SIDEBAR: Too Much Information
When haberdashery chain Lincraft collapsed early in 2005 it had debts of more than $10 million. But it was not a lack of information that led it into the mire. In fact it probably had too much information and the problem was in part that it was swamped by reports and suffering a form of analysis paralysis, according to Karl Kugler, general manager of finance and administration.
That said, the information systems were providing financial reports that gave directors an early warning that they were heading into financially difficult territory. That gave them and their main creditor - the ANZ Bank - the opportunity to call in administrator KordaMentha earlier this year.
Lincraft has since been rescued in a bailout believed to have cost Melbourne discount chain Dimmey's about $20 million. Not rescued was the CIO position, formerly held by Michael Sacher. According to Kugler, once Dimmey's took over it went on a cost-cutting drive. Kugler now has the IT department reporting directly to him on operational issues - and to the CEO for any budget matters. He is not sure there is the need for another CIO - in part because the business is now scaling back on its information systems.
"Part of the problem was we had too much information," Kugler says. "The buzzword is information paralysis." He says that the new owners have recognized that it is not enough to "rely on the IT systems - you have to apply your common sense too".
Michael Sacher is now working as a contractor and declined to discuss what had happened at Lincraft. Of Kugler's claim that the business had suffered analysis paralysis, Sacher would only say that, "I've got a different version but there's no point in raking up old coals now".
Certainly there is no reason to hide from the experience; it is not as though being a CIO of a company that enters administration - even liquidation - is necessarily career limiting. One of the highest profile insolvencies in recent years was the collapse of Ansett. CIO of the airline was Andrew David, who has since been appointed chief operating officer of Virgin Blue. The public affairs manager was Heather Jeffrey who is now in a similar role at Virgin Blue.
But like Sacher, they are shy. Although both must have learned many lessons from the Ansett collapse, neither was willing to speak about the experience.
SIDEBAR: The Writing on the Wall
According to Sparke Helmore partner Susan Bennett, there is a series of primary indicators of insolvent trading that people can look for. These typically include:
• continuing losses
• poor relationship with bank, including inability to borrow
• overdue taxes
• no access to alternative finance
• suppliers place the company on cash delivery terms
• creditors unpaid outside trading terms
• company issuing post-dated cheques
• dishonoured cheques
• special arrangements with selected creditors
• paying creditors round sums not reconcilable to specific invoices
• letters of demand, summonses, judgments or writs of execution issued against the company
"A CIO would need to examine these triggers to ascertain which are capable of being detected by some form of early warning system, "Bennett says.
SIDEBAR: When the Party's Over
Once an administrator has been appointed to a company, he or she is the new boss. Any previous reporting lines are erased, and the CIO is accountable directly to the administrator for as long as the company trades in administration.
Quite often the period of administration does not last very long (maybe a few weeks or months), especially if the company is able to haul itself out of administration with the creation of a deed of company arrangement. But as Horwath insolvency expert Paul Weston says, however long administration lasts, it is a period when you've got a lot of nervous employees. "It's a very difficult time, but we do need them and work closely with them," he says. "Invariably the IS and financial people can see where we are coming from and that we do appreciate them. But they certainly know that it is short-term and there is a problem retaining people during administration, especially in IT."
While these staff remain during administration, their normal salary is paid by the administrator. However any entitlements such as holiday or long service leave need to be negotiated alongside the entitlements of any other creditors. If a company goes into liquidation then it is still possible to continue to trade some or all of the operations, and at that time the CIO would report to the liquidator.
According to Sparke Helmore partner Susan Bennett, if the CIO can be defined as an officer of the company then he or she would be responsible for identifying or delivering all the books to the liquidator, provide all information that the liquidator reasonably requires, do what the liquidator reasonably requires during winding up, and provide his or her residential and work or business addresses if required.
"CIOs failing to comply with these obligations risk being prosecuted for offences under the Corporations Act," she warns.
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