Southern Bay Brewing was placed into liquidation owing more than $760,000 to creditors, highlighting the potential risk businesses can face when another company goes under.
The 30-year-old brewery, which called in liquidators from Pitcher Partners Advisory & Reconstruction on 25th October, found itself in an difficult position as early as July this year.
According to documents released by the liquidators, the business owed just over $765,877 at the time of its liquidation to a variety of suppliers and businesses, including $19,126 to five employees.
Liquidations and insolvencies in the brewing sector are relatively uncommon, but the effects can ripple throughout the industry and make an impact throughout the supply chain.
Tim Gumbleton, a principal at professional services firm RSM Australia, which undertakes insolvency work but is not involved with the Southern Bay liquidation, explained that a liquidation can be either via court process or initiated for protection from creditors on a voluntary basis.
“There are also generally other investigation processes undertaken by the liquidator to identify the reasons for the company’s failure and whether any offences have occurred,” he explained.
“The results of such investigations are required to be reported to ASIC in various circumstances as the corporate regulator.”
When undertaking a liquidation, there is a hierarchy of creditors in terms of which get paid first from any available assets or sales.
Insolvency practitioners generally are paid first, followed by secured creditors including banks, then employees.
After this, any other priority creditors, trade and suppliers are paid, finishing with unsecured debts loans and statutory creditors such as the Australian Tax Office, Gumbleton explained, meaning that many suppliers will be quite far down the list with a finite amount to be spread between creditors.
“There are various special provisions that can see employee claims rank in front of secured creditors out of particular asset realisations such debtors and stock, however the provisions are extremely complex and something to seek further external guidance on if it is ever a matter in question,” he explained.
“There is now also a limited employee safety net for particular employee claims – subject to eligibility requirements and excluding superannuation – overseen by the Attorney-General’s Department.
“Unfortunately many scenarios see little if any return to unsecured creditors when a company ends up in a liquidation scenario,” Gumbleton continued.
“At this point it becomes too late to turn back the clock and revisit your trading terms, security options or debt recovery strategies.
“The time to get these right is at the outset when negotiating terms and undertaking your due diligence.
“However, like most corporate failures, you do tend to see warning signs which are again a significant prompt to revisit, review and double check that all will be okay if things don’t work out for the company even though they are telling you that all is okay and the issues are just ‘temporary cash flow issues’.”
Exposure to an mitigating risk
However, as with most things, prevention is better than a cure, and Gumbleton explained that suppliers have various tools that can be utilised to minimise risk from the outset.
“The first issue we would look at would be to ensure that you understand the business structure and its key players as this will guide who should be executing the supply agreement.
“From there, allowing background and credit checks to be appropriately undertaken and determining who should be providing a personal guarantee depending on the extent of exposure.”
If there are any concerns or your business itself would not be able to handle a major debt owed by another business, then there are also options to mitigate risk in daily trading.
“The supply options can include cash on delivery and the various other common trade account scenarios.
It is also essential to have solid supply agreements, Gumbleton explained.
“When debt is being incurred the terms of supply in the supply agreement are critical as they will provide for matters such as maintaining ownership over stock as far as possible until payment is received – using the PPSA via a PMSI or other security interest options including tracing proceeds – the option of a personal guarantee from those responsible for the business, charging provisions allowing caveats to be placed over personal property etc.”
“It would be a good time to also consider cash on delivery (COD) trading terms and other terms such as credit limits and the like and also contemplating again the debtor insurance and associated options.”
There is also the option of getting debtor insurance or trade credit insurance if there is a material or significant supply arrangement, but this is an expensive option.
“Vigilance and early debt recovery efforts are important if payments are delayed to mitigate further losses and maximise the prospects of recovery and potentially avoid being drawn into a future unfortunate liquidator’s preference recovery process.
“It never hurts to double check that the agreements have the correct parties named, the security interests are valid and enforceable and that you understand all of the available options for recovery such as payment plans, garnishees, stock recovery, guarantee enforcement and so on.
“We find that effective debt recovery strategies utilise the assistance of lawyers and at time insolvency practitioners.
“It is fair to say that as insolvency practitioners not much surprises us anymore as we see all types of scenarios as we are the ones that need to investigate when things go wrong and unwind various asset protection strategies.””
“We are happy to help suppliers pressure test their strategies and provide guidance in the event that bad debts are on horizon and you need help to maximise your recovery.”