The purpose of the Professional Practice Statements (PPSs) is to ensure Affiliates of the Affiliation for Business Resilience & Turnaround (ABRT), and all those who work for, represent or act on their behalf, maintain high professional standards at all times.
The PPSs set out guidance and suggested standards of practice for those engaged in the restructuring and turnaround of a business, and in the resolution of financial distress affecting a business or its stakeholders. They are intended to promote best-practice conduct that is aligned with prevailing statute, ethical frameworks and other relevant professional guidelines.
The PPSs describe required practice as a professional benchmark but are not statutory or legislative statements. They are not intended to prescribe a single mandatory approach or to operate as rigid rules. Affiliates are expected to exercise professional judgment, having regard to the specific circumstances, complexity and risk profile of each matter.
1 The Risk of the Parties
1.1
Before approaching an ABRT Affiliate (‘Affiliate’) for advice and assistance, the board of directors of a financially or commercially distressed company, their representatives or stakeholders will have formed views about the risks they are prepared to take having regard to the financial circumstances of the company.
1.2
Section 588G of the Corporations Act 2001 sets out a director’s duty to prevent insolvent trading by a company, including incurring a debt when the company is insolvent or becomes insolvent by incurring that debt. Breach of this duty may result in a civil penalty under section 1317E of the Corporations Act 2001.
1.3
It is common for companies seeking turnaround or restructuring advice to be insolvent or close to insolvency. Accordingly, the personal and commercial risks to directors, partners or trustees may be significant. Where directors may not fully appreciate this exposure, the Affiliate should raise this issue at the earliest meeting and confirm the discussion in writing (including email), retaining a copy on the Client Case Record (see PPS 3).
1.4
An Affiliate must also be conscious of their own risk exposure and ensure compliance at all times with PPS 1, including maintaining a clear advisory role and avoiding conduct that could be characterised as giving instructions or exercising control over the company or its representatives.
1.5
Where appropriate, directors or other recipients of advice may seek independent legal, accounting or other expert advice, including in relation to personal exposure, directors’ duties, excluded associated business affairs or complex taxation matters.
2 The Art of Risk Management
2.1
Risk management is a structured response to uncertainty, intended to reduce exposure to adverse outcomes and, where appropriate, support recovery and opportunity. In financially distressed businesses, decisions involving leverage, strategic change, operational restructuring or altered trading conditions inherently involve uncertainty.
The Affiliate’s role is not to eliminate risk, but to assist directors to identify, measure and manage risk so that decisions are taken with visibility of consequences. Risk assessment should be shared with directors, representatives and stakeholders throughout the engagement.
2.2
Lower-risk strategies are more likely to produce lower returns, while higher-risk strategies may offer greater upside but increased downside exposure. The Affiliate should ensure this trade-off is clearly explained. As the engagement progresses, material risks and consequences should be reiterated and documented, together with the directors’ responses, and retained on the Client Case Record.
Directors should be encouraged to hold board meetings and minute discussions and decisions, including in owner-managed or family companies that may not otherwise follow formal governance practices.
2.3
The Affiliate should explain that higher perceived risk will generally attract higher funding costs, more onerous terms and increased scrutiny from investors and lenders. Losses may exceed invested capital where liabilities exceed assets.
2.4
Risk management becomes increasingly critical when a company is in financial distress or contemplating insolvency, particularly where directors face potential personal liability.
Risk management typically involves the following activities:
- obtaining complete information about the company’s position and risks
- recognising risks and determining tolerance levels
- measuring and evaluating risks
- deciding how risks are to be managed
- assessing and reporting risks as they arise
- ongoing oversight and adjustment
The engagement itself should also be risk-managed through clear engagement terms, communication protocols, monitoring and contemporaneous record-keeping.
All material advice should be provided in writing (including email) and retained on the Client Case Record.
3 Expert Advice and Outsourcing
3.1
Where a company operates in a specialist or complex sector, the Affiliate should consider whether specialist expertise is required, including industry, technical or jurisdictional expertise.
3.2
Directors should be involved in risk-related decisions at each stage. Their involvement, together with any warnings regarding personal or regulatory exposure, should be documented and retained.
3.3
Specialist advisers may be particularly important where the company has international exposure, complex IT systems, multi-jurisdictional operations or heightened reputational risk.
