How accountants can help with clients' exit strategies

This article was current at the time of publication.

There's growing fear that the unintended consequence of turning off COVID-19 provisions in late September will be a colossal spike in the number of companies destined for collapse.

Ironically, some provisions, including the JobKeeper Payment scheme, plus numerous federal and state-based loans and grants – and the March moratorium on insolvent trading laws – may have exacerbated bad corporate behaviour, resulting in some crossing further into legal insolvency territory.

Unsurprisingly, given the recent provisions, the Australian Securities and Investment Commission (ASIC) reported a 50 per cent year-on-year drop (in May) in companies that would normally have collapsed.

However, with many businesses likely to find themselves cashless once JobKeeper finishes, John Winter, CEO of the Australian Restructuring Insolvency and Turnaround Association (ARITA), suspects the May dip will mark the calm before the insolvency storm.

With banks reluctant to place additional pressure on companies' balance sheets, Winter expects to see a three-step spike in insolvency numbers.

The first will be “proactively” before JobKeeper finishes, the second when the JobKeeper cash runs out, and the third over the Christmas and New Year period, when companies lack the fat on balance sheets to carry a hefty wage bill into the quieter holiday trading season.

While baseline insolvency numbers were down 1000 for the year going into COVID-19, Winter expects COVID-19 to add about 5000 additional closures to the 2000 already heading for the cycle.

Maximise options

While turnaround advice is a specialised area of accounting and legal practice, John Purcell FCPA, policy adviser, environmental, social and governance with CPA Australia, says the role of the public practice accountant (practitioner) in helping optimise the best possible outcomes for clients shouldn't be understated.

Purcell reminds practitioners that the earlier they have tough discussions with clients, the greater the opportunity to identify options to minimise loss or potentially keep the business afloat.

The best way for practitioners to initiate wind-up discussions, adds Purcell, is to encourage clients to confront the harsh realities they're often too fearful to face. Worst-case outcomes may include not only losing the business, but also the family home, depending on what personal guarantees they've signed.

Given that a practitioner will know exactly where a client sits on any cash flow or balance sheet insolvency test, Purcell says they must flag these concerns early.

By initiating discussions between clients and insolvency practitioners, Purcell says it may be possible to maximise any potential safe harbour protections.

"A properly documented restructuring plan may allow a company to continue trading without any finger pointing around unlawful trading, should restructuring be unsuccessful."

"A properly documented restructuring plan may allow a company to continue trading without any finger pointing around unlawful trading, should restructuring be unsuccessful," says Purcell.

However, he reminds practitioners that directors can't get safe harbour protections if the company's books and records aren't in order, or when it comes to getting specific safe harbour advice, your client refuses to speak to an insolvency expert.

“Taking these necessary steps also protects your own practice, especially if the client continues trading without seeking insolvency expert advice,” says Purcell.

“There's a clear divide between public practice accounting and insolvency practitioner territory, and rather than shouldering the burden and risking crossing that divide, the latter needs to know when to pass it on to the former.”

How to help your clients

Instead of allowing clients to rely solely on hope, Winter says one of the biggest roles for a practitioner is to encourage discussions that could lead to a turnaround plan while it's still viable.

The post-COVID-19 environment, adds Winter, is one time when practitioners should ask clients what they can do to help.

“This could mean exploring all resources to maintain cash flow, like talking to banks, lenders, secured creditors, suppliers, trade creditors and landlords to obtain accommodations and extensions to debts that are due or about to fall due,” says Winter.

He says practitioners must confront company directors with their heads in the sand, especially those who stop returning calls, paying their tax, or even opening mail.

“Practitioners must steer clear of unqualified ‘pre-insolvency’ advisers who may offer commissions for referring their clients to them,” warns Winter.

Part of meeting a practitioner's obligations to a client, adds Winter, means only referring them to ASIC registered liquidators and lawyers (with additional insolvency law qualifications), who are experts in restructuring and turning around businesses.

“Once you start talking about insolvency, you've crossed the Rubicon into giving advice you're unqualified to offer, and you don't want ASIC or the liquidator coming after you,” cautions Winter.

“By offering insolvency advice, you'll also compromise your indemnity insurance.”

Accountants play a critical support role

Even after the referral, practitioners play a critical support role in furnishing the liquidator with books and records, says Kristen Beadle, registered liquidator and trustee in bankruptcy and partner with Hall Chadwick.

Assuming meticulous records reveal where money is coming from or going to, she says the practitioner will be able to provide an insolvency expert with an acute snapshot of the client's cash and balance sheet positions and director's personal exposures.

This will help determine whether it can pay invoices on normal trading terms and how it's managing statutory obligations, like superannuation and its Australian Taxation Office debt.

Beadle says it's important for practitioners to support their clients during that initial insolvency consultation to ensure they quickly ascertain whether the company can reasonably be expected to pay its outstanding debts, and, if not, what possible wind-ups might look like.

"Knowing when to refer a client to an insolvency expert saves a practitioner from venturing into insolvency advice, which they may be unqualified to offer."

"Knowing when to refer a client to an insolvency expert saves a practitioner from venturing into insolvency advice, which they may be unqualified to offer," says Beadle.

Once there's been a formal insolvency appointment, Beadle says the directors are no longer in charge of the business and the focus is on the return for creditors.

When having those hard conversations with clients, she says it's appropriate for the practitioner to encourage directors to reveal everything, including vital information that wouldn’t show up in the financials.

She recommends practitioners encourage directors to communicate honestly with staff and family and, if appropriate, suggests they have a mental health check-up.

“From my experience, men struggle to separate who they are from what they do, and financial concerns can negatively impact marriages, the ability to pay school fees and even the car they drive,” says Beadle.

“They need to remember that Australian insolvency laws allow directors to put their hands up and say, ‘Through no fault of my own, I now need to wind this company up in an orderly fashion’.”