Following on from last month’s article on the “Not-So-Obvious Indicators of Insolvency”, this month we look at some of the practical signs that business owners, their accountants and solicitors – or other business associates for that matter – should recognize as signs that a business may be in financial trouble.
Insolvency practitioners take these issues for granted. We are confronted with them every day but we believe that it is worth going over them again to keep these issues front of mind, particularly in light of the continuing financial difficulties that many businesses find themselves in.
One of our recent articles (“Not-So-Obvious Indicators of Insolvency” – March 2010) spoke about the 14 Indicators of Insolvency as set out in the Plymin case. As we stated in that article, not every insolvent business will display all of the indicators and just because some are indicators present, doesn’t necessarily mean the business is insolvent. Helpfully, ASIC has also issued some guidelines and they list a few more indicators – including poor cash flow, the absence of a business plan and budgets, and incomplete financial records.
But we use all of these indicia with the benefit of hindsight. After the business has failed we can say that ‘the business owners should have recognized these indicators’, but just as our last article had the title “Not-So-Obvious Indicators of Insolvency”, many business owners just do not recognise them.
This two part article looks at the practical signs that business owners, accountants, solicitors, bankers or creditors, family members of business associates might see as a business starts to decline. We start this series with the first indicator.
Denial & Avoidance
This sign is when the business owner figuratively sticks their head in the sand and will not deal with the reality of the situation. Indications that this is occurring includes:
- Not taking or returning calls
- Not opening or responding to mail
- Avoiding meetings or contact with advisors, creditors, the bank, the ATO etc.
All of the partners here have had situations where we have been appointed as liquidators or trustees and, when we attended the business premises, we found piles of unopened or unanswered mail. Sometimes business owners cannot deal with the reality of the position and are terrified to deal with demands from creditors, so they simply do not bother to open it hoping that the problem will go away. Next month will be better and the problem will be solved.
We then start to hear from creditors that their calls had not been returned for months and that the business owners were never available to discuss the outstanding debts. We hear from banks and the ATO that, when the business owners eventually did attend a meeting, they were totally unprepared to discuss the financial problems and usually denied that there were any real problems or that ‘it will all be OK soon’.
This avoidance behaviour creates a ripple effect. If creditors or the bank can’t contact the business owner and discuss other options, they are more likely to commence recovery action as the only option left. Whilst this may be inevitable anyway, this just adds to the pressure on the business owner and compounds the avoidance behaviour. They then ignore these documents and end up having the business (and possibly a lot of other assets) taken away from them.
Denial and avoidance will eventually come to an end – but that may only be when a liquidator or trustee in bankruptcy arrives on their doorstep.
Next month we will look at:
- Long-outstanding taxes
- Continued trading losses; and
- The Blame Game