PPSR Reminder

I had a conversation with a business owner today that's, unfortunately, all to common.

This business wasn't registering their security interests (credit agreements) on the Personal Property Securities Register (PPSR). In fact they didn't even know what the PPSR was!

As a result they'd gotten badly burned when a client had gone into Liquidation, with a significant quantity of their stock that had not been paid for. If this business had a Purchase Money Security Interest (PMSI) registered, they would have had a good chance of getting all that stock back, but without the registration, they were out of luck and got lumped into with all the other unsecured creditors.

Despite the Personal Property Security Act commencing over a decade ago, I still regularly see businesses that do not have their securities properly documented and registered, often costing them large amounts of money.

So if you are chatting to any business owners over the pre-christmas period (especially if you're an advisor), maybe take a few minutes to check in and make sure they have all their security interests they may have properly documented and registered.

They'll thank you if something does go wrong!

The Saga of Elon and Twitter

As has been widely reported, Elon has unilaterally terminated his agreement to buy Twitter. Almost since the minute Elon announced he was going to acquire Twitter, the writing has been on the wall for the deal to collapse. Elon has a long history of announcing things that never actually happen, so I had no real confidence he would actually end up buying Twitter. All the fun was in seeing how he tried to wiggle out of the deal.

By way of background, Elon Musk, the richest man in the world (he’s worth about $260 Billion right now) offered $54.20 a share to buy Twitter (after a whole saga where he purchased some shares and joined the board and quit the board). Elon’s musings about buying Twitter pretty quickly moved on to signing a legally binding merger agreement. Unfortunately for Elon, shortly afterward, tech stocks imploded and both Twitter and Tesla’s stocks lost significant value.

This left Elon in a pretty bad position, he had locked himself into buying Twitter for significant more than it was now worth. It was pretty clear from his public statements that, at this point, Elon had decided he wanted out of the deal. Unfortunately for him, the agreement he signed didn’t give him a lot of wiggle room to get out of the deal.

Ultimately, his lawyers came up with three pretexts for Elon terminating the agreement and issued a letter to that end. (You can read the letter at: https://www.sec.gov/Archives/edgar/data/1418091/000110465922078413/tm2220599d1_ex99-p.htm)

None of these pretexts are strike me as particularly compelling. But let’s go through them, from worst to best:

First, Elon alleges that Twitter failed to continue to conduct its business in the ordinary course. Here, Elon makes some specific accusations:

“Twitter’s conduct in firing two key, high-ranking employees, its Revenue Product Lead and the General Manager of Consumer, as well as announcing on July 7 that it was laying off a third of its talent acquisition team, implicates the ordinary course provision. Twitter has also instituted a general hiring freeze which extends even to a reconsideration of outstanding job offers. Moreover, three executives have resigned from Twitter since the Merger Agreement was signed: the Head of Data Science, the Vice President of Twitter Service, and a Vice President of Product Management for Health, Conversation, and Growth. The Company has not received Parent’s consent for changes in the conduct of its business, including for the specific changes listed above.”

While a whole lot of legal ink has been spilled over the years on what is and is not ‘in the ordinary course of business’. In this case, Elon is drawing a very long bow. Firing a few employees in generally going to be in the ordinary course of business, and having employees quit is hardly Twitter’s fault. It also feels pretty reasonable to institute a hiring freeze given the current economic climate. A lot of other tech companies have done the same (including Elon’s own Tesla).

Second, Elon agues that Twitter is lying about the number of bots and fake accounts on the platform. Elon specifically states that he “strongly believes that bots are wildly higher than 5%”. He provides absolutely no evidence at all to support this ‘strong belief’, probably because he doesn’t have any.

Even if he can prove that bot accounts are a bit higher than Twitter has been disclosing, it won’t help Elon. To terminate the agreement, Elon would need to show that this has a ‘material adverse effect’ (MAE) on Twitter’s business. A few percent here and there in bot account numbers just isn’t going to get over that bar.

Twitter has made public disclosures for years that the numbers of bots and spam accounts on the platform is around 5% so unless Twitter has been perpetrating a massive fraud on its shareholders and advertisers for almost a decade, and Elon is the only one to have noticed, the bot excuse is just hot air.

Elon’s final pretext, while still pretty terrible, is probably the best of Elon’s arguments, but the way he has gone about making it has almost entirely undermined it. Under the agreement, Twitter has to comply with reasonable requests from Elon for information.

So, Elon and his lawyers adopted an incredibly transparent strategy of asking Twitter for ever-increasing amounts of ever more esoteric data from Twitter and when Twitter baulked a providing some of the information, or didn’t provide the information in exactly the format Elon wanted, boom, pretext for terminating the agreement.

