KNOW THE RULES, THE REAL RULES

Over the last ten years I, like many others of my insolvency brethren, have had meetings with various consultants who have had in tow a string of disgruntled Bankwest customers all of whom had felt the wrong end of the receiver’s stick.  There was much conversation and consternation about the rights and wrongs of the events that occurred.

The Commission has indicated that the roles and functions of receivers are outside of the gambit of the existing Royal Commission.  No doubt this situation is the result of clever drafting on someone’s part.  However, the situation is what it is and must be accepted as such, well at least until the next election possibly?  On the other hand though the Commission did review the actions of the Commonwealth Bank after it acquired Bankwest and found that, confronted with the facts in front of them at the time, the actions to remediate the Bank’s risk profile were correct and in accordance with appropriate bank policy.

Thus as they say in the classics, “you just can’t fight  reality”.  It has now been finally put to bed and thus it is up to those continuing in business to learn from the mistakes, or possibly more appropriately put, the experiences of the others.  This is in fact one of the greatest things that I have experienced in working in my profession; you get to see how people get it wrong first hand; and that’s not only those facing insolvency but also those around them, including the regulators and their advisors.

Clearly banks remain able to pursue whatever course of action that they consider appropriate to generate more business and grow their customer portfolios.  The fact though is that if they suddenly find themselves overly exposed then the reaction time can be far more rapid on the way out than it ever was on the way in.

I remember a number of years ago when certain institutions found themselves excessively exposed to the bus industry that the banks in question would freeze the customers’ accounts and concurrently advise them that they had 30 days to find alternate funding.  All of the matters that I dealt with had their accounts, predominantly an overdraft, frozen on a Wednesday afternoon when the overdraft was at its lowest point.  The thirty days became instantaneously irrelevant because the significant funds availability in the overdraft that was intended to pay the wages on the Thursday had become instantly unavailable.  Administration followed hours later.  Luckily it was before the days of FEG!

Back to the continuing business owner and the lessons that must be gleaned from this.  One critical point, which actually related to all aspects of business, is “don’t put all your eggs in one basket”.  Just as you should not have one customer, one supplier, one specialist, one option, etc. you should not have one financier.  The days of giving one institution the entirety of your financing business, and having a single long term professional relationship with the local manager are now long gone.

The prudent business operator will seek out a range of financial suppliers who can cater for a variety of different forms of financial assistance.  In doing so one should also search out specialist experts in their respective financing fields. They are often far better placed to provide significantly greater advice in their field, better designed products, and possibly even stronger industry advice if the nature of the financing is very industry specific.  Thus having a separate lender for say, property mortgages, equipment finance, debtor/invoice funding or factoring, overdraft, leasing, trade finance, and the like will give the business operator a true variety of advice, expertise and comfort.

If the business operator has three or four options and falls foul of one then the others will, no doubt, be able to assist with replacing the problem child, I have watched it, and made it, happen.  The business operator is behaving just like the bank; professionally.  They are minimising their business risks and going forward it will become almost impossible for banks not to advise their customers so, to not do so, could well see a future exposure to negligent advice.

The other aspect is that it also allows the business operator to much better manage their securities so each financier is taking an appropriate level of security rather than the traditional scatter gun approach of taking everything the financier could lay their hands on.  Again, far better management of the businesses risks and exposures by the business operator.

I remember a long time ago being on the sideline in some advice given to a major supplier in the electronics industry who had very significant exposures with their retailers.  In one instance the supplier was exposed to the retailer on average about $3 to $4 million, but the first ranking fixed and floating charge, backed up by real estate security owned by the directors, was held by the bank for a $50,000 overdraft, a hangover of the fitout.

It was entertaining to watch the supplier force the removal of the banks securities over the real estate and accept a secondary position behind the supplier over the business.  The bank was simply confronted by an ultimatum from a very large player, and saw that it was either toe the line or get out.  Surprisingly they toed the line.  To the best of my knowledge the retailer never faced insolvency.

It’s amazing what can happen when you look at a situation not just professionally, … but honestly and properly!