Introduction to Insolvency - Understanding the Basics

Introduction to Insolvency, understanding the basics. Welcome to our first episode of io Insolvency Options with Darren Vadi, the managing Director of Insolvency Options, and a registered liquidator. With over 30 years of experience helping businesses and individuals navigate financial challenges. In today's episode, Darren shares his journey into insolvency explains what insolvency actually means. And reveals the warning signs every business owner needs to recognize.

We'll explore when to seek help and the difference between corporate and personal insolvency. You'll understand the fundamentals of insolvency. Know when to seek professional advice and learn why acting early gives you the most options. I'm your co-host, Anthony Pearl. Let's dive into unlocking more about insolvency options. Well, first of all, Darren, welcome to your podcast. Thank you. Thank you very much.

I think we need to kick things off really by introducing yourself properly to the audience, and why don't you tell everyone a little bit about who you are and where it all began. Yeah,

sure. So it all began a bit over 35 years ago, having come straight out of high school. I. Applied for many accounting roles with various firms throughout Sydney and was fortunate enough to be accepted to a one of the largest firms at that time, which was Ferer Hodson. And so from there I worked through the nineties in smaller firms and then went out on my own in 2000 as a boutique advisory firm called Business Recovery Solution. That was for most of the naughties.

And then in 2008, I was invited to become a partner of RNG Partners, which was Small four partner firm. In 2013, we merged with SV Partners, which was again another national firm. And then in October of 22, I recreated insolvency options and started with my small team in our offices down in the uh, Sutherland s Shire.

When you started the new business was the riding on the wall as as such, like, you know, there we were kind of in the midst of COVID around that time and when the landscape kind of changed, when all of a sudden there was an influx of people starting businesses as well as some artificial, I guess, boosts from the government. Was it obvious at the time to you that this was gonna be an opportunity?

Traditionally we get busy during a recovery 'cause there are a lot of businesses that don't have the right capital, if they've got capital at all to continue and or survive through a, uh, downturn. And COVID wasn't anything different to an economic downturn. So what we've found that with my history, with my referrers, the people that I work with, it just made sense to pivot and adjust my business. To move forward to cater for all the work that I was getting and continue to get.

And before we get into all of the details that we're gonna do in the podcast series, but I'm just intrigued about you. Tell everyone a little bit about why did you get into this area, why insolvency? I mean, you know, most people start out wanting to just be accountants. Uh, uh, typical kind of accountants of individuals and small businesses. Why get into this specific niche? I pretty much fell into it.

Having come outta school and applied for many jobs, I received two offers in the accounting field. Another one was more of an accounts type, department type role, and this one was straight into insolvency. So from there I saw the opportunity to be able to gain knowledge, help people in financial distress, and really that's what sort of drives me, is to try and put a bit of calm in a what can be a very stressful situation for people and help.

Navigate the, uh, the waters, so to speak, of the particular financial circumstances that businesses or individuals find themselves. Must be a challenge at times to not take that home with you if you like. You know, you're dealing with other people's stresses and you're trying to create opportunities, but at the end of the day, it is always going to be a stressful situation for someone who finds themselves in that area.

So how do you kind of separate that? Look, it can be very emotional because you are dealing with people's livelihoods that is granted. But the beauty about what I think I bring to the table is just the clear thought process and really identifying the true issues that need to be dealt with without, from want of a better term, the white noise that's going on around, around the individuals involved.

So I suppose we better start off as well by telling people why we've come about doing the podcast together. What's the real driver here for you? I think the real driver for me is getting information and education to the marketplace, making sure that business owners who are struggling or do have some financial stress are able to get the right information in a timely manner to help them. Determine what's best for them to help fix their situation. Yeah, and it's interesting, isn't it?

Because on one hand it's about the numbers. On the other hand, it's very much about the human element. The human element's a big thing, particularly where business owners have invested in most instances, their whole adult life into their business. So then to have a, an event which can be a financially crippling event in the twilight of their life. It can. It is a major burden and it does impact the household.