This is unlikely to work. It’s just too obvious what they’ve tried to do here, and it’s clear from filings that Twitter has made a serious effort to provide Elon with any information he reasonably requested. The agreement requires Twitter to provide him with information that he needs “for any reasonable business purpose related to the consummation of the transactions contemplated by this Agreement”, not absolutely anything he asks for.

In fact, Elon has made it pretty clear in his public comments that he has been seeking information for the express purpose of getting out of the deal, giving Twitter a reasonable excuse to withhold information. Twitter also doesn’t have to give Elon any information that would “cause significant competitive harm to the Company or its Subsidiaries if the transactions contemplated by this Agreement are not consummated”. Given Elon’s publicly stated purpose for requesting all the information is to show that Twitter has been perpetrating a massive fraud on their investors and advertisers, they probably have a reasonable argument here for not providing the information as well.

So, where does this all go next? Twitter has started taking steps to sue Elon seeking specific performance of the Contract, and they’ve retained some high-profile lawyers to represent them. This is most likely the only good outcome for Twitter. Given the damage this whole sage has caused to their business, getting only the $1 billion damages set out in the contract would be a disaster for Twitter.

It’s going to be very interesting to watch how this plays out.

Make Sure the Price is Right

A recent case we saw highlighted an important factor that many businesses seem to be overlooking in the current environment, getting their pricing right.

In this case, we had a business owner who was struggling. They were unable to get the staff they needed to properly services their customers and due to increases in some input costs, they were also losing money on the work they were doing. This was obviously creating a lot of stress, and they were looking for a solution that would get their business back on its feet. They were just looking in the wrong places, spending all their energy focusing on how to get more staff and trying to find places to cut costs, when the real solution lied with their pricing.

By increasing their price, they could bring their core service offering back to a healthy profit margin and while this was going to result in the loss of some business as the more cost conscious customers went elsewhere, they didn’t have the staff to service all of their customers anyway. This approach resolved both their key challenges, mitigating the need to hire more staff, and returning the business to profitability.

As input costs, interest rates and wages continue to rise, it is important for business to regularly review their pricing to make sure that they are both making money on what they sell, but also are maximising the profit they are making with the resources they have available. Getting pricing wrong can mean working too hard for little or no reward. Unfortunately, I’ve encountered more than a couple of business owners recently who had completely overlooked pulling there price level as part of their response to the current challenges.

Tips for Construction Companies — How to Survive

Things are tough right now for companies in the construction sector. They’ve been hit by a raft of challenges all at once. Factors like the rising cost of building supplies, a shortage of skilled labour, and adverse weather conditions have all put pressure on construction businesses, making it harder to turn a profit. We’ve also seen some big contraction companies fail, which has flow-on effects on sub-contractors and suppliers in the industry.

In such a difficult trading environment companies in the construction sector need to be especially vigilant and take steps to protect themselves. Here are a few high-level tips to help companies in the sector survive and thrive.

Monitor Solvency

Anytime a company faces difficult trading conditions there should be a focus on monitoring solvency.

Trading whilst insolvent comes with significant commercial and criminal implications for Directors in Australia, so it’s vital for them to know where their company’s financial position is on a regular basis.

Practically, this means more regularly updating the books and reviewing the company’s financial position. Often directors are busy with the day-to-day and will only look at their financial position on a quarterly or even annual basis. In times of crisis, you need to step up the frequency of these reviews to avoid inadvertently trading whilst insolvent.

Collect your Debtors

With more failures likely in the construction industry, it’s important to keep debtors days low and make sure that there aren’t debtors outstanding long past due dates. This means monitoring debtors and then quickly moving to active enforcement when they become overdue.

I have seen many instances where sub-contractors will run up significant debts with a single client, often going 90 or 120 days or more without payment while continuing to do work, exposing themselves to significant risk when that debtor fails.

Monitor Input Costs and Consider Unprofitable Contracts

As cost pressure grows companies need to be constantly monitoring input prices and re-costing existing projects. As costs rise existing contacts may flip from profitable to losing money. Directors need to know when this happens so you can make an informed choice about what to do with those contracts. In tight times, construction companies need to be focusing on their most profitable contracts while considering renegotiating or abandoning unprofitable ones.

Future Proof New Contracts

Avoid entering into fixed-price contracts going forward. I’ve already seen several companies stuck with fixed price contracts that are now very unprofitable.

Negotiate new contracts with floating cost mechanisms to allow for changes in input costs in the future and include clauses around weather delays to better share the risk between the contract parties.

