been able to be set up properly. And that has caused a bit of a flow on effect of, of not being able to stay right on top of all these notices and so forth. So I guess it's a critical point too, to make sure that your head's not in the sand.

Then if you've got an issue with your My Gov account , for example, you fix it. Or if you're getting, you mentioned letters, not being opened, open all your letters, find out what they say and deal with them.

LEE: Yep. Be reading them and, and address them. Don't sort of put the head in the sand and more often, if you're there on the front foot with the ATO, as opposed to them chasing you, you can do things at your own pace.

And if you need to get into a repayment agreement, you can do it on your terms rather than last minute, trying to push something through perhaps the ATO.

SHAUN: So. Talking about businesses in distress. And we've been through some of the warning signs. What are the usual strategies to, to try to deal with businesses in distress? And I guess this comes in two stages. One is what you need to be doing before it gets really serious. And the second part of the question is. Okay. It's really serious now. And we might be looking at some sort of formal insolvency arrangement. What happens then? So let's deal with the first one.

LEE: Okay. Well, I guess the first is just analyzing, what is the position of the business?

You know, what's its financial position. What's its cash flows both long term and short term . Then identifying, well, what changes can we make to the business? Then setting a strategy as to how we might do that. So you've got to take the first step, take some time to actually look at that. Then a lot with smaller and medium sized businesses, as we sort of set out before cash, it really, a lot of it comes back to cashflow and how we manage that.

There's areas where we can generate cash flow. It might be changing our terms around trade debtors in our collection policies in relation to those. It might be there's stock that's sitting there that we need to liquidate either through a sale to generate some some fast cash reserves, or it might be obsolete stock that we just need to turn into some sort of amount of funds for the business.

Then there's other things like, is there surplus equipment that's not being used? You know, is there better machinery in the back of the shed that, you know, we might need it once a year? Is it easy to sell that? And then just hire it for the couple of days that it's needed. Things like that to put the cash back into the business.

Finance facilities and things like that, you know, is there other finance facilities that perhaps we can put some money back in? There's a bit of a catch with that, Shaun, obviously with terms of costs and things like that, you've got to be wary of, but it may be some sorting that we can look at.

Then on the flip side, where can we save cash or the cash deferrals things like is there excess staff or unproductive staff? Have we got old machinery that's costing us more money in repairs and fuel as opposed to actual some sort of newer machine on a finance arrangement.

Other things such as is there debts that can be you know, renegotiated into a longer term plan, same with those with our suppliers and things like that, talking to them about some sort of arrangements to stage those through.

SHAUN: Okay. So it sounds to me as though a lot of these strategies that we're talking about are business management related more than necessarily operational. And what I mean by that is I might be in a business manufacturing, some stuff. I feel like things are getting a bit uneasy financially. So what do I do? I work harder at trying to manufacture stuff and, sell stuff.

But what are might not be doing because it doesn't necessarily come naturally to me is stepping back and thinking, well, Hey, me putting 110% of my time into that. Is that the most beneficial use of my time or the moment at the moment? Or should I be looking at stepping back, having a look at the management of it, looking at my staffing, looking at my costs, the process of cost reduction, looking at the why on financed.

So, and a lot of that to someone that's working hard manufacturing things doesn't necessarily come naturally, I guess.

LEE: No, that's right. And that's, that's where I sort of said before, a lot of the time business owners find themselves working in the business, not on the business and not taking that time to step back and make strategic decisions.

And I think that's where they need to be open to that. You know, seeking advice from accountants or people such as myself.

SHAUN: Okay. So at the moment, um, We're in a situation where businesses, a lot of businesses are in critical distress. I mean, I know a number of businesses who are also had a game changer in, in doing that very well out of, out of the COVID and restrictions and so forth, but there are a number of businesses, uh, in hospitality, tourism, and a number of other industries that are doing it really tough.

Is there any particular impact that this whole COVID situation is having on insolvency related processes? And in relation specifically to strategies with dealing with a financial district?

LEE: Well, I think there's a couple of points to that, Shaun. One is just the uniqueness of the situation we're in at the moment, this pandemic that's on foot, just the wide reaching nature of how it's affecting individuals on a personal level and also businesses. And the government's response in terms of the risk and restrictions, and containment of it.

We've seen businesses that have gone from a high quite profitable revenues, literally cut down to zero overnight or low amounts. So that's been where business owners have had to suddenly be looking at their business in quite different perspective of what they've done for the last 10, 20, 30 years, uh, and looking is my business, even for viable, um, something that, that would never have had to contemplate four months ago.

It's taking that view. Then we need to look at, well, how are we going to address those need to sit down and have a look. Again, looking at cash flows, the short to medium term. Getting to after September when the government stimulus packages seem to be going to stop. Then the longer term, how are we going to go after that for the next one month, three months, six months.

There's a lot of factors still. And I think this is a lot of the unknown part of this is the uncertainty of where we're heading. What is people's reactions going to be? Are they going to be going on holidays? Are they going to spend all the money that they would have spent on an overseas trip? The local hospitality and restaurants, cafes, are they still going to go out and spend that money?

Yes, I think there'll be those that are itching to get out and do it, but there are those, those sort of very conservative. People are on job keeper and job seeker and uncertain as to what funds they're going to have moving forward.

