“If you’ve failed, that means you’re doing something. If you’re doing something, you have a chance”
In Australia, insolvency means an inability to pay debts when they fall due for payment. But just because you don’t have sufficient cash in the bank account doesn’t mean your company goes into liquidation straight way. Many options exist, which most accountants and lawyers aren’t aware of as this is a highly specialised area of the law. It’s very import that you get prompt and correct advice so that you can save your business if possible and prevent personal liability such as insolvent trading claims.
If you are experiencing any of these you should engage us to work out a plan. The earlier you do this, the more likely it is that a positive outcome will result.
Early signs you need advice
- Inaccurate or no financial records
- Failure to lodge tax returns or BAS returns
- Financial losses and inability to obtain working capital
- Competition from new competitors or technological change
- Poor debtor management or inability to survive if a large debtor doesn’t pay
- Inability to pay GST, PAYG and superannuation or juggling cash flow
- “Maxing out” personal credit cards
- Reduced turnover, bad debts and/ or delayed payment by debtors
- Employees or contractors are unpaid
- Difficulty paying creditors
- Inability to borrow funds
- Post-dated cheques
“Call us now” time to panic indicators!
- Threats that a creditor will issue a statutory demand for payment
- Receipt of statutory demand or winding up application
- Suppliers demanding COD or refusing further supply
- Substantial director or shareholder loans
- Worry about business closure
- Income tax audit, payroll tax or similar audit likely to result in unpaid tax as well as penalties
Voluntary administration is governed by the Corporations Act 2001 and allows companies in financial difficulty to restructure and propose a deal with creditors. Normally, administrators will take control of the company for about a month. Administrations are normally initiated by directors who consider that the company is either insolvent or likely to become insolvent.
The directors and/or shareholders of a company have the option of proposing a restructure which must be approved by creditors. Such a restructure normally involves fresh money being injected into the company by the shareholders/directors and the creditors agreeing to accept a lessor amount in payment of debts owed. If this proposal is agreed to by creditors it results in a deed of company arrangement (DOCA).
If there is no agreement then the proposal is rejected and the company goes into liquidation.
Company under a deed of company arrangement (DOCA)
A deed of company arrangement (DOCA) is an agreement between a company and its creditors which prevents creditors from claiming any further monies from the company and which allows the company to continue trading. The aim of a DOCA is for the company to trade its way out of difficulties and return to normal and for the creditors to compromise their debts but receive more than they would if the company was liquidated immediately.
The administrators of a company will ordinarily become the deed administrators who are then responsible for ensuring that the provisions of the deed are carried out by the company and any others who have made commitments under the deed. In certain circumstances the deed can be varied or terminated early and if not then it ends when all commitments (such as payments to creditors) have been completed.
A receivership is a process whereby a qualified person (commonly an insolvency practitioner) is appointed either by a secured creditor or the court to take control of some, if not all, of a company’s assets.
A non-court appointed receiver will have certain powers depending on the security documents and they will collect and sell the secured assets until the secured debt has been repaid.
A court appointed receiver has the powers given to them by the court and are normally appointed in situations where a company’s assets and/ or income are in some danger. The receiver is an officer of the court and as such may have to report back to the court.