This month, I had the pleasure of attending an AICD event discussing the (hopefully) impending changes to the insolvency laws by the introduction of so=called “safe harbour defences”. One of the speakers was Adrian Loader of Allegro Funds who, apart from what follows, reminded us of the lack of experience generally in management and on Boards in dealing with insolvency as we have not had a serious recession in Australia since the early 90’s. So it seemed to me that it was time for another wake-up call for TEC members.
Adrian firstly introduced us to the CRISIS SEQUENCE and the parties involved at each stage
STRATEGY CRISIS……… PROFITABILITY CRISIS……..LIQUIDITY CRISIS…….INSOLVENCY
Key shareholders Directors Financiers Lawyers!
and then the difference between “hard asset companies” which tend to have a long(er) gestation period to insolvency versus “soft asset companies” such as retail, services & public companies which can have a very short cycle – evidence Slater & Gordon or Dick Smith’s sharp drop at the end. Directors need to understand where their companies sit in relation to the time available for effective action when heading into the Crisis Sequence in terms of their personal liabilities under insolvent trading – which in lay terms means when the companies’ liabilities become the directors’ personal liabilities.
Further, while there is every chance a “deal” can be done to save a truly potentially viable company from insolvency if the process is started early enough, he introduced the term the “Zombie Zone” during which too much uncertainty exists to allow potential financiers to complete a deal – evidence Dick Smith and in my own experience, Phoenix Scientific. This means that you must be proactive and avoid the Zombie Zone. This is in fact no different to normal management practice – it is just that failure is even more painful personally.
Adrian’s list of questions that directors should be asking include the following;
* Value – Are you a director of a soft assets company? What is the true value of the business? Where does the value break – do you need more debt or more equity?
* What options do you have? And understand them
* What level of support do you have from existing shareholders and/or financiers?
* Understand how much of your time is going to be required during the process
* The team should have clear goals and personal commitment – exit non-helpful directors from the team?
* Revisit Corporate Governance framework
* Get competent advice
* Start finance raising early
* Run all options in parallel
* If a deal needs to be done, do you have a “deal doer” to make it happen
The proposed new Safe Harbour Rules for directors of troubled companies firstly allow the Board to openly discuss insolvency (without causing directors to become liable for trading insolvent just by discussing the prospect) however there are several pre-conditions for this defence namely
* requires a restructuring expert to be engaged
* must have a viable turnaround plan
* keep proper records and books
* must be solvent at the time you set up the Safe Harbour defence
And are you merely delaying the inevitable or is there a genuine chance for a successful turnaround?
Nothing much new in the approach which is really management 101 – however the new legislation will allow directors to protect their companies from predatory action by creditors while they develop and implement potentially viable turnaround plans when they recognise that they are sliding into the CRISIS SEQUENCE and start the process early enough to gain the financial support they need. There is no doubt that the changes will help SME companies in the future – provided they are early and realistic in their restructuring plans.
By Peter Finlayson, Alumni TEC Chair