SHAUN: So is there any safety net in the, in the insolvency provisions during this COVID period?

LEE: Yes, they have, but they're up until September. So, credit is now instead of being able to, send demands and wind up businesses for five grand, that's pushed up to 20 grand threshold. So the debt needs to be over 20,000 for that. Now there's response times instead of 28 days, six months. So there is extended timeframes, but again, a lot of that is just deferral as opposed to actual relief.

SHAUN: Okay. So it's keeping the wolves from the door. Yes. they're still out there circling. But they're not right at the door at the moment. So the fact that people have this sort of, I want to say stay of execution, because that seems a little bit too severe, but there, but they've got this period in which to be able to attempt to get themselves, right.

They should obviously be taking every opportunity during that period to use the time wisely so that when we come out in September, we we're going to come out all guns blazing as to what we're trying to do to regenerate the cash flow within the business.

LEE: That's right. There's some good relates at the moment in terms of the jobkeeper, a cash boost, things like that to allow these businesses to push forward to that September point.

But they've got to make use of the time now. After September, we sort of go over that, um, Protection barrier. Yeah. And people are going to be back to on their own and dealing with this. And it may be the fact that, that their revenues are back to where they were. You know, there has to be a little bit of pessimism in respect of doing cash flow projections and alike.

Not just hoping that it's going to be the same figures that it was 12 months ago. That will pre COVID.

SHAUN: So just on a final point, then I mentioned before how the ATO can, uh, can often be key in, in someone's cash flow. Um, given the amount of, yeah. Through either GST or PAYG with her holdings or installments and so forth, obviously.

Come the June quarter bass with the quarterly installments coming up on those people are going to have to be right across their numbers to be able to vary those installments if they need to. But what specifically has changed about the ATO approach during these pandemic restrictions?

LEE: Everything's on hold is basically where it's at at the moment. Often the ATO is cyclical, uh, with political positioning and things like that. So they're on hold. The official line is up to September. Uh, my personal opinion. I suggest that's probably going to be further on perhaps into next year, so their collections or their rigorous collections, their windings up, all of that sort of things on hold at the moment.

The ATO is also effective because they're being tasked with dealing with jobkeeper and other government areas. So they're a lot of their other business units are being moved into dealing with that front line operations. So a lot of other things are probably slowing down as well. So in short the tax office is soft and, uh, if you are on there, Again, on the front foot, making your submissions or putting in your proposals to them, then, then you should be able to get something again.

Again that's just a deferment of a lot of these debts. It's not actually wiping them out. Yeah. You have to be addressed at some point.

SHAUN: That's the real point. Isn't it? Lee? That, uh, This insolvency, uh, we might've had businesses going into distress before it we've certainly got some businesses in distress, right at the moment for all of those reasons that you've explained or have seen. Uh, news articles, clowning one in five small businesses may fall over. I've seen news articles quoting Peter Costello's saying our national debt is gonna come out at a trillion dollars by the time this is all said and done. It’s a very tricky, uh, path that the ATO is trading along with everyone else.

And I know you said the ATO was soft, but obviously they're taking a softer approach is it is exactly what you meant there. Um, but none of these things. Appear to me to be any reason for a business to sit back, take a breath and say, well, I'm not going to have to worry about it until September, because we should be worrying about September right now.

LEE: If, if those that can afford to pay. Those as they go along, they should be looking to do that. So you don't have this large accumulation of debt come September or October.

SHAUN: Yeah, because we are going to have to pilot at some point. So if you can do it as you go, it's easier to pay those bills in smaller bits and pieces than it is to go POW, because we're going to have to deal with bank debt around about the same time with the deferral of some of the bank lines and so forth.

LEE: We’ll an ATO debt you'll have bank debt. You'll have. Um, landlord for those that have got, uh, rent relief, things like that. Yeah. There's the possibility of quite a lot of those deferments suddenly coming up, um, in the October, November type months with the prospects of still lower than normal revenues.

SHAUN: Yep. Okay. Thanks Lee. So wrapping that up then it, it, it seems to me as though your, your key messages here, yes. You are you're, you're quite likely to be in some form of financial distress, particularly during these covert challenged periods. Don't stick your head in the sand, keep it up, look at everything in your business, not just the operations, but the management.

Make sure that you're dealing with things as they arise and not putting them to the side to be dealt with later. And most importantly, communicate and plan and prepare for what happens coming out of, out of the COVID situation. Is that a fair summary?

LEE: Yeah, I think so. We need to be monitoring as we're going along. We need to be planning and be prepared to make decisions, tough decisions if need be, uh, and communicating them with the stakeholders. Often with the communications we're doing that when business is good, but it's equally, if not more important when we're struggling to make sure that everything's onboard employees, management, , supplies, even your customers as well.

SHAUN: Good point, good point. Um, when it seems like everything's getting on top of you, try to shake it off and talk. Yes. Okay. Communications what's what's going to be best for the business. Well, that's, that's us in a wrap. So I'll say thank you very much to Lee and thanks everybody for tuning into the video. I hope you've had something from it and, and make sure that you are attending to all of these things in your business.

And you're having all of the discussions you need to have and have them as quickly as possible. Good luck. Let's do it Moreton Bay tough. Thank you.

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