ASBFEO & Business Turnaround – time for change…

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What does the ASBFEO has to say about Business Turnaround in these turbulent times?

The COVID-19 crisis has worsened the economy and your business may be forced to close. The ASBFEO (Australia’s Small Business and Family Enterprise Ombudsman) has some recommendations to the way business turnaround and insolvency should operate.

Can your a business turnaround be attempted or is you business looking at permanent closure or liquidation? Without being incendiary, one could almost suggest that the coronavirus scare has been more damaging to business health and the economy than it has to human health (although time will tell…).

Whether for better or worse, everyone will have to face up to their financial realities very soon. In September 2020, Australia’s temporary relief measures are going to start disappearing. The automatic protection for directors against insolvent trading personal liability will cease and creditors/suppliers can once again issue statutory demands to trigger the potential winding up of debtor companies.

The ASBFEO has some recommendations regarding Insolvency, Restructuring and Turnaround. To read the full Recovery Plan by the ASBFEO, please visit their website and download the Plan.

How many small businesses are at risk, really?

According to ASIC data, the majority of businesses liquidated are small businesses. The data included by the ASBFEO in their findings may shock you:

  • 65% of all businesses liquidated are small businesses with a maximum of 5 employees
  • 83% have assets under $100,000
  • 76% have liabilities below $1 million
  • Fewer than 10% of creditors get even $0.01 out of a liquidation.

If your small business is owed money by another small business—and those guys go under—then, boy, do you have a problem.

The reality for most will be more debt but less cash

While Australia’s approach to this year’s events has been to allow deferral of debt, temporary reductions in rent, and other such niceties, it’s not all fun and skittles.

Once these things are taken away, small businesses will face more debt and pressure than ever before. Yet they will have vastly reduced cashflows with which to deal with it.

If a director decides that his or her business will not reopen, that debt won’t go away. If that person has employees, then deciding not to reopen will require redundancy payments and other entitlements. Thus, the level of debt gets even higher.

Here’s the scary thing:

There are a huge number of unqualified business advisors out there. It’s all too tempting to simply place them all in the same category as those frequently labelled ‘dodgy pre-insolvency advisors’. However, ASIC’s Chair James Shipton warned in June 2020 there is not enough liquidators to handle the avalanche of anticipated business collapses.

Are more registered liquidators the answer? They may be experts at insolvent administrations but rarely does their role extend to innovation, risk taking and leadership in turbulent economic times calling for rapid change and adaptation.

It is unreasonable and utterly unrealistic to suggest every struggling business owner (who may risk insolvency) needs to consult a registered liquidator. Right now, COVID-19 places every single business at risk (for example, even if turnover isn’t impacted, the management or workforce may suffer having caught the virus…). Many small and family businesses can’t afford the costs of an orderly wind down of operations and business closure through voluntary liquidation (let alone afford the even more costly business restructure using a voluntary administration/DOCA).

Michael Murray comments that an insolvent company’s ability to be liquidated, by default, is dictated by whether it has sufficient funds. This is clearly a poor policy that usually occurs in developing countries (for example, to afford to declare personal bankruptcy in South Africa is considered fortunate and is usually only available to the privileged).

Some advice: If you choose not to reopen your business, don’t jump straight to voluntary administration

The ASBFEO asserts that in the voluntary administration process, nobody is thinking about how to turn the business around. Instead, advisors are working to maximise creditors’ outcomes. In the process, many small business owners are forced to declare bankruptcy, often losing personal assets (like homes) in the process.

Additionally, when a liquidator is involved, creditors can govern the administrator’s actions by vote.

By and large, what happens is that large creditors—those who have experience in these things—will drive votes based on the law, rather than the best outcome for the business, owners, employees, or other creditors.

The voluntary administration process puts creditors before you. Yes, your business might be protected from demands of your creditors; but as a director you may become personally liable for their payments. The protection offered by being the owner of a limited liability company rarely shields the directors (with small and family businesses, directors and owners are often the same) from personal liability as suppliers are usually personally guaranteed and the family home is offered to the bank as collateral (before we even consider the PPSR, insolvent trading or Director Penalty Notices the ATO will issue).

However, the focus with ASBFEO is still on business turnaround.

There may be an alternative to closure, however.

Right now—until 25 September 2020—there is a moratorium on directors’ personal liability for business debts. That’s known as ‘safe harbour’ and comes under section 588GA of the Corporations Act. The amazing thing is that this is will still be available to struggling and concerned directors after September 2020 (subject to certain criteria).

The challenge that you have is that safe harbour is a process. So if you want to keep your safe harbour intact once your safety net is gone, you have to start working on it as soon as possible. Preferably before the end of September 2020.

There is no guarantee that a safe harbour approach will save your business, but can result in your creditors giving you more space. When they are involved in the process, and know that you’re doing whatever you can to get a better outcome for them too, they can be surprisingly flexible.

The Recovery Plan may not be ideal but the focus of the ASBFEO business turnaround. It’s certainly attracted a lot of criticism (especially from those with a vested interest). However, ‘perfect’ should never be the enemy of a good plan. The ASBFEO rightly points out that a company’s management will often possess critical capital knowledge and industry expertise needed to achieve a business turnaround. Such a statement is the foundation for building a better framework and system that suits the contemporary issues faced by small businesses.

Every turnaround requires a unique skillset – if this is not on hand, that expertise can be sourced externally and by using the ABRT Professional Database.

Opinion: Author

Eddie Griffith is the principal partner at TurnAbout AU based in South Australia, and is the ABRT founder and Chairman.

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