Turnaround and Restructuring
Many business owners do not know the break-even point for their business and do not adequately focus on the key drivers of profitability. This is a significant opportunity for consulting work for accountants to assist directors with:
- Options available to increase revenue or reduce general costs and expenses;
- Options available to reduce fixed overheads, such as seeking to renegotiate lease or finance arrangements or arrange exit strategies if lease or finance agreements are no longer necessary;
- Strategies which may be available to recover or realise amounts from overdue debtors or the sale of other assets, which may not be of core importance to a company’s business;
- Finance options which may be available to provide immediate cash flow; and
- Coaching them to “work on, not in” the business.
We provide advice, guidance and assistance to accountants and company directors in respect of strategies which can be implemented to turnaround a company’s business so that it may trade profitably in the future.
In some circumstances we may also be able to assist businesses in negotiating arrangements so that debts owed to creditors may be paid over time or coming to arrangements with creditors to compromise their debts. Such arrangements can assist a business with immediate cash flow problems by reducing or deferring current liabilities.
An insolvent company may agree to sell its business to another entity with the insolvent company to then be placed into liquidation at some point in the future. Such a sale may either be on the open market, if possible, or to a new entity, which may be related. If the sale is to a related entity then the sale ought to focus on a company’s core business / assets with a view to the new purchasing entity being in a position to trade profitably.
In any sale of a business or assets a company’s directors must comply with their duties, which include acting in the best interests of the company and all stakeholders. Where a company cannot pay its debts, directors’ duties also include having regard to and acting in the best interests of the creditors. To ensure compliance with a director’s duties, any sale of a company’s business and assets ought to be entered into for fair value and on commercial terms. This is particularly important in circumstances where a sale to a related entity will not enable all debts of the company to be paid and it is likely that the company will be placed in liquidation at some point in the future.
If a sale is not transacted for fair value and on commercial terms it may disadvantage creditors and give rise to breaches of director’s duties, recovery claims by a liquidator and offences being reported to the ASIC, which may subsequently prosecute directors. This conduct is commonly referred to as “illegal phoenix activity”, however, the ASIC recognises that there is a distinction between “legal” and “illegal” phoenix activity depending on whether the issues of value and commerciality are adequately addressed in the sale. Accordingly, proper legal and accounting advice ought to be obtained to ensure that sale arrangements are properly structured and do not give rise to “illegal phoenix activity”. In this regard there has recently been a significant growth in the number of “fringe advisers” who provide advice regarding financial difficulties but are not qualified insolvency practitioners and are unregulated. Certain of these advisers have been associated with “illegal phoenix activity” and this issue is under scrutiny from the ASIC and the ATO which are looking to pursue prosecutions in this area.
The benefits of a sale of business to a related entity may include the directors maintaining control of the business rather than an administrator or liquidator taking control, continuity of the business in the transmission to the purchaser and the directors have the opportunity to communicate and manage dealings with clients, employees, suppliers and financiers.
There are a number of issues to be addressed in a sale of a business including:
- The manner in which a business is valued;
- If a sale is to a related entity, the manner in which consideration is to be paid or provided to ensure that the sale is transacted for fair value and on commercial terms;
- How existing contracts or incomplete projects are to be dealt with;
- The impact of the sale on future dealings with the vendor company’s suppliers;
- The effect of the sale on leases which the vendor company is a party to;
- How will loans and finance agreements be dealt with, including obtaining any necessary approval of the sale by relevant secured creditors;
- Whether some or all employees will be transferred to the purchasing entity and if so what employee entitlements will the purchasing entity be required to assume;
- How the purchasing entity will fund its initial trading costs; and
- Where the sale price for a business is insufficient to pay all amounts which are owed to creditors, the impact of residual personal liabilities which may remain for the directors and how those liabilities may be dealt with, for example any loan account debts owed by directors, personal guarantee debts and ATO claims for PAYG Tax and SGC where Director Penalty Notices have been issued and expired or “lock down” director penalty provisions apply.