Avoid the risk of insolvency and know what to do when there is a risk of it knocking on your door!


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Avoid the risk of insolvency and know what to do when there is a risk of it knocking on your door!

dVT Group were recently invited to participate in a podcast with Joanna Oakley, Lawyer at Aspect Legal.  It is a two-part series providing insights and advice on recognizing the signs of insolvency and what to be aware of should you find yourself in this situation.

The main points covered in the podcast are:
a)  Understanding how time can make the difference when a business is in financial strife;
b)  The personal risk exposure for directors of businesses;
c)  Knowing the warning signs of trouble and what questions to ask at the right time.    

Antony de Vries is the founding partner of dVT Group, which is a specialist accounting and advisory firm and experts in the areas of business turnaround and insolvency.  Over the past 23 years they have helped more than 2,500 businesses overcome their financial challenges and regain the control they desire.   

The podcast is aimed at all businesses, arming them with information about recognizing signs of financial distress both in their own organization and in the clients who may owe them money.  But it’s also aimed at providing accountants and other professional advisers that work with these businesses some insight as to the warning signals they should be looking out for and what to do if they are seeing some of those troubling signs.

Business Owners coming through too late!
Antony says, “The most common and disturbing theme that we see is that business owners come through to ask for help too late.  Australians are actually quite a proud society and no one really wants to put their hand up and say, look I’m just not sure whether it’s getting a little bit too hard for me. But she’ll be right mate, I’ll be able to sort of bat on. We’ll get through this”. 

It is frustrating to see the damage that can occur when people are unaware of what is slowly happening to their business, especially as these situations could be resolved if they were dealt with early in the piece.  Their options start to evaporate and sometimes they are left with no options at all.

A success story: turning a business around. 
In the podcast, you can hear a great success story where we were able to help a business that came to us for help early.  Through the appointment of a voluntary administration process and other actions, the business got out of trouble and 14 years later has a business that is five times in size and with no debt.

These success stories can only be achieved if the signs are recognised and acted upon early.  Accountants can help by keeping a look out or just simply knowing the conversation starters. 

By asking a couple of simple questions, the majority of people will most likely be more than happy to talk about their business and would value such an open dialogue.

The podcast also features a not so successful case study of a good solid profitable business that was starting to experience difficulty following a change in law and serious health problems.   They did not think to ask for help as they did not think anything could be done to change the situation.  It was difficult to hear that the family were left with no business and no money.  This could have been avoided by getting the right advice at the right time, to identify the right pathway to either find the right person to take over the business or to potentially benefit from the sale of the business. 

Personal risk exposures for directors.  
Many business owner are aware of their duties as a director, but just don’t fully appreciate that whilst they have this entity that is separate to them in their company, there are still risks for them personally if they continue to trade in a business that effectively is insolvent or seen to be insolvent at a particular point in time. 

So when does it become a risk for the directors?  Antony says: “When a company can’t pay all its liabilities or all the debts that it incurs whilst running its business it creates a shortfall. The law says that you shouldn’t go and seek money from other people (employees, suppliers for goods and stuff like that) when you don’t have a reasonable chance of knowing that you can actually pay them for that work.  If this is the case and the company goes into liquidation, the directors will become personally liable for any shortfall of all those debts that they allowed to happen and that remain unpaid.

In reality what happens is the active creditors, suppliers or the employees will actually threaten to withhold their services if they don’t get paid.  This can then result in other liabilities such as taxes to go unpaid.  The director thinks he’s doing the right thing because he is keeping the business running, but in the back of it, he’s just created this sleeping time bomb.  The tax department have given themselves a special rule that says if you don’t fill in your BAS form within three months, the director becomes personally liable.  So in these situations, the onus is on the director to not let these issues accumulate and to obtain the right advice on who to pay and how they are paying, as it can make a difference between personal liability and not. 

Warning Signs 
So what are the tell-tale signs of a problem brewing.  Signs that should have business owners or their accountants (on their behalf) starting to ask questions and perhaps thinking about getting external assistance?

Poor cash flow is probably the biggest indicator – is there enough cash in the bank to actually pay for what you owe, when they’re asking for it.  Some of the questions may be – are you overdue with any of your taxes, are you paying your employees superannuation liabilities on time?

The second podcast of this series will feature the warning signs of financial trouble, how to recognise them and what to do about them once you see them.

In the meantime, we hope you take the time to enjoy this podcast (27 mins) and that you get some useful tips about what to do and what not to do if you’re involved with a business that is starting to feel a cash flow crunch. 

https://www.stitcher.com/podcast/joanna-oakey/talking-law-legit-legal-tips-for-business-with-all-the-jargon/e/51560685

If you would like more detail about any part of this article or podcast, please contact Antony de Vries at dVT Group on (02) 9633 3333 or Joanna Oakley at Aspect Legal on (02) 8006 0830.