Insolvency: How to know when your clients are in trouble

Transcription

1 Insolvency: How to know when your clients are in trouble Presentation to: Institute of Public Accountants, 2016 WA Regional Conference Presented by: Katherine Payne, Special Counsel, Hall & Wilcox Melissa Humann, Partner, PPB Advisory Hall & Wilcox _2 1

2 Today How to know when your clients are in trouble early warning signs of distressed companies How you can help your clients financial and other analysis/input What are the issues facing your client directors exposure and obligations What options does your client have restructuring alternatives and insolvency law reform Hall & Wilcox 2

3 Causes of decline/distress Causes of decline External factors Internal factors Need to be carefully managed Controllable by management Early warning signs of decline Clear factors Subtle factors Decisive action required Requires work to understand Hall & Wilcox 3

4 The warning signs Tired products / uncompetitive offering Loss of key customers Excessive corporate spending on luxury assets /expenses Director churn Business plan lacks objectivity Loss of exclusive contracts Changes to external environmental conditions Loss of key personnel Can t articulate strategy Inability to prioritise Increase in input prices Lack of communication with financier Changes in regulatory framework Increasing tension amongst stakeholders and the Board Failure to meet deadlines Products / business complexity Management inertia & confusion Obvious lack of leadership Regular accounting policy changes Superficial forecasting Sales growth turnaround strategy Poor working capital management Annual one-offs accounts write offs and adjustments Downgrades Statutory payments overdue Recent years losses Wild fluctuations to budget Borrowings hardening Non financial Financial Lead Warning indicators Lag Hall & Wilcox 4

5 What to look for 1. Macro factors 6. Key stakeholders 5. Financial performance / structure What to look for? 2. Life cycle / signs of distress 3. Management culture & control 4. Management information Lead Warning indicators Lag Hall & Wilcox 5

6 Financial forecasts Must reconcile P&L and cash flow without balance sheet = red flag! Anchoring the balance sheet Need a stable starting point to be able to comment on achievability of forecast Sense-checking Reconcile reserves (balance sheet movement should agree to profit and loss after tax) Working capital movements should reconcile between cash flow and balance sheet Fixed asset movements should reconcile to capex in cashflow and depreciation in profit and loss Balance sheet forecast Profit & loss forecast Cash flow forecast Hall & Wilcox 6

7 Scenario analysis Sensitising management s forecast 1. Identify downside risks 2. Model impact on the company s forecast: Profit & loss Balance sheet Cash flow 3. Gain understanding of company s ability to: Generate free cash flow Service debt in a downside scenario Hall & Wilcox 7

8 Free cash flow Maintainable earnings based on historical and forecast performance deduct abnormal and non-recurring items deduct personal expenses Normal capex maintenance replacement may or may not equate depreciation charge consider finance options (leasing) Cash flow available for debt servicing Interest rate cover Level of confidence in customer Industry driven Appetite for credit Sustainable debt Hall & Wilcox 8

9 Re-cap Review key assumptions Perform sensitivity analysis Form a view on: Forecast cash flows Debt serviceability & capability Provide users with: Risks & opportunities inherent in forecast Hall & Wilcox 9

10 What banks want to know Cash crisis leading to additional funding requests. Potential insolvency concerns Understand the problem need more comfort on the solution Management and/or management information systems are potentially weak Need to know current security position and require a view on potential provisioning Information gaps need filling an IBR can plug some or all of them eg three way financial forecasts Require an independent assessment of a customer s financial situation Hall & Wilcox 10

11 Is the company insolvent? Insolvency: Not able to pay all of its debts as and when they become due and payable Question of fact commercial reality in light of all the circumstances Cash flow test Temporary lack of liquidity Consider credit arrangements and future revenue reasonably anticipated Third party funding arrangements Hall & Wilcox 11

12 Directors exposure and obligations Insolvent Trading DPNs Guarantees Unfair Preference Payments Directors duties - Debts incurred when the company is insolvent (or becomes insolvent because of debt) + suspicion - Liability - Defences - PAYG - SGC - Check all guarantees - ATO indemnity - 6 month period - Care and diligence - Good faith in best interests of company, and for proper purpose - Improper use of position - Improper use of information - Prevent conflicts of interest Hall & Wilcox 12

13 Options include Workout Restructure Voluntary administration Liquidation Hall & Wilcox 13

14 Insolvency reform Approved by parliament Increased creditor involvement in insolvency process Increased creditor powers Assignment of claims Additional proposals Safe harbour Ipso facto 1 year bankruptcy term Hall & Wilcox 14

15 Summary Be aware of the signs Raise them with your client The directors are likely to be concerned as to their personal liability Encourage your client to consider their options Seek specialist advice Hall & Wilcox 15

16 Questions? Katherine Payne, Special Counsel Commercial Dispute Resolution Phone Katherine.payne@hallandwilcox.com.au Wayne Kelcey, Partner Commercial Dispute Resolution Phone Wayne.kelcey@hallandwilcox.com.au Melissa Humann, Partner PPB Advisory Phone mhumann@ppbadvisory.com Hall & Wilcox 16