Ask for Help

Don’t be afraid to ask for help. Lean on your trusted advisors like your accountant and solicitor, they are experts in their areas and can help you manage risk and get your company through the tough times.

An Update on Debt Collection Activity

After a long hiatus over the pandemic period debt collection activities across the economy are slowly starting to return to normal levels. While the number of corporate insolvencies, bankruptcies and wind-up notices remain well below historical levels, they are slowing increasing. Here’s a quick update about what I am seeing and hearing around the industry.

The ATO

The ATO broke their silence on their debt collection activities last Friday, confirming that they are ramping up debt collection activity while still focusing on providing support and assistance to those with overdue debts. The ATO advised that they would be continuing to use a collaborative approach with most taxpayers and, for the moment, firmer action would only be taken where taxpayers aren’t receptive to communication.

The ATO confirmed that they have issued 29,552 awareness letters for disclosure of business tax debts and 52,319 awareness letters about the use of Director Penalty Notices (“DPNs”). Word on the street is that the ATO has identified around 150,000 small businesses that require compliance attention and that they intend to issue a further 50,000 DPN warning letters through the end of the financial year.

While this is a definite step up from where the ATO was during the pandemic, this still represents a very soft approach to debt collection and is a long way from the ATO’s stated goal of ensuring that there is no unfair advantage to non-payers.

In my experience that ATO has remained very open to doing deals to compromise tax debts that accrued through the pandemic, especially through formal processes like Small Business Restructuring or Voluntary Administration. However, I am also hearing that their patience is running out, and in particular, several clients have been told that the current payment plan will be the last that the ATO is willing to offer them.

I expect the ATO will slowly ramp up activity over the next 18 months, progressively increasing their compliance activities as time goes by. That being said, now is the time to do deals, before the ATO moves from the current support setting and starts focusing more on collecting outstanding tax debt.

Landlords

I’m seeing landlords start to take action to recover rent that was deferred during the pandemic period. I suspect this is going to be a bit of a balancing act for landlords for a while, as the desire to collect deferred rent conflicts with a desire to hang onto existing tenants in a relatively weak rental market. This will especially impact landlords holding retail, hospitality and commercial office space.

Like with the ATO, I am seeing a general willingness from Landlords to do deals to compromise deferred rent. In particular, now is a great time for businesses to proactively reach out to their landlords and seek to negotiate a settlement on any deferred rent. I’ve seen some great results from this approach.

Institutional Creditors

There are also starting to be signs of debt collection action from institutional creditors. Some companies are starting to take steps to return to a more normal debt collection setting, including instructing agents and selling debt books for collection. I’m also hearing that some of the major institutional creditors are starting to talk about lifting the bans they placed on ‘firmer action’ during the pandemic period.

Banks and Mortgages

Except in extreme circumstances, I’m not seeing a lot of movement from the major banks either on business debt or mortgages with arrears. I expect the major banks will be the most conservative of the creditors and the slowest to restart their normal debt collection processes. Particularly with mortgage debt, the banks have built up significant LVR buffers with most clients and overall mortgage stress remains low, meaning something significant will have to change for the banks to risk the political fallout from a round of foreclosures.

We Crashed

Apple TV’s excellent series on the rise and fall of WeWork finished up recently. The series follows the founders of WeWork through its rise from a tiny co-working start-up to a $45 billion Unicorn and its rapid implosion and eventual bailout in 2019.

For those who don’t know the story, WeWork was founded by Adam Neumann and Miguel McKelvey in 2010 in the wake of the GFC with the idea to repurpose empty office space into co-working spaces for freelancers and start-ups. At the time the idea was novel, that you could rent a desk for as long or as little as you needed, anywhere in the world. But the hype quickly overtook the reality of what was just a clever real estate play. WeWork marketed itself as a tech company, made bold claims about changing the world and branded its offices as ‘physical social networks’. WeWork grew rapidly, fuelled by billions of investor money, eventually reaching a valuation of $45 billion. However, the wheels came off when the Company attempted to go IPO and the resulting public scrutiny of its business model, truly amazing losses, and questionable management.

The show is very entertaining and it provides a great look at the particular kind of crazy that is needed to found and manage a high growth startup like WeWork. I highly recommend it, it’s a fun, fast-paced and well-told story.

However, while watching the last few episodes, which document the death spiral and eventual implosion of WeWork, I couldn’t help but see some parallels with some of the clients I see day to day at Worrells, albeit on a much smaller scale.

