If you have a client in financial difficulty, we can be relied upon to provide the right solutions.

ARITA, with the support of CA ANZ and CPA Australia, has released a special guide for accountants in public practice that outlines steps they can take to help their clients with companies in financial distress.

Download the guide: Dealing with Financial Distress

Fact sheet: Providing temporary relief for financially distressed businesses

Fact sheet: Cash flow assistance for businesses

We are regularly called upon to act as a ‘circuit breaker’ between a trusted advisor and their client in times of financial difficulty.  Sometimes a client’s procrastination or refusal to accept advice can cause anxiety and frustration in their advisor.  By providing an independent voice we can help them understand the ramifications of their financial position and put them back on track.  Our role can be to shepard them back to the voice of reason, or we can counsel them one-on-one.

We are happy to meet with you and your client together or only with the client.

Clients may have had the misfortune to be in receipt of a demand from a liquidator for either insolvent trading (if their company is now in liquidation) or for an unfair preference (if they had received payments from their debtor prior to its liquidation).  We can provide both you and your client with advice on the merits of the claim made against them and assist in defending against having to make a payment to the liquidator.

As we regularly make such demands ourselves, we are best placed to act “on the other side” to help your client in such circumstances.

Just like you are your client’s trusted advisor, we can be yours.  Although our specialist skills are not often called upon, when they are, it’s essential to have the best advice possible.  For decades we have been working with accountants and solicitors when their clients get into financial difficulty.  We can help guide you and your client through this troubling time.

We understand that business distress is not the regular environment of many accountants yet they are the ones tasked with discovering their client’s true financial position and asked to provide options.  By working together we can help you unlock the solutions needed by your client and provide you with well-informed and supported insolvency advice.

You must be cautious when dealing with a director who wants to re-birth their insolvent company.

Illegal phoenix activity is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements. This illegal phoenix activity often involves the:

• non-payment of wages, superannuation and accrued employee entitlements
• non-payment of suppliers
• non-payment of statutory liabilities (such as ATO debt)
• avoidance of regulatory obligations.

If you assist a client in illegal phoenix activity you can be guilty under Section 79 of the Corporations Act of assisting a director breach their Corporations Act duties.

However, if the failed company was properly managed by its directors then its business can be sold to a new company for fair value on commercial arm’s length terms.  This normally requires a business valuation to be undertaken in addition to a valuation of any assets to be transferred.

The Safe Harbour legislation enables a director of a company facing financial distress to turn their business around by taking reasonable steps to restructure and allow it to trade out of its difficulties.

In assessing whether the Safe Harbour protections apply, directors must:

• keep themselves informed of the company’s financial position
• take steps to prevent any misconduct
• ensure the company keeps appropriate financial records
• obtain advice from an appropriately qualified entity who is given sufficient information to give appropriate advice
• develop or be implementing a plan for restructuring the company to improve its financial position

A director is unable to access Safe Harbour if the company fails to:

• pay entitlements to its employees by the time they fall due (eg superannuation)
• lodge returns, notices, statements or other documents as required by taxation laws (eg must have lodged all of its Business Activity Statements)

The accounting profession is morphing with accountants being called upon to become advisors to their clients.  This is being driven by not only the demand for these services but also is seen as an opportunity by accountants to ‘value add’ to their existing customer base and broaden their revenue pool.  The drive for accountants to ensure that their clients remain loyal to them often means that they will strive for the intangible status of “trusted advisor”

Friendly accountants to a distressed business, with the best intentions, sometimes ‘lend’ their staff into an organisation in distress to try and help them out.  This benevolence can have unfortunate unintended consequences for the good Samaritan.  Jumping into the trench with your client when they are in financial distress can sometimes seem like the right thing to do.  However, seeking independent advice about the prospects of turning around a distressed client is often the best approach and helps place distance between you and your client’s potentially unrecoverable financial position.

While providing advice, offering guidance and giving recommendations to a client is all well and good, becoming an intrinsic part of the client’s business or entrenched within their organisation may see the accountant or seconded staff member become a de facto director and may expose both your organisation and that staff member to attack.