27 Jun 2013

Objective Analysis or Emotional Commitment?


3 min

Often the role of the insolvency practitioner is to convince business operators to accept the true financial position of their business. Understandably business operators’ objectivity can be clouded by their emotional investment into the business. Often the true financial position and prospects of a business could not have been clearer if only rose coloured glasses had not been used. Such are the circumstances of a recent case.

A family business had been in operation for over two decades as a supplier of white good spare parts and repair service. The demise of the company resulted from its inability to maintain distributor agreements which meant the loss of discount pricing, quick access to parts and parts being provided on account.

The director and his wife personally advanced in excess of $150,000 to the company via credit cards in their names, sank the net proceeds from the sale of their family home into the business, and accumulated a debt of over $1.2 million owing to them over the life of the business.

Following pressure from the Australian Taxation Office in relation to unpaid superannuation, the directors consulted Worrells. Our advice was unavoidably, to place the company into liquidation. Sadly both the director and his wife are facing retirement with only a small balance in their self managed superannuation fund and a mountain of credit card debt.

It is clear that the prime reason for the company’s failure was its inability to secure supply on competitive terms. This fundamental problem was disguised by the directors continuing to artificially underwrite losses with their own funds.

We see the beginning of the end in the events of 2000. That year a significant dip in trading was suffered and saw the director approaching his employees with the news that the company was unable to meet their superannuation obligations. The proposition put forth was for employees to consider the doors closing or for superannuation to be paid at a later date, when times were good again. Unsurprisingly the employees elected to keep their jobs.

Some years later the company contacted the employees’ superannuation fund to discuss organising payment of these employee superannuation obligations that it owed. The superannuation fund indicated that someone would contact them in a couple of days to make appropriate arrangements. Subsequently the company was hit with an audit from the ATO which resulted in an assessment raised for an amount well in excess of what the company believed to be outstanding. This debt included interest and penalties.

If the director had made the objective decision to close the doors back in 2000 the position today for the director and his wife would be quite different.

It may be commendable that the director leveled with his employees and fought for a way forward. However it is a good reminder that business is a commercial enterprise. Risk should always be weighed up against return. In this instance the director and his wife overcommitted to the company to ensure trade creditors and employees were paid, to the detriment of their own financial livelihood and retirement.

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