3.4
Experts should be properly briefed, ideally with the Affiliate involved. Advice received, together with any limitations, disclaimers or assumptions, should be recorded.
3.5
The competence and experience of directors participating in decision-making should be recognised and documented.
4 Strategy and Risk-Taking
4.1
When advising on strategy, the Affiliate should assist directors to identify and understand all material risks and ensure advice reflects the directors’ stated risk appetite.
4.2
Turnaround and restructuring inherently involve risk. The critical issue is not risk avoidance, but informed and managed risk-taking.
4.3
Headline risks are those capable of undermining the entire strategy. The Affiliate should ensure these risks are clearly articulated and understood.
Strategic decisions remain the responsibility of directors. The Affiliate’s role is to ensure consequences are visible.
4.4
Risk should also be considered from the perspective of stakeholders including employees, creditors, regulators, customers and the broader community.
All identified risks should be documented, assessed and communicated in writing, with records retained.
5 Ethics, Conflicts and “Skin in the Game”
5.1
The Affiliate must identify and evaluate actual, potential and perceived conflicts of interest and ethical threats, including threats to integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Where safeguards cannot reduce threats to an acceptable level, the engagement should be declined or terminated.
5.2
Examples of threats include direct financial interests in the client, loans or guarantees, contingency or success-based fees, referral arrangements, gifts or incompatible services.
5.3
Where an Affiliate is offered equity, options, success fees, referral benefits, board roles, management authority, signing authority or other “skin in the game” arrangements, this should be treated as a heightened conflict and liability risk. The engagement should be re-scoped in writing and conflict management steps disclosed. Where governance or legal exposure may change, directors should obtain independent legal advice before proceeding.
6 Money Laundering and Bribery
6.1
Affiliates must be alert to risks of money laundering, terrorism financing and bribery and should manage engagement risk through appropriate client acceptance and continuance processes.
6.2
AUSTRAC administers the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and publishes guidance on customer due diligence, ongoing monitoring and AML/CTF programmes.
6.3
Where an Affiliate or their firm is a reporting entity, appropriate AML/CTF programmes, training, identification procedures, record-keeping and reporting obligations must be in place.
6.4
AML/CTF obligations are subject to ongoing reform. Affiliates should remain informed of legislative and regulatory developments relevant to their services.
6.5
Bribery of foreign public officials is an offence under section 70.2 of the Criminal Code Act 1995. Liability may arise through conduct or involvement.
7 Illegal Phoenixing and Creditor-Defeating Dispositions
7.1
Where turnaround strategies involve asset transfers, related-party transactions or new entity structures, the risk of illegal phoenix activity should be treated as a core risk category. Directors should be informed in writing of potential civil and criminal exposure.
7.2
The Corporations Act contains provisions dealing with creditor-defeating dispositions, including court remedies and ASIC’s administrative powers in certain circumstances.
7.3
The Affiliate should encourage directors to evidence market testing, valuation processes, board deliberation and document retention so that transactions can later be assessed by reference to process and contemporaneous evidence.
8 Third-Party and Accessorial Liability
8.1
Liability may extend beyond the company and its directors. Persons involved in contraventions may face exposure under corporate and workplace laws.
8.2
Section 79 of the Corporations Act establishes accessorial liability for persons involved in a contravention, including through aiding, abetting or being knowingly concerned.
8.3
Section 550 of the Fair Work Act 2009 provides a similar “involved in” mechanism in relation to workplace contraventions.
8.4
Accordingly, Affiliates should maintain clear role boundaries, defined scopes of engagement and careful documentation of advice and decisions.
9 Shadow Director Risk and Practical Controls
9.1
Where an Affiliate’s conduct could be characterised as directing the board, exercising control or being a person whose instructions are habitually followed, shadow or de facto director risk may arise.
9.2
Risk controls include clear written statements that decisions rest with the board, properly minuted deliberations, provision of advice rather than instruction and avoiding any holding out as management or an officer.
10 Insurance
10.1
Public liability insurance covers bodily injury and property damage claims. Appropriate coverage depends on risk exposure.
10.2
Affiliates should ensure professional indemnity and public liability insurance are current, adequate and maintained.
10.3
Engagement terms should be reviewed for termination clauses triggered by insolvency or restructuring.
