Saving the ship the ATO is trying to sink

Is that lifeline going to save you long-term?

The ATO have significantly increased collection activity to the point in Victoria where it has their own day for the hearing of winding ups in the Supreme Court. An extraordinary move, we are seeing anything up to 50 companies having winding up petitions against them on a Tuesday morning.

If I had a dollar for every company director I have seen that thinks they have a good business; I would be a rich man. I often refer to it as bankruptcy neurosis. Those who cannot see the wood for the trees, think their business, or business idea is sound and that tomorrow they will have a profitable business. The reason it is always tomorrow is a combination of factors, including the one big contract to be signed tomorrow, the operating structure changes that they are yet to implement, the fact that one element of the business may be unprofitable yet the other is not; and yet they’ve never bothered to measure profitability of each element of the business. The fact is, without true, independent advice, directors are often unable to impartially consider their business’s fundamentals. It takes advice from a strong advisor.

So back to where I started, the ATO is winding up a considerable number of companies every week. Recently we have become aware of finance brokers targeting the winding up list offering to assist companies that have cash-flow difficulty. Generally, these brokers are refinancing the directors’ personal properties to allow the ATO (and other creditors’ debts) to be paid out prior to the winding up hearing. The issue we see is that while property prices are going up, it is often easy to refinance real property, however, the fundamental issue is whether the business is, in fact, profitable. Getting back to the title of this article—“The Sinking Ship”—often a refinance will only tide the company over for a short period and within 12 or 18 months, the company is back to the same position prior to the refinance, albeit, the director having considerably less equity in their home. We say it is imperative that if any client is considering a refinance or injecting money into a business that they actually look at the business fundamentals to ensure that it is profitable, or can be made profitable in a short period. This analysis must be objective and with independent professional advice.

If you have a client in this situation and they fail to consider their business’s fundamentals, or the fundamentals are poor and the business continues to lose money, are you (their professional advisors) culpable if in fact you do not give very strong advice against entering into the transaction?

We will leave you to ponder that thought; however, it would seem to us that the directors may have a cause of action if they put their personal assets at risk after seeking advice.