Accountants and lawyers are often the first to recognise when a business client is heading into financial difficulty.
The difference between a business that restructures successfully and one that is forced to close its doors often comes down to how early the directors seek help.
When early engagement matters most
At Worrells, we frequently see directors reach out only once the situation has become critical, overdraft limits have capped out, creditor demands have escalated, supply of goods or services cut off, and ATO repayment plan proposals have been denied. Put simply, “the wheels have come off the business,” and by this stage options are limited.
Compare this to when directors and advisors act sooner, the range of options expands dramatically.
From my experience with over 3 decades of restructuring, I distil successful restructuring down to three key attributes, namely:
A workable plan
Funding to get it across the line; and
Adequate timing
With this in mind, there are three options to consider:
Voluntary administration (VA)
Provides immediate protection from creditor enforcement while an independent administrator assesses the business and explores a Deed of Company Arrangement (DOCA). This process can deliver a viable restructure or orderly exit, preserving jobs and goodwill.Safe harbour protection
Gives directors breathing room to develop and implement a plan that is reasonably likely to lead to a better outcome than immediate liquidation. It protects against personal liability for insolvent trading, provided the directors seek advice early and take meaningful steps.Small business restructuring (SBR)
Tailored for eligible small companies, this streamlined process enables directors to remain in control while working with a restructuring practitioner to propose a plan to creditors. It’s efficient, cost-effective, and designed to keep viable small businesses trading.
The approach
We often see failure on the part of directors and advisors to clearly distinguish between an entity experiencing a balance sheet crisis versus cashflow crisis (P&L) and therefore fail to approach the problem from the right direction.
Balance sheet stress typically presents as a chronic deficiency in working capital. Trade creditors are ageing beyond tolerable levels, continuity of supply is threatened, ATO debts are in arrears, and repayment plans are failing or being rejected.
A working capital deficiency may originate from a “one-off event” or a non-reoccurring event, for example, a large bad debt, loss of a contract, or a failed expansion into a new product or service line. These are often recoverable events, but the company needs the breathing space to recoup its losses and resume profitable trading, and most importantly, keep creditors at bay.
The good news is that Worrells can tangibly demonstrate that early intervention, through one of the three restructuring options, can bring a business back to life. To prove that point, Worrells has a strong success rate in SBR approvals, resulting in hundreds of companies that might otherwise have been placed into liquidation being saved.
Under the SBR (as well as VA), creditors vote on a debt compromise that essentially has two key variables:
What cents in the dollars are being offered to settle the debts.
Over what period of time will those payments be made.
It’s important to compare a cash flow or working capital crisis to a genuine profitability problem where the business is no longer viable. A temporary squeeze can often be managed, but if the underlying issue is that the business model is broken, due to digital disruption or shifting market conditions, no amount of restructuring will fix it.
In such cases, early intervention to wind down the company and possibly place it into liquidation may be the best option to mitigate loss, not only to creditors but to directors as well, who may be personally expose through guarantees to major suppliers or financiers.
The power of time: key restructuring options
There are several formal frameworks available to assist companies in distress. Each can be highly effective, but only when there is time to plan and implement properly.
Each of these options requires sufficient lead time and accurate financial information. Once the company runs out of liquidity, those opportunities can quickly disappear.
The crucial role of advisors
As a trusted advisor, you are often the first to see the early warning signs, declining margins, unpaid superannuation, ATO arrears, or missed creditor payments. This makes your role pivotal in helping directors act before it’s too late.
Encouraging your clients to seek restructuring or safe harbour advice at the first signs of distress can:
Protect directors from personal liability.
Preserve the company’s trading position and goodwill.
Ensure compliance with directors’ duties.
Improve the prospects for recovery or sale.
It’s not about predicting failure, it’s about positioning for the best possible outcome.
Working together early
At Worrells, we see restructuring as a collaborative process. The best results come when accountants, lawyers, and insolvency practitioners work together from the outset, sharing insights, exploring options, and developing a plan that protects both the business and its directors.
Our principals are available for confidential, obligation-free discussions with you or your clients at any stage of financial distress. Early engagement ensures directors retain control, understand their options, and have the time to make informed decisions.
The takeaway
Reaching out for help should never be a last-minute activity. It should be an early, deliberate step taken when there is still time to plan, negotiate, and protect value.
If your clients are showing signs of financial stress, encourage them to seek restructuring advice now.