So it's all about, in my view, trying to help these business owners through the tough times. So let's probably start at the beginning then, in terms of, for people wanting to understand this space a little bit more, because I guess typically they start seeing there's an issue.

And people throw terms like insolvency around. Why don't we define it for people as a starting point? Sure. So insolvency is a situation where businesses or individuals simply cannot pay their debt as and when they fault you. That's the technical term for insolvency. And you know, practically you'll see that in your business where there isn't enough money coming in. To the bank account to enable you to pay your debts that are there, that are due to be paid.

And what you end up finding is that these business owners will just start delaying the payment of their creditors and then the whole circular dynamic moves on. And it sort of steamrolls, doesn't it? Because the problem is, is in delaying things, you're often then paying more on credit cards and other areas where you might be borrowing. So the debt just increases when you're doing that. Yes it does. And you know, interest is a big thing.

We have certain creditors may be able to apply interest to, to their debts outstanding. Uh, certainly the tax office applies a interest charge to any monies overdue to them. Banks, you know, if you're relying on your bank or your mortgages working capital, there's an interest component there. So what comes with a cashflow shortage also comes with additional cost.

Yeah. I mean, that's a big thing, isn't it, for people and, and do you find that people have got their head around what this actually means? I mean, what is the state of mind when people are coming to you? Generally, when people come to me quite often, it's too late.

I often say if business owners have approached me 6, 9, 12 months earlier, there may have been a business to salvage. There may have been an opportunity to turn around the business. But unfortunately what we find is that by the time business owners recognize or really admit that they have a problem, they are really at the 11th hour and they've exhausted all resources that they have that they could have used earlier to actually properly address the situation and affect a, a successful turnaround.

I mean, it's bringing in the experts at the right time, which is important for business in, in all aspects, isn't it? I mean, that's the, that's one of the key lessons I think for business owners that whether your business is thriving or you know, barely surviving or going backwards, it's when to call in the experts in different areas is so important.

This is very true. You look at, you look at a lot of the successful businesses, they will have advisors, albeit accounting, albeit. Legal, albeit specialized technical advisors to ensure that the business continues in a positive, uh, manner. Yeah, and, and I think the question of timing, I mean, it's easy to look back in hindsight, right? It's easy to go back and say, well, they should have contacted me six or nine months earlier.

But if you're a business owner, you're listening into this, how do you know when it's the right time? Well, the right time in my view is when you may see that.

For at minimum, you have gone through two quarters of trading, IE two BA returns have been launched, and you're finding that your cashflow is becoming tighter and tighter, and where you are having to negotiate repayment arrangements with the tax office, for instance, or your age payables, your creditors have moved out from say 30 days to 60 days. When you notice a few of those little telltale sign, that's when business owners really need to put their hand up and seek some advice.

And you know, the ability to pay your creditors comes from the receipt of funds from your debtors. So, you know, if you find that your debtors are outside terms and they're in turn starting to drag and pay 60 days as opposed to 30 days. There's a few little signs that can prompt you to say, Hey, do I have a real issue? Is it an industry issue, or is it just a customer specific issue that I need to address?

Yeah. And I guess, is it scary for people to recognize, firstly, that there are some issues there, but secondly, to go to someone in the insolvency space, is that a mental barrier for a lot of people? Oh, look, I don't doubt that that is a mental barrier because. The term insolvency is not endearing to many people, right?

Everybody would like to think that they trading well and business is going well, but ultimately an insolvency professional that you've probably best equipped to look at your financial position and actually provide you with some ideas on what needs to be done and what needs to be looked at instead of being there as the last resort. Insolvency professional can actually assist you even if as a second set of ears, so to speak, to just review and, uh, provide an opinion on how you were trading.

I think to your point earlier about leaving things too late and not being able to rescue them, and we see it all the time, the headlines of major brands that we are familiar with, and we see that no buyers. For them and that they are just gonna shut the doors. And that happens quite regularly at a big brand level. So I imagine it doesn't get any easier in the smaller size business. Certainly doesn't.