As WeWork began to get into financial difficulty, the leadership team ignored the advice of their investors and expert advisors and instead doubled down on a strategy that was the reason they were in financial trouble in the first place. Rather than slow their growth and take some time to consolidate the dominant market position they had built, WeWork continued to pursue a high cost, high growth strategy, convinced that at some point all of its unprofitable venues would just magically become profitable.

It reminds me of this old cartoon…

The first rule when you find yourself in a hole is to stop digging. Unfortunately, I often see business owners who, like WeWork, have dug themselves a financial hole and rather than stopping digging, by changing strategy or restructuring with the help of an expert advisor, they choose to keep on digging hoping that it will all just ‘come good’.

One of the great things about business is that you get concrete and timely feedback about what is and isn’t working. What is making money and what isn’t, what is selling and what isn’t, what is getting customer attention and what isn’t. This gives us actionable intel on what we need to look at changing to make a business better.

While most business owners read the signs, get good advice, and turn their business around, unfortunately, it isn’t everyone and businesses still fail needlessly, affecting the lives of directors, investors and employees.

The ATO has Changed the Rules on DPNs

It looks like the ATO has changed the steps that a Director can take to avoid personal liability when they receive a Non-Lockdown Director Penalty Notice (DPN). Specifically, they have removed the option to enter into a payment arrangement and added appointing a small business restructuring practitioner.

As a refresher, the ATO can issue a DPN to make a director personally liable for a penalty equal to the value of a Company’s overdue SGC, PAYG and GST.

There are two types of DPN’s:

• A Non-Lockdown DPN, which can be issued when a company has lodged its Business Activity Statements (BAS) and Instalment Activity Statements (IAS) within three months of the due date and Superannuation Guarantee Charge (SGC) statements within one month and 28 days after the end of the quarter and has not paid the debt.
• A Lockdown DPN, which can be issued where a company has not lodged their BAS, IAS, or SGC statements within the above timeframes and has not paid the debt.

The only option available to a Director who receives a Lockdown DPN is to pay the penalty, or seek relief under one of the statutory defences.

For a Non-Lockdown DPN, pre-COVID the ATO offered Directors the following options to avoid personal liability:

1. the company’s tax liability is discharged;
2. the company went into administration;
3. the company went into liquidation; or
4. the company entered into a payment arrangement

However, the ATO appears to have changed the options with recently issued DPNs. Going Directors the following options to avoid personal liability:

1. the company complies with its obligation to pay the unpaid amount to the ATO;
2. the company goes into administration;
3. the company appoints a small business restructuring practitioner (SBRP);
4. the company goes into liquidation.

This change appears to be a result of the decision in Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5, that entering into a payment arrangement does not cause a tax debt which is due and payable to cease to be due and payable.

This change is a good one and will see more taxation debts dealt with at the time a DPN is issued. Too often entering into a payment arrangement is simply kicking the can down the road as it does not deal with the Company’s tax debt, just delays enforcement for period until the Company falls behind again and a new DPN is issued.

By pushing Directors to make a final decision, to either formally restructure their debts though SBR or Administration, or appoint a Liquidator, we will hopefully see less zombie corporations continuing to trade.

For Struggling Businesses Now is the Time to Seek Safe Harbour

The current surge in COVID-19 cases is causing havoc for businesses. Consumers are staying home and not spending, workers are being forced to isolate leaving businesses without enough staff, and supply chains have ground to a halt, so businesses can’t get the products they need to trade.

This confluence of events is hurting business revenue at a time when many businesses already had unhealthy balance sheets as a result of trading through lockdowns, putting Directors at risk of insolvent trading. Which exposes Directors to a significant risk of being made personally responsible for the debts of their business if it later fails.

However, there is an easy and cost-effective way that Directors can mitigate this risk, by taking advantage of the corporate safe harbour.

What is Insolvent Trading?

Insolvent trading occurs when a director allows their company to incur debts while the company is insolvent. If the company later fails, a liquidator can make a claim against the director for those debts, making them personally liable to pay back any amount still owing to those creditors.

A company is insolvent if it can’t pay its debts when they are due. This includes paying its tax and paying superannuation to employees. If a company needs to defer payments to the tax office, landlord, employees, or suppliers as a result of the current trading conditions, it may be trading while insolvent.

What’s the Risk

As noted above, if a director allows their company to trade while insolvent and the company later fails, the director may be help personally liable for the debts of the company. Practically, that means a liquidator will make a demand against the director for payment. If they fail to pay the claim, the Liquidator may bankrupt the director.

What’s the Safe Harbour?

The safe harbour regime exists to provide directors with protection from a potential insolvent trading claim while they implement a plan to turn their business around.

