A corporate undertaker talks top tips for making sure you get paid, reining in rogue liquidators, and having a heart for those who’ve lost money.
PwC’s John Fisk has handled high profile company failures from Pike River to Lombard Finance and the Ross Asset Management Ponzi scheme. He also chairs the catchily titled Restructuring Insolvency and Turnaround Association New Zealand (RITANZ), the voluntary body charged with corralling his largely unregulated sector. After a career of following the money and chasing bad eggs, Fisk offers The Spinoff some insights into life as a liquidator and how to avoid being on the receiving end when a company collapses.
The Spinoff: You deal with failed companies for a living. Is there ever a happy ending?
John Fisk: A few years ago we were appointed receivers to Turoa Ski Resort, just at the start of the season. The company had no money whatsoever. It was operating on a national park, the assets were chairlifts on the side of a mountain, the creditors had stacked up. So we decided to offer season passes at $199, and that raised enough money to run the ski field for a season and sell it as a going concern. So suddenly we became ski operators. There’s a lot of satisfaction in that, because you learn a lot about a business and the people who run it. In that case there were over 200 jobs saved.
Isn’t having to wind up businesses a bit depressing though?
I think it’s dangerous if you lose empathy for people who’ve lost money, but it’s not depressing. Someone else has already stuffed it up, frankly, and you’re trying to get the best out of that situation, whether it’s getting all the money back, preserving jobs, or taking legal action against people who’ve defrauded the company. It’s tremendously rewarding when you can make a payout to creditors. Last week we did a final distribution to the Ross Asset Management (RAM) investors. At the end of the day it was less than 20 cents in the dollar, but if we hadn’t taken the legal action it would have been nothing.
How on earth do people get sucked into scams like Ross Asset Management?
They tend to trust their friends rather than doing their own homework on an opportunity. So if I said to you, ‘this is brilliant, I’ve been getting 20% for the last 3 years, the guy’s terrific’, a lot of people listen to that. There was also an exclusivity to it, ‘this is just between you and me, no-one else knows about it’. And the person you’re dealing with is a really nice person. You can’t be a fraudster and be difficult to deal with. It’s really tough, some of the RAM people were almost suicidal.
What’s been your most difficult company failure?
The one that was probably the most challenging was Pike River. We were appointed less than a month after 29 men had died. As an accountant, you’re not brought up to deal with the media, and the international media were interested as well. And you also had the challenge of dealing with business issues in the middle of a tragedy.
Having said that it was rewarding in that we were able to get a good payout under their insurance policy. We also did a thing called a compromise, where the secured creditors agreed to allow money that would normally have been paid to them to be paid to unsecured creditors as well. So it meant the local tradies got something back, I think it was about $10m.
You’ve seen plenty of companies go bust leaving suppliers out of pocket. What can a small business do to make sure they get paid?
You can register a purchase money security interest (PMSI) over goods that you’ve supplied to the company. So if, for example, a cafe goes into liquidation and the people who supply the salt and pepper shakers haven’t been paid. If they’ve got a PMSI they can come and take the shakers back. To do that you have to have it registered on the Personal Property Securities Register (PPSR), and the first thing a liquidator does is go to the PPSR. For one-off small transactions you wouldn’t bother, but if you’re a subcontractor to a big firm you’d want to do that.
Hang on, do small businesses know about this?
It’s vaguely known. There is some education needed here.
This is gold. What else?
Watch out for owners who spend a lot of money on things that are not core to the business. If they’re spending it on assets for the business I wouldn’t be so worried, but if they start spending up on flash cars and holidays and it all happens very quickly, I’d be asking questions. It’s also usually an indication they’ve taken their mind off the game.
Any other tips?
All businesses go through cycles, and at some stage you will start going down what we call ‘the demise curve’. The earlier you recognise the signs the better. The old saying ‘cash flow is the lifeblood of the business’ is very true. You might be profitable, but if your cash flow dries up you’ve got a problem. Maybe you’ve grown so quickly that you can’t keep up because your creditors need to be paid more quickly than you’re collecting money in.
To keep a focus on cash flow you need to be good at forecasting, because history won’t tell you. Particularly if something’s been successful in the past but things have changed, facing up to those changes and doing something about it early is important.
Is it true that to become a liquidator you only need to be over 18, not bankrupt, and of sound mind?
More or less. Since 1993, anyone who is over 18 that isn’t bankrupt can be an insolvency practitioner. You also aren’t allowed to be subject to a Mental Health Act certification, and there are a couple of other criteria. The philosophy was that the market would determine who’s appropriate for a job. But we saw people getting appointed who didn’t have the appropriate skills. For example, you could have what’s called a ‘friendly liquidator’ appointed by the failed company’s directors. That’s why RITANZ was formed as a voluntary incorporated society.
That is all changing now, though. We’re moving from a voluntary process to a compulsory one, and from April next year you will need to be a licensed insolvency practitioner to take an appointment.
Give us Insolvency 101 – what’s the difference between a liquidation, a receivership, and going bankrupt?
A liquidation is a bit like the death of a company. Maybe the company’s purpose has come to an end, and if it can pay all its debts it’s a solvent liquidation and everyone’s happy. Our work gets more complicated when it’s an insolvent liquidation and there is not enough money to go around. We secure the assets and distribute them in order of priority to all the creditors. The costs of the liquidation are the first thing met – essentially no-one would take on the job if they didn’t get paid. Then employees are entitled to a preferential claim for their wages and holiday pay. The next preferential creditor is Inland Revenue. Then if there are no secured creditors the next people who get paid are unsecured creditors.
A receiver is appointed by a secured creditor, which is anyone who holds a general security agreement (GSA) over the assets of the company, such as a bank. Sometimes you’ll see a company that’s in receivership and liquidation, and the receiver’s job takes priority over the liquidator.
A bankruptcy is only of a person, although the rules that apply are similar to a liquidation.