I was reading with great interest, the article entitled “Investors win in insolvency shake-up” in the AFR on 3 June 2011.
The article discusses the Federal Government’s proposals to change the way liquidators, administrators and insolvency firms are appointed, terminated and how their fees are determined.
What’s the problem?
If you’ve ever been involved in a company that is in administration, liquidation or declared insolvent you’ll know that:
- the fees insolvency practitioners charge are generally very high in relation to other professional services;
- the insolvency practitioners seem to take much longer than would seem necessary;
- there is rarely anything left for shareholders after the insolvency practitioners have finished; and
- even creditors are lucky to see much of a return.
So why this is the case when we have such clear “insolvent trading” laws in Australia and strong regulation with clear guidelines on insolvent trading?
Insolvency practitioners’ fees are so high simply because they are in a tightly controlled industry, often shrouded in mystery and fear with have limited competition.
However, in fairness, insolvency practitioners often get caught between a rock and a hard place. On the one hand, they must try to plan a return to operations to trade their way out, on the other hand, they must be able to see a very clear path back from the edge or simply liquidate and get the best price for all assets. It is a complex juggling act and they don’t always get it right, but they do always get paid which irks many observers.
The reason it can take some time is that executives and senior management and directors that are involved in companies that are having problems (usually cash flow and less often profit problems) usually leave it too late to ask for an external review of their situation. After all, it is not really something any senior executive wishes to go through, much less broadcast. I have seen many cases where directors and management simply can’t agree on whether the company is trading while insolvent through lack of information. This drags on the decision to declare insolvency.
What’s the solution?
I believe it’s a rapid external business review, short, sharp and strategic in nature and with a forward looking element. Too many insolvency practitioners simply look at past history not future opportunity. My experience has been that, if an external review is undertaken early enough it can identify where more cash can be generated, where cash outgoings can be reduced, where alternative sources of liquidity can be obtained and how the company can be returned to a profitable, solvent state with appropriate liquidity management arrangements in place.
In short, companies should get the ball rolling early, as soon as they feel like they are in trouble and before they know they are. Timing is everything in these cases. Corporate insolvency is not some embarrassing disease to be ashamed of, in fact from an accounting viewpoint is it very simple and clear. The current economic climate is driving more and more businesses to the brink and the often the best way out is early intervention and action.
The one thing that most insolvency firms, liquidators and administrators often lack is entrepreneurial flair. They often fall short in identifying new business opportunities as they are very conservative by nature and inward focussed. This is understandable given their operating environment and the insolvency law.
By way of example
Dequity Partners recently undertook a financial and marketing review with the intention of turning around a company that has been making small but regular losses for the last few years. The owner was confused as to what to do next and didn’t have a clear picture of the business finances, which is more common that we’d like to think.
This process has rapidly identified where the problems were internally and what opportunities the company has in the market. In this case, the turnaround project is less about forensic accounting or asset valuation, and more about increasing marketing and sales in strategic areas. It is a profit increase program.
If this business had waited any longer we’d be selling off the assets by now as creditors were beginning to worry.
By undertaking a full business review, analysing every aspect of the business and looking for quick wins we were able to plan a clear path back to profit. This hasn’t even meant selling off assets or calling in administrators. Of course, we are extremely careful not to allow the business to trade while insolvent but fast action has brought this business back from the brink. Surely this is the best outcome for the owner, the staff, the creditors and of course the Australian economy?
The key message I’d like to get across is that we welcome reforms on corporate insolvency. However, we urge business owners and senior executives to take rapid action and don’t delay until it’s too late. Reviews prior to appointing administrators are a good way to establish clarity and independent decision making.
Tags: corporate insolvency, Dequity Partners, Insolvency, insolvency advice, insolvency and trustee service Australia, insolvency australia, insolvency firms, insolvency law, insolvency practitioners, insolvency practitioners association of australia, insolvent, insolvent trading
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