If the director follows the safe harbour process, including getting advice from a qualified professional, the director is protected from the personal liability for insolvent trading.

How do Directors access the Safe Harbour?

To access the safe harbour, a director needs to engage a qualified turnaround professional (like me) to work with them through the process.

When appointed to assist with accessing the safe harbour, I:

1. Help the Director review the financial position of the company.
2. Work with the Director to develop and implement a plan to turn the company around
3. Once the plan is finalised, assist with monitoring the plan to ensure that the company stays in compliance and remains in the safe harbour.

If your business, or a clients, is struggling with the current difficult trading environment, reach out for a no obligation chat about whether the safe harbour might be available. A quick call now could save a lot of trouble and expense in the future.

It’s Rough for Business Right Now

It probably comes as a surprise to no-one, but the current Omicron outbreak is having a significant dampening effect on the economy, making what was already a tough time for small businesses that much harder.

Economic forecasts for the month of January are sharply down on pre-omicron projections, with economic growth for the March quarter expected to be around 1% to 1.5%, down from the 2% to 2.5% forecast pre-Omicron.

Businesses are struggling to find staff to keep their doors open as workers are forced into isolate or can’t work due to illness. Goldman Sachs estimates that between 24 and 76 million hours of work could be lost in January alone.

Consumers have also pulled back, staying home rather than getting out and spending. While many are forced into seven day isolation due to a positive test or close contact, we are also seeing people self-regulate and adjust their behaviour in light of the increased risk of catching COVID-19. Data from ANZ shows that national spending for the week ended 5 January was at its lowest level of the entire pandemic in Sydney. While other stated saw the lowest level of sending since their lockdowns ended.

The drop in spending is reflected in consumer confidence which has taken a hit during the first week of January, falling 2.4 points, while only 14% of Australians expect ‘good times’ for the Australian economy over the next 12 months.

I expect these tough conditions will be with us for a further six to eight weeks. In NSW, which is ahead of the other states, we are still a couple of weeks away from peak infections. Once we are past the peak, it will take a few weeks for case numbers and hospitalisations to fall and then a few more before consumer confidence and spending start to bounce back.

All of this adds update a really difficult time for businesses, who can’t find staff to keep their businesses open, and then can’t find customers willing to get out and spend even when they are open. This new challenge comes at a time when business were already dealing with the economic hangover of trading through lockdowns and the withdrawal of government support.

For businesses facing difficulty now is the time to reach out to your trusted advisors and put a plan in place to preserve the business through the next couple of months.

When does a business need help dealing with the COVID Hangover? — Brendan Giles

As we recover from the impact of COVID-19, many small and medium businesses are facing difficulty dealing with the ‘hangover’.

Steps businesses took to survive through lockdowns, like deferring rent and taxes, seeking holidays on finance payments, maybe even delaying the payment super for employees now have to be dealt with. I call this the ‘COVID hangover’.

This hangover can put a lot of pressure on businesses as we recover from the pandemic. The combined stress of the government withdrawing support, trading recovering slowly, and dealing with the ‘COVID hangover’ will be too much for some businesses.

If you are running a business, or advising clients about their businesses, the key to saving struggling businesses is to seek the right advice early. To help identify when a business might be in need of some expert turnaround or resturcktriong advice, here are some key indicators to look out for.

• Outstanding taxation debts, especially if the debts are more than 60-day overdue or the ATO has issued a payment demand or reminder.
• Non-urgent creditors not being paid on time, such as Superannuation.
• Creditors aren’t getting paid. Significant amounts of accounts payable are outside trading terms.
• Reliance on high costs forms of financing such as overdrafts or credit cards to meet business expenses.
• Customers aren’t paying. Significant amounts of accounts receivable are outside payment terms.
• The company has received a Statutory Demand or wind-up application.
• High staff turnover or unhappiness within the management team. People are jumping ship.
• Significant losses, especially if there have been continued losses over the last two years.
• The directors or shareholders are routinely injecting funds into the business to keep it afloat.
• Negative net assets on the balance sheets.
• Cash flows are insufficient to deal with day-to-day expenses and paying down debt accrued through the pandemic.

If your business, or a client’s, is showing one or more of these indicators, there are many unique opportunities that exist to restructure the business, renegotiate its debts, improve business health and cure the ‘COVID hangover’. The most important thing is to seek help early. The earlier a business gets the right advice, the more options are available, and the greater the chance the business can quickly get past the ‘COVID hangover’.

If you’re interested in the options available to restructure COVID debts, reach out for a free, no obligation chat about your business and how I can help.

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Originally published at https://www.brendangiles.com on November 30, 2021.