No. No. And what you often find is that the smallest size business, because they are so key person dependent, dependent upon the owners key director and the like, the ability to sell those types of businesses are going in concern. Far more reduced than a larger business, which operates autonomously that with a few small changes, the profitability can be returned to that business.

So let's just establish a bit of a framework from the beginning then, and say, okay, I'm in a situation where maybe I need some assistance. What happens when they come and knock on

your door? What are the kinds of things, what are the levers that you can pull at the early sta? Those sort of early stages? I think the early stage for me is having an updated set of financial accounts to enable us to sit down and just review the historical trade. Because at the end of the day, it all does come down to what the cost of doing business is and are you achieving sufficient income? To cover that cost. That's the first thing you know.

There may be some businesses where they've had a significant bad debt, which is an isolated event that has adversely and financially impacted the business. Then that's a really simple solutions to then address that short term cashflow issue. However, if there are some systemic issues within the business where profitability has not been there over a period of time. It is certainly then harder to find a solution to help fix the underlying issue. So it's coming back to it.

It's all about having the financials available to identify what the issues are. Then once we've identified what the issues are, we can then look at the solutions available to address those issues.

I think the important thing here as well is that I imagine someone who's got the expertise that you do, there are things that you can see in the financials that other people may not see. Well, having done this for 35 years and most in soy practitioners would not be dissimilar to myself. You see a lot having investigated the reasons for failure. So having identified the reasons for failure in businesses that have.

Previously gone into liquidation, we sort of have the, an idea of what we should be looking for to identify what the rule issues are, and that's effectively what an insolvency practitioner can bring to the table is to, you know, readily and expediently identify what the issues are, to then work out and determine what solutions, uh, are available.

So just to wrap up this part of the discussion, talk to me about the difference between the types of insolvency that there are, 'cause there personal and there's corporate, so, and there's an important differentiation between those. Yes, there are, you know, personal insolvency relates to individuals, an individual who is unable to pay their debts. The real generally, the only option for a person who's unable to pay their debts is bankruptcy. There are.

Two alternatives to bankruptcy, one being a personal insolvency agreement, the other being a debt agreement, and they are alternatives which can enable an individual to avoid bankruptcy and based on their asset and liability position, it provides for the repayment of their creditors. Not in full, but certainly provides for a better return than what a bankruptcy scenario would provide for. Corporate insolvency.

The liquidation is the main type of insolvency where the business is ultimately wound up. The appointment can be either voluntary or via a one a company's creditor pursuing a debt and appointing a liquidator through the court. Alternatives to liquidation again.

To provide a better return to creditors, uh, either a small business restructure, which is limited by the size of the liability owing, and a few other criteria, such as total debts being less than a million dollars, superannuation being paid up to date, and all the statutory lodgements tax, lodgements bas, income tax, and the like are all up to date as well. The other alternative to liquidation is a voluntary administration.

One of the outcomes of a voluntary administration is a deed of company arrangement where an offer is made to the creditors, which provides for a greater return to creditors. Thus allowing the business to continue to trade into the future. So they're the really, the two differences between corporate and personal insolvency.

Well, that's it for this episode of the IO Insolvency Options Podcast. I hope you've got plenty of valuable knowledge and practical steps for whatever your situation is from Darren today. And if you need guidance on insolvency matters. Contact Darren Vadi directly@insolvencyoptions.com au or call 1804 6 3 3 2 8. Or of course, you could connect with Darren on LinkedIn details in the show notes below.

With over 30 years of experience, Darren and his team provide personalized solutions for both personal and corporate insolvency challenges. This episode was produced by my team at podcast done for you.com au helping professionals share their expertise. Through powerful podcast content. If you found value in today's episode, please like, comment and subscribe to the IO Insolvency Options podcast.

Wherever you are listening to this, your engagement helps us reach more business owners who need these crucial insights. Until next time, remember, there's always a way forward when you know your options.