Advisory Update Matt Byrnes National Head of Restructuring Advisory Ahmed Bise Principal - Financial Advisory - Grant Thornton

Advisory Update

Matt Byrnes
National Head of Restructuring Advisory
Ahmed Bise
Principal – Financial Advisory
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Early Warning Signs

    Matt Byrnes
    National Head of Restructuring Advisory

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Setting the scene…

• Global outlook is negative – we are not immune..!
• Issues in China, growth forecasts are down globally and Oz; no wages
  growth, RBA more likely to reduce the cash rate than increase
• No genuine recession for almost 30 years – watch for ‘Groupthink’
  syndrome..!
• A number of sectors under severe stress – i.e. Retail, Property and
  Construction, Agri, Tourism & Hospitality
• Closer to home – impact of bushfires and Coronavirus..?
• Advisors need to be alert and pro-active with their clients
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Why is early detection so important?

• More options for you and the client – ‘funnel’ effect..!
• Chance to save the business / lifestyle / family home
• You get to keep a long term client (fees for your business)
                                                                   Options
         OR
• Allow the client to limit further financial loss, and move on

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Insolvency

                              “The inability to pay debts as
                                 and when they fall due”

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Early warning signs

1.            Liquidity indicators
2. Profitability indicators
3. Financial reporting
4. External forces

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Warning signs

1st Stage
• Falling sales
• Poor Liquidity Ratios (i.e. current, cash)
• Poor management & financial accounting information –
         Timeliness, Accuracy, Reliability
• A realistic forecast cash flow shows a deficiency that can’t be
  met
• A major client leaves or goes broke owing money
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Warning signs

1st Stage
• Fast moving product lines are often not in stock
• Bank overdraft is constantly being pushed to the limit each
  month
• Aged creditors are stretching and ‘blowing out’
• Customers are consistently paying late
• Directors not taking a salary
• Repeated trading losses are occurring
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Warning signs

1st Stage
•        Rapid sales growth is occurring without sufficient capital to
         finance it – “Growing Broke”
•        Failure of related company which is either owed $ by the
         company or to the company
•        Refinance applications are being knocked back
•        Arrears or non-lodgement of BAS returns
•        Stress, marital problems or other factors impacting key personnel

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Warning signs

2nd Stage
• Not paying superannuation
• No genuine interest in buying the business
• Being placed on stop supply / stop credit or C.O.D
• Repayment plans with creditors
• Rent and other essential services unpaid or delayed
• High turnover of key people
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Warning signs

2nd Stage
• Large bad debt write offs or provisioning
• Disputes with auditors
• Demands from uncontested creditors
• Partial payments being made, i.e. installments
• Putting staff on forced holiday during an abnormal shutdown

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Warning signs

3rd Stage
• Creditors removing stock under R.O.T
• Litigation or judgment debts
• Wages being delayed
• Receive eviction notice
• Receive S222AOE Notice from the ATO
• Receive Application to wind up
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Warning signs

Options
• Continue to Trade On
• Sell the Business
• Raise further Equity
• Refinance to a new lender
• Voluntary Administration or Liquidation

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Current Trends

• Interest rates to stay low (no room to move..!)
However:
• ATO – small business debt is the highest in history
• Obtaining debt finance is harder than ever – beware of
  second & third tier financiers
• Personal Borrowings being used to prop up business - when it
  is time to stop?

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Director Penalty Notices &
                                   Shadow Directorship

     Ahmed Bise
     Principal – Financial Advisory

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What are we seeing

•         The corporate veil: Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019
•         GST and personal liability
•         Increased onus on public practitioners
•         ASIC; increased scrutiny
•         Pre Insolvency Advisers
•         Retail collapses
•         Bushfires, Floods, Coronavirus: feast and famine
•         Employers exposed for not paying staff correctly
•         SME insolvencies are expected to rise in 2020, defaults/Court actions are increasing

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DPN

• Mechanism for DCT to recover unpaid PAYG &
  Superannuation
• Notice specifies unpaid amounts & remission options
• Imposition of personal liability in the absence of legal
  action

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Treasury Laws Amendment (2018 Measures No. 4) Act 2019

•         The obligation to ensure a Company pays an estimate of SGC or
          PAYG liability commences at the same time as the obligation in
          relation to ensuring the Company pays the underlying liability to
          which the estimate relates; rather than the date the Company is
          given notice of the estimate

•         The 3 month rule which applies before director penalties apply with
          respect to unpaid SGC liabilities (& estimates) has been removed

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DPN, PAYG

•         TIMING when the amount is notified to the DCT determines action.

•         NON LOCKDOWN: Unpaid amount of PAYG obligation
          is reported within 3 months of the original due date penalty can be
          remitted by any one of the following within 21 days:
          –         Payment

          –         Administrator

          –         Liquidator

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DPN, PAYG

•         LOCKDOWN (PERSONAL LIABILITY) : If the unpaid amount of PAYG is
          reported or remains unreported more than 3 months after the due
          date the only way to remit the penalty is to pay

•         If the company fails to report PAYG by due date, DCT may estimate

•         The director penalty provisions apply to estimated liabilities.

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DPN, SGC

•         TIMING when the amount is notified to the DCT determines action.
•         NON LOCKDOWN: Unpaid amount is reported by the DUE DATE for the SGC
          statement the penalty can be remitted by any one of the following within 21
          days:
          –         Payment
          –         Administrator
          –         Liquidator
•         LOCKDOWN: If reported after the due date (or not reported) the only way to
          remit is to pay
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DPN – What’s new?

•         4 July 2019: Federal Government introduced the Treasury Laws
          Amendment (Combating Illegal Phoenixing) Bill 2019 will extend the
          regime to INCLUDE GST, luxury car tax and wine equalisation tax.

