Accountants and client insolvency: what you need to know

Taking a large sum of money from a superannuation fund to prop up a business and pay off creditors may seem like a risky way forward. Yet for anyone who has been involved in the collapse of a small business, this is a common scenario.

It is also common for a business to end up in bankruptcy or liquidation despite the attempt to save it.

As debts mount, business owners often look for ways to ease the pressure from creditors, and it is all too easy to make unwise decisions. For some, this includes buying time by selling personal assets, borrowing from friends and family, and extending credit, but all these tactics do is delay the inevitable.

While such tactics may keep a struggling business afloat in the short term, the future is already written if businesses do not seek advice from an insolvency expert.

This is where accountants play a critical role, says Angela Smith, partner at SLF Lawyers.

“Many businesses will try to trade themselves out of any difficulty that they’re in, and they often don’t realise that they are in difficulty because they are unaware of the extent of their tax liability,” Smith says.

“Accountants are the frontline professionals who can identify that there is a problem and that expert help is needed, but it may not be that they can provide that help.”

Seeking the services of a registered liquidator is the best approach, Smith adds, but for many, “liquidator” is still a ‘dirty word’ and signals the end of a business.

“This is not always the case. People are scared to speak to liquidators and insolvency lawyers, but often they can look at the issue and see that the situation is not as dire as it may seem,” she says.

“Maybe a deed of company arrangement [DOCA] or small business restructure can help the company to avoid liquidation and remain capable of continuing its business.

“Unfortunately, some accountants don’t want to engage a registered liquidator because it signals doom and gloom, but this is just not the case,” Smith says.

Registered liquidator Shabnam Amirbeaggi FCPA, managing partner at Crouch Amirbeaggi, agrees. Seeking advice early is often the key to creating more options for the survival of a business, says Amirbeaggi. In many cases, it leads to a long-term trusting relationship between the accountant and the business client.

“Every accountant should have at least one or two liquidators in their network, and many liquidators will provide their time for an initial discussion free of charge.

“Seeing a liquidator doesn’t mean the business has to end. Some clients really benefit from a few hard questions from a proactive accountant – testing strengths, weaknesses and ultimately the viability of a business,” Amirbeaggi says.

Graeme Beattie FCPA, managing principal of Worrells NSW and ACT, says accountants should be alert for warning signs that a business is starting to veer off course.

 

"Seeing a liquidator doesn’t mean the business has to end. Some clients really benefit from a few hard questions from a proactive accountant – testing strengths, weaknesses and ultimately the viability of a business."

 

“Public practitioners can, at times, not so much ignore the warning signs, but do not want to believe them. These are issues such as clients not wanting to lodge their BAS [business activity statement], resulting in their ATO [Australian Taxation Office] liabilities accruing, or having cash flow issues. If you leave it too late, the conversation becomes about liquidation instead of restructuring,” he says.

“Don’t ignore the client’s position. If they are in a downward spiral, then, as their accountant, you are in the best position to provide guidance by suggesting that they speak to someone about it and file noting that process.

“You don’t want to be in a position down the track where the client accuses you of not alerting them to the issue, particularly if they’re not lodging their BAS on time. Lodgements that are submitted more than three months after the due date can result in a client receiving a lockdown director penalty notice from the ATO,” says Beattie.

Liquidators and trustees in bankruptcy in Australia are registered under the Corporations Act 2001 and the Bankruptcy Act 1966, respectively. They are allocated a registration number, and their name and registration number appear on the relevant register maintained by the respective government regulator. The process is similar in other countries.

“We are licensed by the Australian Securities and Investments Commission [ASIC] as registered liquidators. This allows us to take on appointments as a liquidator, but also as a voluntary administrator or a small business restructuring practitioner,” says Beattie.

“Those types of appointments can help to address a company’s financial position and restructure their liabilities to help them survive and move forward in the future, while also providing for the best result for creditors,” he adds.

Liquidators can also help clients avoid some common situations Amirbeaggi has seen.

“Unfortunately, I have seen many clients who tried to patch up a cash flow problem without first seeking advice and ended up losing more than they should.

“I recall a client taking a large sum from superannuation, an asset not traditionally available to creditors in a bankruptcy, to settle debts, but ending up bankrupt anyway because he missed one creditor.

 

"Unfortunately, some accountants don’t want to engage a registered liquidator because it signals doom and gloom, but this is just not the case."

 

“There was a case where a company director used personal money to buy a business, wasn’t given any advice on asset protection options before investing, and ended up losing the lot when the business failed and ended up in liquidation,” says Amirbeaggi.

Accountants should also be aware of the possible pitfalls of giving advice outside of their scope, which may lead to exposures under the Corporations Act 2001 , such as aiding and abetting (section 79), creditor-defeating dispositions (s588FDB), and even possibly being drawn into an insolvent trading claim as a shadow director. Insolvency is a highly specialised public accounting service. Public practitioners do not need to have all the answers for their clients, but it is important to know where to go for trusted advice.

“Too often, I have seen accountants giving advice to their clients on restructuring options or transactions relating to asset sales or transfer of assets, which are later subject to review by a liquidator when the business doesn’t survive,” says Amirbeaggi.

“There are many reported cases where the wrong advice to a business client has affected the accountant, both financially when the scope of advice was outside the professional indemnity policy, and reputationally when the accountant has been named.

“It becomes a very expensive exercise when advice goes wrong,” Amirbeaggi says.

Trustworthy advice

While insolvency in Australia is heavily regulated, there is little oversight of so-called “pre-insolvency advisers”. The term refers to individuals who advertise themselves as having the skills to help business owners understand why their business is failing, then come up with a strategy to turn it around or wind it up.

This segment of industry creates more problems than it solves, and accountants should avoid connecting their clients with such firms for advice, says Beattie.

“There are businesses out there that are offering their services to people in financial distress by promising to help restructure a business to avoid talking to a qualified liquidator.

“The problem is that a lot of these firms are unqualified, and they are unlicensed. They’re giving advice without proper experience or professional indemnity insurance, or the quality assurance process to make sure that the client’s getting qualified advice,” says Beattie.

The ways these firms approach a business in distress is often to strip them of assets, says Smith, and the result is that, ultimately, qualified professionals are brought in to fix the mess.

“Rather than doing the right thing and assessing what the business needs, they are selling off all the assets and promising to get the best deal they can.

“The proper process would be to look at whether [the business] needs to go through a DOCA. Does it just need someone to go in for a short period of time to clean things up and then come back out? Or is it so far gone that a liquidation is going to be best for the directors as well as the creditors? That advice should be provided by a professional liquidator or an insolvency lawyer,” Smith says.

Amirbeaggi stresses that insolvency law is a dynamic, complicated and complex niche area, and it requires many years of experience and additional qualifications before an accountant is recognised as a registered liquidator or registered trustee in bankruptcy.

“The internet has opened up a world of information, and it is easy for accountants and their business clients to sometimes be tempted by the fanciful advertising and stories with ‘too good to be true’ outcomes being reported by those who do not have the expertise or qualifications in the area of insolvency,” says Amirbeaggi.

“AFSA [Australian Financial Security Authority] and ASIC both keep a list of registered trustees in bankruptcy and registered liquidators, including their contact details. We are pretty easy to find, and happy to have a discussion with you, or you and your business client.”

Signs a business is in trouble

Warning signs that a client is in financial distress and needs professional insolvency advice.

• Cash flow statements and forecasts show persistent cash deficits
• Profit is falling 
• Sales are declining
• Struggles to access new finance from lenders
• Reaches or exceeds credit limit
• Business costs are rising, but without an equivalent increase in revenue