What’s best for your client?
Guide for accountants, bookkeepers & commercial lawyers
A Controlled Business Exit vs An Immediate Liquidation… Or Both?
Are any of your clients in financial distress?
Struggling with growing debt or increasing cash flow pressure?
Did you know working with a business owner in cash flow or debt distress can be one of the most rewarding challenges a professional advisor like yourself can navigate in their career?
Because the financial and emotional impact on your client’s life during these hard times can be so devastating – your help in resolving these issues will generate goodwill with your clients that will be loyal to your practice for many years to come.
Would you like to be able to give them the most up-to-date financial distress advice?
If so, then this guide could help be the difference between:
- a Band-Aid solution that might lead to a mediocre or even highly damaging client outcome; and
- a solution that provides results that lead to lifelong loyalty and raving fan clients.
As you are already no doubt aware, a business can fail for a long and growing list of reasons.
- Government intervention
- Not enough Government intervention
- Equipment failure
- Natural disaster
- Poor pricing strategy
- Bad Debt Write-offs
The list goes on.
Regardless of the cause…
…the underlying effect on the business is the same –
Untenable cash flow pressure and unmanageable debt.
Essentially, where a business:
- has insufficient resources to meet all of its obligations to creditors;
- is unable to source further working capital to “plug the cash flow gap”; and
- has little prospects of successfully implementing an informal turnaround through business model restructuring, pricing changes or marketing efforts...
…that business is destined to fail.
So, what is the best way to deal with a failing business – exactly?
When questioned for advice, a common approach for some professional advisors is to refer their clients to the local registered liquidator, because “they’ll be able to tell you what to do”.
Sound advice? Maybe.
But is there a better way?
Enter ReGroup Solutions and the Controlled Business Exit Strategy (“CBE”).
A CBE strategy allows a business to wind down its affairs in a (yes, you guessed it) controlled manner with a view to achieving a better outcome than simply dumping the company directly into liquidation – even though liquidation may be a foregone conclusion!
A controlled business exit is built around three core philosophies: Control, Certainty & Compliance.
The major difference between a controlled business exit and immediate liquidation lies in the fact that during a CBE a director or business owner retains control of their business.
In a liquidation scenario, a liquidator takes control of the company and the director’s powers are legally suspended. As a result, your client is no longer able to dictate how, when and why certain actions take place in relation to the company’s assets, customers, creditors and stakeholders.
What this means is that your client is at the mercy of the liquidator and their team. The actions of the liquidator and their team have the ability to affect your client in a number of ways. Some of which could be quite devastating.
And, what’s more important to consider is this – once you have appointed a liquidator you can’t reverse the process. It’s done. So, its critically important for your clients, if they are considering a close down, they first determine the most appropriate time to appoint a liquidator – if at all.
A CBE advisor would be in a position to assist with determining the best time.
Following on from the above, with greater control comes a greater degree of clarity and certainty.
In a direct liquidation scenario you can only ever guess how things will pan out.
Given the highly regulated nature of the liquidation process, a liquidator is unable to provide your clients with detailed advice or outcome assessments in advance of their appointment.
This often means your client is in the dark about the outcomes of the liquidation process until a result has been achieved or action has already been commenced.
A CBE provides your client with the ability to consider and address all issues that are likely to arise in a liquidation event – AHEAD OF TIME – if a formal insolvency appointment is ultimately required.
They can then choose options that best addresses their concerns armed with the knowledge of expected results.
That alone, should give your clients immediate value and a worthy factor in formulating your advice.
Generally, directors have a primary duty to their shareholders and need to operate their business within the ordinary framework of the Corporations Act 2001.
When a company is insolvent, or there is a real risk of insolvency, director’s duties expand requiring that a director also considers the impact of any activity or decisions about the business on the company’s creditors (including employees with outstanding entitlements).
Other general duties imposed on directors and officers of companies include:
- the duty to exercise powers and duties with reasonable care and diligence, which includes taking steps to ensure they remain properly informed about the financial position so as to avoid insolvent trading;
- the duty to exercise powers and duties in good faith in the best interests of the company and for a proper purpose;
- the duty not to improperly use positions to gain an unfair advantage or to cause detriment to the company; and
- the duty not to improperly use information obtained through positions to gain an unfair advantage or to cause detriment to the company.