•         5 February 2020: passed the Senate

•         Obligation begins on the day the relevant tax period ends (the initial
          day). The initial day is the end of the GST instalment period.

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Example, Non Lock Down

•         30 June, quarter
•         28 July, due date for lodgement
•         23 July lodgement, $200k liability
•         Non payment; the director penalty provisions apply from 28 July
•         1 February DPN issued
•         10 February, enters VA
•         Full amount is remitted, not locked down

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Example, Lock Down

•         30 June, quarter
•         28 July, due date for lodgement
•         1 November lodgement, $200k liability
•         Non payment; the director penalty provisions apply from 28 July
•         1 February DPN issued
•         10 February, enters VA
•         Full amount is locked down

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Example, Lock Down

•         30 June, quarter
•         28 July, due date for lodgement
•         1 November lodgement, $200k liability
•         Non payment; the director penalty provisions apply from 28 July
•         1 February DPN issued
•         10 February, enters VA
•         Full amount is locked down

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What Directors Must Do

• Correct address, postage date is the date the notice
  is given

• Record keeping

• Monitor

• Lodge reports when required

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DPN - Defences

•         30 Day rule, incoming directors
•         Director did not take part in managing the company because of
          illness/other good reason
•         You took all reasonable steps, unless there were no reasonable steps you
          could have taken, to ensure that one of the following three things
          happened
          –         Payment
          –         Administrator
          –         Liquidator

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DPN - Defences

•         SGC liability – the company treated the Superannuation Guarantee
          (Administration) Act 1992 as applying in a way that could be reasonably
          argued was in accordance with the law, and took reasonable care in
          applying that Act
•         SGC Act: 60 Day Rule within which to raise a defence outside of Court
          Proceedings
•         Resignation does not absolve a Director of personal liability
•         Minutes

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Outline

• Dangers to public practitioners and/or employed
  accountants when you have a client displaying warning
  signs of financial distress

• Survival tips

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Key Messages

• Your client’s problem is THEIR PROBLEM.
• Keep detailed FILE NOTES and put it in WRITING!
• If attending Directors’ meetings obtain a copy of the
  minutes – check them
• You may THINK that you know your client but under
  pressure people CAN CHANGE AND TURN ON YOU

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Key Messages

Section 588G of the Corporations Act applies if:
(a) A company incurs a debt
(b) The company is insolvent at that time, or becomes
    insolvent by incurring that debt, and
(c) At that time, there are reasonable grounds for
    SUSPECTING that the company is insolvent, or would
    become insolvent…
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A defence that you should be aware of

                       Section 588H(3) reliance on other person

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What does this mean to you personally?

• A person(s) can be deemed to hold the same statutory
  and fiduciary duties as a validly appointed director.
• ‘Shadow Director’
• There may be both civil and criminal sanctions for
  directors that breach their duties: validly appointed or not
• Accountants have an even higher level of onus

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Shadow Directors – defined in Section 9 of the Act

Unless the contrary intention appears, a person who is not
validly appointed as a director; if:

I.             They act in a position of a director, or

II.            The directors of the company or body are accustomed to
               act in accordance with the person’s instructions or
               wishes.

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Shadow Directors – defined in the Act

         The statutory definition of a shadow director excludes
        persons that give ADVICE in the proper performance of
           functions relating to that person’s PROFESSIONAL
        CAPACITY, or the person’s business relationship with the
                       directors of the company.

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Shadow Directors – factors, tests, checklists

        Principle derived from case law: it’s necessary to
        consider the duties performed by the person(s) in
        view of THE OVERALL SCHEME OF A COMPANY’S
                     BUSINESS OPERATIONS

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Have you ever?

•         Directed a client as to who should or should not be paid right now

•         Prepared budgets and cashflow forecasts and issued same to third
          parties under a covering letter carrying your signature: banks,
          creditors, statutory authorities

•         Negotiated contracts for clients

•         Negotiated repayment plans for clients (with the DCT in particular)

•         Taken part in any day to day decision making

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Have you ever?

•         Been seen by third parties as being your client (Giving the impression
          that you are in charge)

•         Signed agreements on the client’s behalf (with the DCT in particular)

•         Approved payments.

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Shadow Directors – the court will consider

•         The size of the company

•         The internal practices or structure of the company

•         How the alleged shadow director is PERCEIVED by outsiders

•         The person or group of persons responsible for decision making

•         The Court will refer to acts not on one individual occasion but over a
          period of time and as a regular course of conduct

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Shadow Directors – the court will consider

•         The exercise of board or top level management functions

•         Has the person acted as the company in relation to matters of great
          importance, in particular, in regards to the main business activity?

•         Performed a duty of a validly appointed director

•         Signing of documents on the Company’s behalf

•         Signing cheques.

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Shadow Directors – Defence

                                                                    THE ADVISER DEFENCE
         The adviser is engaged to perform SPECIFIC FUNCTIONS
          whilst the latter (shadow director) is ENGAGED IN THE
               AFFAIRS OF THE CORPORATION GENERALLY

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Tips for Survival

•         Make it clear that you are at all times acting on your Client’s BEHALF!

•         Make it clear that you have been INSTRUCTED!

•         It MUST BE the directors that take action

•         Give ADVICE not DIRECTIONS

•         Email

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Tips for Survival

•         AT ALL TIMES act in accordance with you professional capacity
•         Use well worded engagement letters
•         Keep detailed notes of verbal advice, but better still PUT IT IN
          WRITING
•         DO NOT take over financial management
•         Remember the directors make the decisions – the paper trail should
          demonstrate this
•         Your PI insurance may not protect YOU!
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Questions

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