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By Marcel Vaarzon-Morel and Trent Fuller

Several years ago I attended a business clinic held by the NSW BIA and the single point I remember was: “In times of uncertainty, how business responds, is critical to its survival”.
The uncertainty facing the marine industry today is real and it would be fool hardy for a company director to ignore the underlying economic factors causing this uncertainty or consider these factors as short term, in light of recent court decisions discussed in this article.

Economic reflections

In the March 2011 issue of Marine Business the article “A Grey Cloud Over The Industry” referred to, amongst other things, the future economic uncertainty fuelled by an Aussie dollar that remained above parity with the US dollar. Several months on it has become clear that this uncertainty is not short term and unfortunately for the marine manufacturing and export industry, the prediction of tough times appears to be a long-term reality.
No where has seen it tougher then in Europe with sovereign debt levels being the new talk of the town. This coupled with the Unites State’s beleaguered economy represent yet another threat to global financial stability directly affecting investor confidence and domestic retail spending. To add salt to the wound, for the marine industry, would-be-purchasers are looking overseas for what is perceived as bargain basement deals.

Marine industry response

To the credit of the recently formed Boating Industry Alliance Australia (BIAA) a National Maritime Industry Emergency Crisis Summit was recently held in Brisbane where industry representatives vented their frustration at their deepening economic woes, placing much of the blame at the growth of the grey markets and government over-regulation.
Whilst the Brisbane summit may have discussed many of the market concerns and potential responses that business and government might consider, it is in the here-and-now that business needs to plan forward before it is too late. The purpose of the suggested plan (below), although simplistic, is to high-light from a legal perspective the duties of company directors in a practical business context and also provide business in general with some basic navigation forward.

1. Suggested plan

Determine the Business’s financial position, both in the short term and long term, in respect to a company’s responsibility to remain solvent while trading.
The director/s of a company should take advantage of using their accountant, financial adviser and other relevant appointed persons or experts to assist them in this assessment. And these opinions should be assessed by the director/s using their knowledge of the business and knowledge of the economy, especially when sales are slowing and margins are narrowing as is the reality of the present economic times.

One of the many lessons that came out of the GFC was the increasing importance of directors’ responsibilities in times of economic hardship. As was illustrated in the well-publicised James Hardie and Centro cases, directors need to be aware of and responsive to market volatility. This means understanding the risks, and making informed decisions on behalf of the company. The days of the “armchair” directors are over. No longer are directors of companies able to argue on grounds of general ignorance, indeed there is an inclination by the courts to hold directors to higher standard than ever before.

2. Assess the exposure of the company director/s

This assessment goes to the question of “how much risk is the director who gives a personal guarantee prepared to take” being the same question for the owner of an unincorporated business. The difficulty in cash strapped economies is that suppliers often do not give credit to companies alone and will rely upon personal guarantees from directors to ensure payment and thus supply. However, where personal guarantees are given, no longer can the director hide behind the protection provided by the company structure, placing their own personal assets at risk.

At the end of the day, if the company remained trading while being unable to pay its debts, this corporate protection may be lost if a director knowingly allowed a company to trade while insolvent. The Corporations Act holds directors personally liable if their company takes on debt while insolvent. On the flipside, these directors’ responsibilities may in fact encourage directors to enter voluntary administration to avoid personal liability, rather than work to grow the business in times of trouble. Voluntary administration is the stage before liquidation and involves inviting administrators to attempt to trade the company out of financial difficulty. However, the problem with placing a company into administration is that it sends negative signals to the market especially when the market is already struggling.

3. Reassess your market and marketing/business plan

In view of financial uncertainty and potential risk it may be a case that directors need to reassess their business and marketing plan considering future directions, for example using effective web pages, blogs and social networking sites etc. If necessary a new business plan should be drafted stating, where the business is situated financially, what the business wants to achieve and how it’s going to get there, providing direction and stability. This plan becomes the back-bone of the future of the business in times of instability and a tool in renegotiating finance if required. It also provides a director with the necessary knowledge as to whether the business remains viable or not.

4. Get business support

At the business clinic, I mentioned earlier; the presenter prided himself on the fact that every Friday afternoon he played a round of golf with various persons of importance to his business, stating that this was made possible by a 6am start on that day. The issue here is that all too often business owner’s get bogged down with the everyday running of the business that is, “working in” the business and not allowing time to “work-on” the business. Like the presenter who pursued some of his networking and marketing opportunities on the golf course. Getting bogged down in the everyday running of the business may be considered dangerous, if you’re he director of a company, when expectations are much broader than this. This view is supported by recent courts decisions where the director’s duty is expanded to look beyond the pursuit of profit and take additional factors into account such as social and economic factors.

Given the increased expectations on directors and business owners alike it may be helpful to delegate parts of the business to professionals to assist in supporting all aspects of their business. Believe it or not the account/financial manager, bank manager and even your commercial lawyer can be your business’s best friend and this relationship should be developed. To be able to ring one of these professionals up for some quick advice, which they are able to give if they know your business, may be the difference between the company sinking or floating.

Where to now?

The questions you’ve got to ask yourself are, “Is it business as usual?” or “Is it in the company’s best interest not to wait till the bilge pumps are unable to cope with the level of debt and plan the future?” If the answer is “yes” to the second question, then how am I or the other directors going to navigate this new path. Well, just like commercial shipping industry that relies upon pilots to expertly navigate the ship through the difficult waters so should directors revise business plans and call upon their financial and legal experts to help them navigate the company through difficult times. While this article has focussed on directors of companies, the concepts are equally applicable to owners of unincorporated businesses.

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