When a CBE is handled in consultation with an experienced practitioner, your client can rest assured that any decisions made about their circumstances have been addressed after consideration of the relevant legal framework.
For that reason, we do not recommend a “self-managed” approach to a controlled business exit. There is simply too much risk to your client in failing to approach their problems in the proper way.
A ReGroup Solutions advisor can assist your client with compliance risk.
Aside from the benefits derived from the underlying philosophy of a CBE, as outlined above, as a professional advisor, steering your clients in the path of a controlled business exit strategy rather than deciding to liquidate immediately will also give the following benefits.
Important Benefits of Choosing a Controlled Business Exit Over an Immediate Liquidation
Mentioned earlier was the fact that the corporate liquidation process in Australia is highly regulated. The insolvency regime involves ongoing deadlines, statutory reporting obligations and the costs that are associated with those strict parameters.
Whilst that is a compelling foundation for when a business enters a formal insolvency appointment, it is little comfort for a company Director that is hoping to be able to explore a number of different options.
For instance, a director may wish to consider the chance to sell their business (or part of it) while they’re fully considering other options. IMPORTANT TIP: (Remember to ask about the Regroup Solutions Business Rescue Program™ which can run concurrently with a CBE™).
Or, a director may decide that they would like to continue trading their business with a view to implementing changes to their business model – or at least allow a period of time for their fortunes to change.
They may decide that they want to enter into a merger or joint venture as a way of overcoming their financial difficulties and possibly avoid insolvency all together.
The scope of a formal insolvency appointment does not lend itself well to such innovative ways of dealing with financial problems.
In contrast, a CBE practitioner is able to explore, investigate and develop innovative and dynamic approaches to financial problems while advising you on the framework within which you are operating.
These approaches may even lead to a complete rejuvenation of a business’s financial operations and avoidance of a formal insolvency appointment!
Maintain and Maximise the Value of Assets
Unfortunately, in a liquidation scenario, the value of a company’s assets is compromised.
The stigma that is associated with the insolvency profession has an immediate impact on the value of a distressed businesses assets.
- Once a buyer is aware that they are buying equipment or assets from a company in liquidation they are immediately looking for a bargain. They know that the liquidator will likely accept less than fair market value.
- A company’s customers also see a liquidation scenario as an excuse to delay payment of outstanding accounts, or to raise unreasonable disputes simply to avoid paying legitimate bills. These customers know that the liquidator has limited knowledge of the circumstances surrounding the claim and they play up on this fact.
- In addition, there are additional costs (financial and non-financial) associated with the collection of the company’s receivables ledger. These added costs (such as debt collectors charges and legal fees) create an impairment to the value of the ledger and ultimately diminish the company’s asset pool.
- Assets like stock and inventory can be impaired in a similar way or even rendered obsolete and worthless.
- A company’s “work in progress” is likely to be brought to an immediate halt in a liquidation scenario. This might even lead to liquidated damages and counter claims from customers where projects remain unfinished.
A CBE has the benefit of preserving the value of the company’s assets because there is no requirement for a director to advise creditors, shareholders or any other stakeholders that they are seeking assistance with their financial problems.
A CBE practitioner can work hand-in-hand with a company director to ensure that assets are realised for their maximum value. As a result, it makes good commercial sense to allow for a controlled wind down and asset realisation program to be undertaken.
In a liquidation scenario:
- Your client’s company is likely to be charged the high hourly rates that many liquidators continue to charge – anywhere from $150 an hour for junior unqualified staff, up to $700 per hour for the liquidator themselves. As you can imagine, those costs add up quickly.
- The remuneration of the liquidator is subject to approval by creditors and not decided by your client. They will not be able to control those costs.
- There are administrative aspects to a liquidation that would not ordinarily be payable had the company not appointed a liquidator. These include the cost of reporting to ASIC, the ATO, creditors, and security holders like banks.
- Once a liquidator has been appointed, there is no limit on the amount of money that they can charge if they are required to continue to work on a matter. These costs are paid from the assets of the company and diminish any return to creditors – and possibly reduce the amount of money that can be applied against liabilities that directly impact your client – like personal guarantees.
