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Advice that costs you nothing

We are regularly in discussions with businesses and advisers to businesses about options and issues for directors to consider when their businesses are struggling with cash flow and are under pressure from creditors.

The regularity of our involvement in these discussions and the broadness of industries that we consider, give us an ability to provide realistic commercial advice regarding restructuring options that in many cases enables businesses to avoid insolvency.

Regrettably, we also hear that clients in need of our advice decline to take up the offer of a no obligation discussion because of a past experience with an insolvency practitioner or fear of a negative outcome.

So for those clients who are reluctant to discuss difficult problems, we thought we would outline the broad structure of a typical conversation we have with directors trading in what is colloquially referred to as the twilight zone.

• An outline of the current financial position is reviewed.
• The particular rights of creditors (priority and secured) are discussed.
• The risks of trading versus non-trading are evaluated.
• The range of problems facing the directors and company are discussed.
• We describe how a relevant cash flow model can be developed and what KPI’s need to be monitored.
• Typical roadblocks to restructuring are reviewed, including making over-optimistic assumptions in projections and being closed to considering broad restructuring options.
• The outcome is an agreed set of action plans and the outline of a restructuring plan.

In our opinion, these discussions are beneficial to directors seeking to ensure their obligations of acting in good faith and exercising appropriate care and diligence are discharged fully.

As can be seen from the above, a simple discussion traversing a broad range of topics is not necessarily an entree into insolvency. As with all advice given, it remains with the directors to decide whether to take the advice or not, so control always remains with the director and their company.

Can a director be made personally liable for a breach of the Fair Work Act?

Answer: Yes

In our experience in significant cases where an employer has failed to pay the fair entitlements of employees, the Fair Work Ombudsman has the capacity to make directors personally liable for compensating employees and paying penalties imposed by the Court.

Section 550 of the Fair Work Act 2009 (“FWA”) is the authority for the power to hold company directors personally accountable for the actions of their companies.

Under Section 550 of the FWA, a person who is involved in a contravention of the FWA is held responsible for that contravention. A person is involved in a contravention if they:

• have aided, abetted, counselled or procured the contravention; or
• have induced the contravention, whether by threats or promises or otherwise; or
• have been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or
• have conspired with others to effect the contravention.

The penalty applied by Section 550 of the FWA against a person involved is not discharged by the employer company passing into liquidation.

Whilst it’s not a commonly prosecuted claim, it remains a risk to directors and is a timely reminder to employers to take care with the employment of staff so that systems and procedures exist to ensure staff are employed on terms consistent with the National Employment Standards and applicable awards or enterprise agreements.

Subcontractors and the Security for Payments Legislation

The failure of Bob Day’s Homestead Homes group of companies and other recent significant failures in the building and construction industry has highlighted the plight of sub-contractors working in the industry.

The Corporations Act 2001 (“Act”) recognises the appropriateness of giving employee entitlements a priority ranking for distributions in a liquidation, but sub-contractors, who seem to make up the bulk of labour utilised on building sites, are not given the same status.

In addition, our experience is that head contractors/builders experiencing cash flow difficulties often exploit the weakness in bargaining position of sub-contractors and delay payments made to them using a wide variety of stalling tactics, increasing the chances of financial loss.

The Building and Construction Industry Security of Payment Act 2009 (“BCISP”) commenced operation on 10 December 2011 and applies to any contract to carry out construction work (or to supply related goods and services) within South Australia.

The BCISP provides that a contractor/claimant can make a payment claim on the principal/respondent within a specified period and the respondent, when served with a payment claim, needs to respond by providing a payment schedule set up the amount of the payment plan the respondent proposes to make. If there is no timely response, the respondent becomes liable to pay the claimed amount.

In particular circumstances the claimant also has powers to suspend construction works being carried out (or related goods and services being supplied) and can invoke an expedited claim adjudication process, increasing the pressure on the principal/respondent to meet the payment of valid claims.

All of these processes are designed to help equalise the balance of power in negotiations between contractors and principals involved in building projects so that the chances of contractors being left hung out to dry is minimised.

