The Core Test — What “Better Outcome” Means

Those words matter, and they should be understood carefully.

What Is the Comparison?

The legislation defines a better outcome by reference to the company.

The comparison is between the outcome from the course of action being pursued and the outcome for the company if an administrator or liquidator were appointed immediately.

That is important.

The question under the legislation is whether the relevant course of action is reasonably likely to lead to the better outcome contemplated by section 588GA.

Whether that test is satisfied depends on the circumstances of the company and should be considered with appropriate professional and legal advice.

“Reasonably Likely” Matters

The legislation does not use the words certain, guaranteed or successful.

It uses reasonably likely.

We should not attempt to turn those words into our own legal test.

Instead, our practical role is to help ensure that decisions are being made using reliable and current information, that the proposed actions can be properly examined, and that the results are measured as the circumstances of the company develop.

That means replacing hope with information.

Establishing the Reality of the Business

Before a course of action can be properly considered, we need to understand the business.

• What is actually happening to cash?
• What is owed by customers?
• What is owed to suppliers?
• What is the position with the ATO?
• Are employee entitlements and superannuation being met?
• Is the underlying business profitable?
• Are jobs being priced properly?
• What finance commitments need to be serviced?
• What is happening to working capital?

And importantly:

This information allows the director and their advisers to examine the company’s position and the options available using evidence rather than assumption.

Developing the Course of Action

Once the position is understood, attention turns to what needs to change.

That may involve actions concerning cash flow, debtors, creditors, costs, pricing, operations, finance, assets, taxation obligations, employee entitlements or other parts of the business.

Some actions may need to happen immediately. Others may form part of a 30-day or 90-day course of action.

The important point is that the course needs to be connected to the actual problems identified in the business.

Testing the Course Against Reality

This is where our approach has become increasingly important.

A course of action is developed using the information available at the time. But businesses change.

• A major debtor may pay.
• A major customer may disappear.
• Margins may improve.
• Costs may increase.
• A new contract may be won.
• A proposed finance facility may not proceed.
• The ATO position may change.
• An action expected to improve cash may produce a different result.

So we continue to measure.

This is not about changing direction every week.

It is about making sure that the course being pursued remains connected to what is actually happening in the business.

What the Legislation Asks Us to Consider

Section 588GA identifies a number of matters that may be considered in determining whether a course of action is reasonably likely to lead to a better outcome.

These include whether the director is properly informing themselves about the company’s financial position, taking appropriate steps to prevent misconduct, ensuring appropriate financial records are maintained, obtaining advice from an appropriately qualified entity supplied with sufficient information, and developing or implementing a plan for restructuring the company to improve its financial position.

These are important considerations.

They also explain why information, behaviour, advice, planning and implementation all matter.

Our Role

We do not determine that a particular course of action satisfies the legal test.

Our role is to help make the business and the course of action visible and measurable.

• We establish reliable financial information.
• We help identify what needs to change.
• We document the actions agreed.
• We measure whether they happen.
• We examine the results.
• And we create a contemporaneous record of the information, decisions, actions and changes occurring throughout the process.

Where legal interpretation is required — including whether a proposed or continuing course of action satisfies section 588GA — appropriate legal advice should be obtained.

Better Information. Better Decisions. Better Business.

There is also a broader business lesson in the better-outcome process.

Once a director starts looking closely at cash, profitability, debtors, creditors, compliance, pricing and management behaviour, the conversation can become bigger than financial distress.

The same information required to understand a business under pressure can identify what needs to change to make that business stronger.

That is the opportunity we pursue.