In a controlled business exit the costs are drastically reduced:
- The costs of a CBE are largely decided by your client and they do not need to be approved by any other party;
- Your client can terminate the CBE agreement at any time. They cannot terminate a liquidation if they think costs are running high.
- ReGroup Solutions does not charge an hourly rate, and any upfront payment is able to be paid from the company’s available resources.
- The CBE process often leads to the ability to meet the costs of a liquidation (if one is required) through the orderly wind down of the business – and reduces the amount of work that a liquidator will need to do, hence minimising the cost of the liquidation process.
Better Outcome for Creditors
A CBE practitioner has the ability to liaise directly with banks, creditors and stakeholders if given authority.
They are able to prove to them that further action on their part may not be a strong commercial decision.
A CBE practitioner can show these people that the likely return that would be achieved in a CBE scenario is greater than that which would be achieved in a liquidation of the distressed business – and accordingly escalating recovery action is not a good idea on their part.
As a result, in a CBE, stakeholders are more likely to enjoy the benefits of a return on their credit – and consequently there is less personal exposure for your client.
A return to creditors in a liquidation scenario is statistically extremely low.
Chances are business owners and managers will have formed strong relationships with their employees, suppliers, and customers.
It will be important to your clients that they are able to protect, as best possible, the impact that business distress will have on these relationships.
In a liquidation scenario, the cold reality of the situation is often unloaded on the creditors of your client’s company in a clinical and emotionless way.
This can leave stakeholders frustrated, angry and even hostile towards the person they feel is responsible – your client.
In contrast, during a CBE scenario, your client can dictate the tone and nature of the messages released to stakeholders.
This allows them to deal with the stresses and pain points that are being experienced by all parties involved with greater care and feeling.
In a CBE scenario time is on your side.
For the most part, your client is not obliged to make decisions or undertake any activity until they choose to do so.
With time not being a factor, your client can better negotiate potential asset or business sales and maximise returns.
They can come to agreements with creditors or appropriate payment plans.
They can investigate options involving greater time horizons such as Safe Harbour protection.
Essentially, your client dictates the pace of the CBE to suit their needs.
Peace of Mind
While financial distress is innately stressful for a business owner, the benefits of a CBE, discussed above, allow that stress to be limited and managed.
Focusing on the issues that they can control, while they can control them, avoids the added pressure of dealing with the liquidation process and its many uncertainties.
Mental well being is a serious issue.
Society is only now beginning to accept that failing to address psychological health can have dramatic and devastating consequences on individuals, their families and the wider community.
Your client’s peace of mind is critical in the formulation of advice and recommendations.
Liquidation Benefits – Still Available
One of the most appealing benefits of the CBE strategy lies in the fact that all the benefits of a liquidation can still be accessed after the controlled wind down operation has been conducted.
Often, a controlled business exit will conclude with the appointment of a liquidator to the remaining corporate entity. As such, the benefits associated with the liquidation process can still be accessed, including:
- the ability of the liquidator to review the controlled business exit process to ensure that any transactions occurred during that time were in the best interests of creditors;
- the ability for liquidators to investigate and pursue any outstanding legal claims which would be better handled over a longer period of time and under the guidance of a registered liquidator;
- collect accounts receivable or retention amounts owing that are payable over a longer time-frame and no longer require the directors input;
- pay out the proceeds of any asset realisations which may remain in the company to creditors in the appropriate priority (e.g. employee priority claims, secured, unsecured). This ensures that no creditors are preferred over others and each receives their legal entitlement to company assets;
- the liquidation process allows for the formal deregistration of the corporate structure with ASIC;
- a liquidator takes over communication of the company’s affairs with any remaining creditors so that the company director can move on with their life at the appropriate time; and
- liquidators can attend to any other issues that have not been dealt with in the controlled business wind down process.
Having had a chance to consider the above, if you’re an accountant, bookkeeper or commercial lawyer advising small business clients that are in financial distress, please keep their best interests in mind.
We are prepared to provide a preliminary strategic analysis and recommendation report for your clients – at no cost.