Applying to court to extend the deadline for registering on the PPSR

There is no doubt that the introduction of the Personal Property Securities Act 2009 (“PPSA”) has caused problems for many in interpreting the prescriptive timeframes and new terminology introduced.

As a result, many less sophisticated businesses have been left in weakened commercial positions due to inadvertence or a lack of understanding of the law.

That said, Courts have shown a willingness to correct registration timing errors where there has been a finding of “inadvertence”.

Where insolvency has occurred, the Court may, however, be a little less forgiving of the inadvertence of the parties.

So, what have Courts said when considering extension applications?

Firstly, Section 588FM of the Act allows a party to apply to Court to extend a critical timeframe with respect to the registration of a security interest if satisfied that at least one of the following grounds apply:

• the failure to register within time was accidental or due to inadvertence or some other sufficient cause;
• the failure to register within time is not of such a nature as to prejudice the position of creditors or shareholders; and
• there are other just and equitable grounds to grant the extension.

Secondly, Section 293 of the PPSA allows a party to apply to Court to extend a critical timeframe with respect to the registration of a security interest if satisfied that at least one of the following grounds apply:

• whether the need to extend arises as a result of accident or inadvertence or some other sufficient cause; and
• whether extending the period would prejudice the position of any other secured parties or creditors.

Therefore the Court must consider a different prejudice under Section 588FM of the Act when compared to Section 293 of the PPSA.

In a recent judgement of the Supreme Court of New South Wales in Accolade Wines Australia Limited and other companies [2016] NSWSC 1023, an asset financing company incorrectly registered its financing statement and sought to rectify the problem by correcting the error outside of the strict PPSA / Act timeframes by seeking curative orders.

In this matter, the Court was called upon to consider making orders pursuant to Section 588FM of the Act and Section 293 of the PPSA.

After hearing the particular arrangements that had been made concerning the registration of the financing statements, the Court was sufficiently satisfied that there had been genuine inadvertence and made Orders to allow the late registration.

We continue to see many instances of businesses being unfamiliar with the application of the PPSA and in particular with respect to the registration of security interests. The above case shows that the Court can be lenient, but we also warn that the Court should not be seen as an easy cure-all forum; particularly after an insolvency event.

Our firm has a presentation that we can give to clients and staff that highlights the perils of non-registration and illustrates the key dates and time frames businesses should consider. It is an area of law that is relatively new and complex and we would recommend taking specific legal advice for clients involved in any transaction involving leases, rental arrangements and loans in particular.

Christmas Cash Flow – More Tricky than Carving the Turkey

It’s now only a matter of weeks until the end of the year and with that comes the challenge of managing cash flow over the December/January period.

History has shown us that many businesses struggle to manage their cash flow through the holiday season and into the New Year for reasons that are related to the disrupted cash cycle that occurs at Christmas.

Our suggestions for helping manage the cash flows of businesses through this period are as follows:

• issue bills early in December - don’t wait until the end of December to bill for services rendered during the month to avoid your invoice not being recognised until late January;
• plan more than you would normally do. If your business doesn’t operate using a rolling 13-week forward cash flow forecast, now is the time to start, so that there are no surprises in cash flow in the new year;
• use the period of Christmas sales to quite slow or excessive stock levels. People are in the habit of expecting sales at Christmas time and they respond with making purchase decisions, so get on the bandwagon and join in;
• if your business is traditionally quiet through the Christmas/New Year period, there is no point in keeping the business open and incurring costs unnecessarily. Consider implementing strategies such as a shutdown or running with a skeleton staff to ensure staff leave entitlements are kept in check; and
• retailers beware! We know many businesses survive on the strength of cash flow generated through Christmas trading. If you’re one of those businesses, don’t spend the cash flow on
  unnecessary items in the New Year and remember that tax and superannuation have to be paid out of the proceeds of sales made.

Our recommendation is to review these strategies with clients to help them be best placed to start the New Year on the right foot.

Inevitably there will be some businesses that won’t have made sufficient provisioning for the Christmas / New Year cash flow and more intensive cash management strategies may be needed. If this is the case, early intervention helps maximise options to resolve difficult problems and we will be happy to provide assistance should that be the case.