Pre-Insolvency Advisers (for SMEs)

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Author: ABRT Professional Member | Ben Sewell RTA (originally published 3 September 2020 at Sewell & Kettle) – Debunking the Myth

When should you engage a pre-insolvency adviser?

Pre-insolvency advisers are professionals who help business owners conduct a root cause analysis to understand why their business is failing and then help develop a turnaround strategy or, if this is not possible, plan an orderly winding up.

Businesses should engage a pre-insolvency adviser when they suspect their business is or may become insolvent. They will likely come to this conclusion with reference to the many signs and symptoms that often flag approaching insolvency. These typically include:

  • Poor bookkeeping
  • Personal guarantees/ director loans/ not taking a salary
  • Angry creditors
  • Late debtor payments
  • High staff turnover/ forced holidays
  • Inability to obtain finance
  • Growing broke
  • Failure of a related entity
  • Problems in the personal lives of directors
  • No interest from purchasers
  • Missed BAS lodgement or payment
  • Unpaid payroll or super
  • Negative working capital and poor liquidity/ repayment plans and write-offs
  • Issues with the ATO and auditors
  • Continuing losses of profit and customers
  • Significant adverse events

Small to medium sized enterprises (SMEs) are businesses with less than 200 employees and they constitute 97% of all businesses in Australia according to the Productivity Commission.

The first step for SMEs worried about their financial position is to figure out what the underlying problem is with their business. Directors will note symptoms, such as poor cash flow or losing key customers, but in order to figure out what to do next, they need to identify the underlying causes of these symptoms through analysis.

For SMEs, the viability of a business depends on potential profitability and the energy and working capital that the proprietors are prepared to expend to grow and improve the business. If one of those three essential elements are missing, then the business is not likely to be viable.

Is your business viable?

For many businesses facing insolvency, the question at the forefront of directors’ minds is “can I save the business?” This question rarely has a clear answer. For many SMEs, especially those that are family run and have a long history, the business will be more than just a job – it is a livelihood and their tribe. Other intangible value moves with the proprietors, regardless of what happens to the company structure itself, so there is an opportunity for phoenixing. However, it is important to consider the advice of experts before deciding what to do next; there may be a way to save goodwill value through a restructure, although being decisive and willing to make tough calls is essential to ensure viability is lasting.

What should I look for in a pre-insolvency adviser?

There are a number of different types of pre-insolvency advisers. But due to the poorly regulated nature of the field, it is important to conduct research before engaging any professional. Look out for the following traits:

  • Real world experience

The best advice will come from those with industry experience and previous success in implementing turnarounds.

  • Memberships and accreditations

An adviser with accreditation is more likely to be accountable and professional. Look for the following:

  • Association for Business Restructuring & Turnaround (ABRT)

  • Australian Restructuring and Turnaround Association (ARITA)

  • Turnaround Management Association (TMA)

  • Company liquidation registration (ASIC)

  • History

Always look at the history of your potential adviser so you know who you will be dealing with. This is especially important because a number of pre-insolvency consultants move into the industry after being struck off as liquidators or being convicted of white-collar crimes.

  • Pricing

It is important to understand how you will be charged. Read all agreements carefully and be wary that if it is not immediately apparent how the pricing is structured or it is not transparent then this should be questioned.

  • Ethics

Always engage advisers that operate legally and ethically. Engaging an adviser with questionable ethics is never worth the risk.

  • Strategy

Always question your pre-insolvency adviser’s strategy. Question a number of advisers and find the strategy that best aligns with your goals. One questionable strategy is illegal phoenix activity.

  • Conflicts of interest

A reputable adviser should conduct a conflict of interest check. This will ensure that your matter does not conflict with any of the adviser’s existing or past clients. Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman has issued stark warnings about phoenix operators and pre-insolvency advisers. She has warned that phoenixing “destroys small businesses” – by allowing debtors to escape their liabilities upon which small businesses may be relying for income and cash flow. In addition, the ASIC uses regulatory strategies to disrupt illegal phoenix activity and warns that they may take action where “evidence shows that directors intentionally misused company assets or acted in a way that is contrary to the company’s best interests”. Commenting on the financial year ending in June 2019, Commissioner Price revealed that ASIC prosecuted 382 people for 827 offences of failure to keep books and records, a key indicator of phoenix activity.

  • Excessive workload

Advisers will not be helpful if they do not have adequate time or resources to devote to your business. Ensure your adviser has the capacity to take on your matter.

Who are the effective pre-insolvency advisers?

Insolvency practitioners

Insolvency practitioners (company liquidators) are well equipped to provide advice since they have years of study and accreditation behind them and they are therefore well versed in the industry. They are also registered with ASIC.

Insolvency lawyers

Solicitors specialising in insolvency are very effective advisers in pre-insolvency matters. Solicitors can provide a range of services and they will be able to see your matter through to the finish. Be conscious of the fact that lawyers who truly specialise in insolvency are rare, so always make sure to check your lawyer’s experience.

Experienced businesspeople and consultants

Experienced businesspeople, particularly in the fields of business and law, make excellent advisers. They understand how these fields interact and have widespread experience in dealing with company turnaround issues. The ABRT is the only professional organisation that is focused on developing a turnaround profession beyond lawyers and accountants.

Who are the ineffective insolvency advisers?

Struck off liquidators

If an individual has been struck off as a liquidator, it indicates poor commercial acumen and an inability to achieve good outcomes for businesses. This is not the kind of individual you want.

Commercial lawyers

Most commercial lawyers are not qualified to handle pre-insolvency matters. Unless they have the specialisation required to navigate insolvency, they will likely be unable to assist.

Receivables financiers and short-term lenders

Their solutions are usually band aid solutions that are not backed up by experience or qualifications. More debt at a higher interest rate is unlikely to be the right solution.

Unqualified advisers

Qualifications are essential. Those without qualifications are unlikely to provide effective advice or have the credentials required to act on your behalf. However, qualifications must be combined with real world experience.


Whilst it may be tempting to cut costs and try to restructure you company alone, the likelihood of success is low and you open yourself up to personal liability and further debt. The best investment you can make in your business is to obtain professional advice.

What should a professional adviser do in a pre-insolvency scenario?

Ensure data entry is correct and balance the books

Ensuring financial transactions are updated and that accounts are reconciled is necessary to understand what has gone wrong.

Respond to or manage any ATO, ASIC or Court correspondence

Your adviser should first establish communication with these bodies to negotiate payment plans or pause recovery actions. This will allow time to deal with root cause issues.

Undertake a root cause analysis

A pre-insolvency adviser’s main goal is to ascertain why things are going wrong. This will require looking at the business as a whole and finding the root causes of problems. This analysis will be vital in understanding the business’s ongoing viability.

Recommend a course of action

Based on the outcome of the above steps, the adviser should make an informed recommendation on the best course of action.

Look for voidable transactions and act as advocate

Your adviser should identify any voidable transactions to get a better picture of risks to directors. If you have engaged an insolvency solicitor they will then advocate on behalf of the director and respond to any claims.

Professional advice is always a smart investment in an insolvency scenario. Sewell & Kettle Lawyers focus on debt recovery and insolvency, and are uniquely placed to help you face your commercial challenges. Read more about our legal and insolvency services, and then contact us.

Author: ABRT Professional Member | Ben Sewell RTA

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