Story Cameron Cooper
Photos Nic Walker

When red flags appear in a client’s financial figures, the overriding question for McBurneys Chartered Accountants and Business Advisors principal John Howell FCA is: What is the best course of action to save and strengthen the business?

If it’s calling on accredited specialists outside his own firm, then so be it. Rather than posing a threat to his accounting firm’s work, Howell believes aligning with external experts – including insolvency, mergers and acquisitions, and forensic accounting professionals – makes sense for all parties involved.

“The client will be thankful there are other financial experts who care and who can make a difference,” he says.

It’s why, earlier this year, Howell advised Sydney commercial interior design company Endrim to engage with insolvency firm Rodgers Reidy when the business – like many during COVID-19 – experienced cash flow stress. The resulting restructuring plan has given Endrim a lifeline and underlined the value in accounting professionals knowing when to refer to experts for the best interests of clients.

Pictured: Andrew Barnden FCA (from left), Simon Trude, John Howell FCA

Collaboration between chartered accounting firm McBurneys and international insolvency firm Rodgers Reidy to restructure commercial interior design business Endrim has paid off. Here is how the rescue mission unfolded.

Phase one: Conceding cash flow defeat

As monthly Australian Taxation Office (ATO) repayments of up to A$10,000 hit home in early 2022, Endrim principal Simon Trude knew something had to give.

His once-thriving commercial interior design consultancy – boasting a strong client base across Australia and Asia – fell into a debt trap as COVID-19 lockdowns put the brakes on office fit-outs in the commercial, hospitality and construction sectors. International border closures also meant Endrim could not have face-to-face contact with its Asian clients – a cultural must in that market. “So, it was kind of a perfect storm, and it was killing us,” Trude says. “Our profit just disappeared.”

Phase two: Calling in specialist help

Recognising the warning signs, Endrim’s accountant, McBurneys Chartered Accountants and Business Advisors, suggested Trude should liaise with Rodgers Reidy about the recent government-introduced small business restructuring (SBR) process, which is designed to assist small businesses experiencing short-term financial stress.

“COVID is the reason a lot of businesses are in strife at the moment,” says John Howell FCA, principal at McBurneys, adding “the client shouldn’t be ashamed of doing something like this.” He says a large debt-repayment arrangement with the ATO was “like a noose around the neck” for Endrim and had to be addressed.

With McBurneys providing all the relevant financial history and documents, Rodgers Reidy was appointed to manage the SBR on 20 April this year, with Andrew Barnden FCA leading the restructure.

Significantly, Howell says partnering with Rodgers Reidy did not risk his firm’s client relationship with Endrim. “There was no crossover of work and we weren’t required to do any less work during the administration period,” Howell says. “We still had to prepare our regular BAS statements for the client and complete our other usual work for the client.”

Phase three: Executing the restructuring plan

Barnden praises McBurneys and Endrim for taking quick action to embrace a restructuring plan. He advises CAs to “identify the early warning signs” of business stress – such as significant tax debts, superannuation liabilities and dishonoured payments – and then have candid discussions with their client.

“Some people bury their heads in the sand, while others proactively address the situation, and others just kick the can down the road,” Barnden says.

He acknowledges that such scenarios can be highly stressful for directors, who as part of the SBR process must declare their business insolvent, even if it is only temporary. “That’s a big milestone for a director to put their hand up and admit that they’re in trouble, because the business is their baby.”

As part of its work, Rodgers Reidy presented a detailed restructuring plan for Endrim to all creditors to settle their debts in full and final satisfaction, including McBurneys and the ATO. Creditors ultimately accepted a debt-settlement deal of 22.5 cents in the dollar.

“Endrim did have a significant payment plan in place with the ATO, but it was creating a huge drain on the cash resources of the business,” Barnden explains. “This SBR process allowed it to offer a lump-sum payment to compromise the ATO debt, which freed up cash flow moving forward.”

The SBR process took two months. Trude says the speed of the restructuring process is crucial. “The good thing is there’s a time limit to it. So, it was just about information download and getting everything across to McBurneys and Rodgers Reidy. It was pretty painless.”

Phase four: Back to business

With workers returning to offices and clients commissioning design and fit-outs again, Endrim is slowly but surely rebuilding. “Considering the legacy debt we had, the restructuring has really opened us up to be able to move forward,” Trude says.

He admits that temporarily declaring insolvency was the biggest concern for the consultancy during the SBR process. “It was something we were concerned about, but it was only for a short period of time.”

Reflecting on the success of the Endrim restructuring, Barnden says cooperation – not competition – between accounting firms, insolvency experts and clients is crucial during such challenging events.

“It’s all about teamwork, communication and working with the accountants in the practice,” Barnden says. “We’re not trying to poach a client. We’re there to assist them and to turn the client around so that it can continue in the future.”

“We want to assist clients through the restructuring and following which, allow their existing accountant to work with that client.”

Howell believes the referral to Rodgers Reidy has served to strengthen McBurneys’ relationship with Endrim, not weaken it.

“They’re grateful for our introduction,” he says. “That’s a good feeling and we feel like we’ve made a difference.”

With the cash flow crisis behind the company, Trude is confident of ongoing success and is encouraged that Asia-based clients are also on the radar again. He would recommend the SBR process for others and praises the collaborative effort of McBurneys and Rodgers Reidy in helping his business.

“As a team, we pulled it all together,” Trude says. “I’m glad I undertook this process as it has allowed the company to focus on the future rather than trying to deal with past debts.”

