In their role as trusted advisor, accountants will familiarise themselves with all aspects of a business—including the owners. And not just from a business perspective, either. Quite often they’ll learn a thing or two about the owners’ personal lives as well.
And just as they get a sense that things aren’t right with the business, they can often sense when things aren’t right with the owners.
Such as when their marriage is failing, and the owners have separated.
As you can imagine, this can be a very tough time for them. But it can also be a tough time for their business as well. It can become collateral damage—the owners are too distracted to run it, customers and supplier accounts are left stranded, and recordkeeping becomes an afterthought.
It isn’t long before the business is in financial trouble, creating even more stress for the owners. And if it’s forced to close, they may find themselves personally liable for the business’ debts.
Help is at hand
As an accountant, you are in a unique position where you can help both the business and the owners. You’re both an objective outsider and a trusted professional. And you know their business well. Which means you can provide valuable advice to not only protect the business’ financial integrity, but also provide guidance to expedite any personal property settlements.
Liquidator, Jarvis Archer, and family lawyer, Daniel Hallam, both commonly deal with this situation. It’s from this experience that they share their insights and practical steps to help you guide clients and their businesses through a separation or divorce for better outcomes.
How to look after the business (from the Liquidator’s point of view)
- Move quickly. When business owners are distracted they take their eyes off the business. So, you need to get involved early. You may need fortnightly or even weekly reports and discussions to ensure the business meets its ongoing cash flow needs and remains profitable.
- Maintain integrity of the accounts. If either (or both) of the owners look after the books then chances are they will be neglected. And if that happens the accounts will be a disaster, making it impossible for you to monitor the financial position of the business.Consider engaging an external bookkeeper (perhaps your own, or someone you trust) to maintain the business’ financial integrity. (Our preferred bookkeeper is Smartbooks Online.)
- Maintain statutory compliance. It’s imperative that you keep meeting ATO and other statutory obligations. Either party receiving an ATO director penalty notice, garnishee notice or statutory demand will put the business at risk, and you’ll need to take urgent action.
- Ensure they aren’t trading while insolvent. If you notice any early warning signs that the business may be insolvent (or approaching insolvency) then you’ll need to help them make some quick decisions to avoid insolvent trading. (The owners may be liable for any unpaid debts incurred while the business is insolvent.)
- Withdraw the business from the dispute. While the dispute is ultimately between the owners, the business can become collateral damage. For example, if one of them is the sole director or shareholder, they could resolve to appoint an Administrator or Liquidator without the working partner’s knowledge. Ensure that the partner working in the company is also its director and shareholder.
- Consider various options for the business, such as:
o Obtaining finance to support the business. Debtor finance usually doesn’t require any security beyond the company’s own assets and can be used to buy out the other partner if they’re a shareholder. And if accounts receivable is being neglected, it can be outsourced.
o Controlling cash flow, and cutting expenses if revenue is declining.
o Negotiating payment arrangements with creditors.
o Closure and if necessary, liquidation.
How to look after the owners (from the family lawyer’s point of view)
- Assess your level of comfort. When a marriage is failing, people’s trust in their advisors can change dramatically‑up or down. You need to determine whether you’re best placed to help both parties, only one of them, or even just the business.
- Manage expectations, but focus on an outcome. Both parties need to understand the risks to themselves and the business. While you should consider each person’s wants and needs, and try to get the best result for them both, it’s not always practical and can lead to major legal disputes with high emotional and financial costs.
Keep the couple’s focus on resolving the situation and avoiding a worst-case scenario. And don’t be afraid to talk to a family law specialist about your approach, or any issues that arise.
- Maintain trust. During a marriage dispute, trust can quickly evaporate. This can trigger defensive responses, which may result in the business owner being handcuffed by unnecessary obligations (e.g. requiring signoff for any payments over $1,000).
If you can manage and support the flow of information, you may be able to avoid these kinds of communication breakdowns.
- Make sure everyone is aware of their responsibilities. As upsetting as a marriage breakdown can be, it doesn’t absolve either party of their responsibilities. They still face the risk of insolvent trading, breach of duties, preference claims, etc.
Encourage reasonable behaviour and maintaining the ‘status quo’ as much as possible. If the business thrived when each party applied their particular skill, see if they’d be willing to keep doing what they were doing. If they’re not, then try to come up with a way to deal with their incompatibility. As an independent advisor, you can probably come up with some straightforward solutions.
- Keep an eye out for possible tax benefits. Marriage breakdowns can sometimes create savings opportunities such as stamp duty exemptions and capital gains tax rollovers. But to take advantage of them you must adhere to the strict provisions of the tax and family laws. Running your proposal past a family law specialist may lead to a more tax-effective result.
As their trusted advisor, this is a chance for you to not only help the owners and their business get through a difficult situation, but also to provide real value. They may even become lifelong clients.
And while you may not have all the answers, insolvency and family law specialists are generally willing to provide obligation-free guidance and advice.
If you have any questions or concerns, Daniel and Jarvis are both happy to discuss them with you. Here are their contact details.
Principal at Bluewater Lawyers
Phone: (07) 3607 3815 / 0404 453 139