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- Thinking Ahead Issue 4
Our People in Corporate Recovery and Insolvency
The top 10 secrets of a successful Voluntary Administration process
VA’s are designed to provide a reconstruction opportunity to companies that have hit financial difficulties and to allow them to initiate a process of rescue and rehabilitation without undue cost or inconvenience.
Darrin Paine , Associate Director , Bentleys Brisbane
Achieving a successful VA process requires a strong appreciation of all the elements involved in the process.
Following are some handy hints to ensure that a VA process runs successfully and has the best chance of turning a business around.
1. Get in before the business becomes “terminally ill”
The VA process is designed to mend companies that are sick, not terminally ill. Therefore a VA appointment must be made at a time when there are still options available for the company. Businesses should start considering the process as soon as they start experiencing signs of significant distress, as the situation can deteriorate rapidly and severely. One of the most common indicators of financial distress are rising ATO and or superannuation debts –they are often symptomatic of other underlying pressures that are preventing these debts from being paid.
2. Keep your stakeholders engaged
It is vitally important that the full details of the voluntary administration process are thoroughly explained to the stakeholders upfront so that they may consider their alternatives and make an informed decision. When/if a VA process is the chosen path, it must be recognised that this is a very stressful time for directors. Too often, many will take the ‘head in the sand’ approach and try to ignore the process or they will pursue other business ventures and back-up plans. This type of behaviour will lead to an almost guaranteed failure of the VA process. The business directors need to be committed and present to ensure that the process works. This period, more than any other, is when the business needs full attention and energy.
3. Assess the business model as well as the issues
The VA process, when implemented successfully, can rescue a business from demise – however, the ongoing viability and ultimate success of the process is ensuring that the underlying business model is strong and can support continued operations. If the model isn’t right, a VA will only act as a “band-aid” treatment to the inevitable failure of the company.
4. Ensure that you have the right business acumen in place
Often, key personnel simply do not have the business acumen, or are too emotionally tied to the business, to understand the reasons for illiquidity or how to change it. For a VA to be successful, management must be able to identify the issues that have caused the current illiquidity, understand the key drivers required to take corrective action and be prepared to put emotion aside to make hard commercial decisions.
5. Get the Creditor Proposal right
It is essential to remember that it is the directors who must source and recommend an arrangement proposal for creditors. The Administrator cannot be involved with this process otherwise they are at risk of affecting their independence. Difficulties can arise when directors are unable to source alternate finance to fund the proposal and / or do not address the underlying issues that caused the company’s original dilemma – so getting the terms of the arrangement right is imperative.
6. Look at your processes and accounting controls
Generally, if an administrator needs to address issues of internal accounting failure or general lack of procedural accountability during a VA – it will turn out to be an expensive process and, in all likelihood, will unravel a raft of endemic issues that can’t be corrected in the short to medium term anyway. To avoid this scenario, accounting controls and processes are one of the areas that should always be closely monitored and tested to ensure that they are robust and reliable. They are a key “barometer” for the health of a business.
7. Get started while there’s still an order book
In the VA process, the administrator needs to be able to access funds that will allow them to continue operating the business. The administrator is personally liable for debts incurred during the VA process, therefore if there is insufficient working capital and/or if the administrator is not confident that operating costs and debts can be covered, they may have no option but to cease trading. Putting the VA process in place when there is still a business to administer is the only way that the process will work.
8. Keep the communication continuous frank and honest
The Administrator’s job is to investigate what has gone wrong in the business and where issues can be addressed. When directors are not open and up front about business operations, it raises concerns for Adminstrators and leads them to suspect that there is something to hide. In the VA process, honesty really is the best policy as you need your Administrator to be working with you and supporting you in order to get a successful outcome
9. Keep your creditors happy
Keeping on-side with creditors throughout your period of financial difficulty is essential to ensure that:
- a. They will continue to support the Administrator (and continue to supply) as they trade throughout the VA period;
- b. They will accept the arrangement proposal put to them by the directors at the creditors meeting, meaning that the company must be placed into liquidation or;
- c. Continue to work with you after a proposal has been accepted.
10. Make sure that VA is the right fit for your business
The VA process cannot be made to fit every scenario. Ensure that you are armed with the information you need at the front end of the process to get the best results. Some insolvency practitioners may take the approach that the VA appointment will “make the debts go away” – but when your business is in difficulty, the “devil is in the detail” to achieve a successful turnaround.
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