Pictured: Andrew Barnden FCA (from left), Simon Trude, John Howell FCA

Accountants working together

The collaboration of accounting firms and registered liquidators has been highlighted through the government-introduced small business restructuring process. Launched on 1 January 2021, the scheme is the result of advocacy from Jill Lawrence, senior policy advocate – business reform at Chartered Accountants Australia and New Zealand (CA ANZ), who, in her former role at the office of the Australian Small Business and Family Enterprise Ombudsman, explored insolvency through a small business lens and made recommendations for change.

Rather than forcing struggling businesses into a long-term repayment plan, the SBR process allows eligible companies with debts of less than A$1 million time to recover and restructure. Directors stay in control of their business and a moratorium prohibits creditors, including the ATO from taking action to recover money or property during the restructuring.

The scheme allows a maximum period of 30 business days for directors to develop a restructuring plan with the support of a registered liquidator, followed by 15 business days for creditors to vote on the plan.

Lawrence says when she first floated the SBR model, many registered liquidators criticised it, suggesting it could risk a client’s relationship with their accountant. “I took it quite personally,” she admits. “But the scheme means everyone must take a leap of faith – the creditors, the business owner, the registered liquidator and the ATO.

“If directors have a genuine plan and the liquidator considers it achievable, with everyone’s support there’s every chance the entity will remain as a viable business in the economy and keep its employees – and that helps everybody,” she says.

In her role at CA ANZ, Lawrence supports the notion that collaboration with experts through such schemes presents a chance for accounting firms to strengthen, not risk, their connection with clients.

“The message is that the CA is the doctor and the registered liquidator is the heart specialist. The quicker you harness the expertise of a liquidator, the more chance there is of a positive outcome and you get to keep the client.”

“The quicker you harness the expertise of a liquidator, the more chance there is of a positive outcome – and you get to keep the client.”

Rodgers Reidy director Barnden endorses that sentiment. He has overseen two SBR cases in recent months – the Endrim restructuring and another matter involving a regional NSW hotel that experienced significant cash flow issues because of pandemic-related lockdowns.

Barnden notes that firms such as Rodgers Reidy, which specialise in insolvency, forensic and reconstruction services, do not typically have tax, auditing or compliance divisions. “We want to assist clients through the restructuring and following which, allow their existing accountant to work with that client.”

A valuable restructuring instrument

While initial take-up of the SBR scheme was slow, more small businesses have turned to the model since the last quarter of the 2022 financial year as the full impact of COVID-19 downturns has taken a toll.

The tax office comments that it is committed to engaging with taxpayers that have overdue debts, including through the SBR. “The ATO has voted in favour of approximately 90% of the valid proposals received to date,” says deputy commissioner Vivek Chaudhary. “We know that many businesses are being heavily affected by the challenging economic conditions created by COVID-19 and other natural disasters.”

Chaudhary adds that for business owners, “feeling overwhelmed or getting behind with their tax, we encourage them to contact their registered tax professional or the ATO as early as possible so we can work with them to find a tailored solution”.

He adds: “No matter what the situation, it’s never too late to ask for help.”

Lawrence is confident the SBR scheme will become an increasingly important method to help distressed companies, while enabling accountants and registered liquidators to apply their expertise and achieve beneficial outcomes for all parties.

“It needs to become part of a CA’s tool belt because they see companies hit trouble before anyone else and possibly even before the business owner does,” she says.

Lawrence hopes that classifying small businesses going through the SBR process as ‘insolvent’, even though temporary, will not deter proud business owners from using the scheme. “It’s just a legal term and it doesn’t mean the business has to go under,” she says.

To further strengthen the initiative, she is calling on the ATO to apply a “light touch” when dealing with SBR cases, rather than requesting the full level of reporting required in a formal external administration.

Lawrence also wants service providers such as insurers, banks and workers compensation agencies to be supportive of small businesses during any SBR process. “For this scheme to succeed, everyone in the ecosystem has to support the process,” she says.

Barnden is encouraged that the ATO’s focus, through the SBR scheme, appears to be on saving businesses that have struggled “through no fault of their own” as a result of fallout from COVID-19. However, he warns that “the pendulum is starting to swing the other way” more broadly as the tax office increases its collection processes, including issuing penalties for late lodgements.

“So, now is the time to act if clients have built up a large tax debt during COVID-19 and, due to cash flow issues, haven’t been able to deal with that debt,” he says. “Accountants need to identify that and engage with a professional who specialises in reconstruction to see what are the available options.”

Lifeline proving effective

Evidence to date indicates the SBR scheme is saving small businesses. Lawrence’s analysis of Australian Securities and Investments Commission (ASIC) data reveals that of the notices in which a restructuring practitioner has been appointed to a company, only 10% have lapsed and cannot progress to presenting a plan to creditors.

Of the remainder, around 67% have progressed to a plan being made; that is, they have been accepted by creditors, with the remainder still in progress. “That’s a big number,” says Lawrence. “It may not seem like it to people outside this space, but it’s a high conversion rate.”

On the back of helping Endrim navigate its way out of financial trouble, Barnden and Howell are supportive of the SBR process and eager to apply their skills to other such cases.

“Anytime you can use your skill set to turn around a business and help it continue trading is always good,” Barnden says. “It’s a win-win.”

Howell has no hesitation in recommending a similar process for other small business clients that are under significant financial stress.

“Accountants these days are busier than ever, and this is a specialised area where insolvency experts can greatly assist us,” he says. “We’d have to seriously consider the SBR option for an eligible client who is really struggling under a mountain of legacy debt.”

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