3 rules to protect your business when assisting distressed clients.

It’s not always easy for people who are in financial distress – either personally or in their business – to talk openly about it. If you find yourself on the receiving end of such a discussion, it’s often a sign that the person genuinely values and respects your advice. 

However, as a professional, it can be difficult to balance the desire to help with the need to ensure in your role as an advisor you are not dragged into the problem and are properly renumerated for your services. Particularly for lawyers, accountants, financial counsellors and other trusted advisers who people turn to in times of hardship, the risks are especially inherent. 

As a finance or legal professional, your time and knowledge is valuable. The fact that you are someone’s first port of call when things go south is proof that you have a substantial level of financial nous. What’s important is to have practices and processes in place so you can confidently engage with these clients while protecting yourself and your business. 

Rule # 1: Require upfront payments

Much like any service provider, seeking a staged payment upfront (i.e.: cash for service) is an essential practice for finance and legal professionals when working with clients who are facing hardship. 

While it does require discipline to implement and uphold this practice, it could mean the difference between retaining all the funds you are paid for the service provided, or getting cents in the dollar if the client was to fall into a formal insolvency regime. 

It’s important to remember that an adviser who is aware that a person or business is in financial distress has little likelihood of being able to avail themselves of the defence of “lack of knowledge of potential insolvency”, in respect of any funds received on credit terms, if a Liquidator or Bankruptcy Trustee is eventually appointed. This is the case even if you have delivered thousands of dollars in services; your advanced knowledge of their situation means you are exposed. 

Leaning on clients to pay a hefty invoice immediately before liquidation is also risky, as the payment may be clawed back by the liquidator – requiring you to repay it into the liquidation pool. 

Ideally, opt for staged payments from your client or an appropriate third party in advance of any completed works. For example, you could ask your client to pay a fair portion of your fee in trust and a small remainder simultaneously with delivery of the work. If your work with them continues, simply repeat this process to ensure you aren’t left high and dry in the event that liquidation becomes their best option. 

Rule # 2: Be clear about your role as an adviser

Another risk to advisers when supporting distressed companies is during negotiations with creditors. 

Failing to be explicit that you are acting for your client can potentially lead creditors to believe you hold a role in the distressed business. For example, a number of calls to the Australian Tax Office (ATO) to negotiate a payment plan may lead the ATO to record your name as an internal representative of the company. If the business then becomes insolvent and the liquidator reviews these records, you could be implicated as a “shadow director”. 

Remember to always be clear that you are acting on instructions from the director, and speak from the capacity of an advisor who is distinct from your client’s business. 

It’s also a good idea to maintain this sentiment in your relationships with clients, regardless of how well you know them. Make it clear that you are providing advice and options to support them, and have sufficient boundaries to ensure you don’t become entangled in their state of affairs. 

Rule # 3: Take extra precautions

There are several added precautions you can take to protect yourself and your business when assisting distressed clients.

One of these is to leverage useful initiatives, such as Safe Harbour, that are designed to support companies in financial distress. Safe Harbour practitioners are skilled in developing valuable restructuring plans which could give your client the best chance to turn their business around. 

Safe Harbour also provides your client with a defence against personal financial claims that could arise as a result of insolvent trading. 

Having a referral to a Safe Harbour practitioner as part of your advisory process can lead to improved outcomes – and gives you the confidence to continue working with them while knowing they are operating under the regime. 

Lastly, you may wish to explore asset protection strategies as another avenue to protect yourself and your business. An asset protection specialist can help you understand the various ways to future proof your business, which are often relatively simple yet extremely effective. 

RSM is here to support you

We invite all finance and legal professionals to reach out to us any time to discuss financial risks and issues affecting your clients or your own business.

Our experienced advisers, safe harbour practitioners, and registered liquidators are skilled in all aspects of restructuring and recovery including:

• developing detailed Options Reports to help your clients know exactly where they stand
• developing restructuring plans under the Safe Harbour regime
• implementing a restructuring or recovery plan 

We can also advise you on how to develop pragmatic processes to protect yourself and your business – be they around upfront payments, strategies for asset protection, and more. 

Our goal is to act as a trusted additional layer of support to assist you and your clients as they find a clear-sighted way out of their current situation. 

FOR MORE INFORMATION

For a friendly and confidential chat with a restructuring and recovery expert, contact your local RSM office.