The Coronavirus pandemic has led to the failure of many small businesses. Therefore, what should you do if your business is facing insolvency?
What is insolvency?
An insolvent company is unable to pay its debts as they fall due. Signs of insolvency include:
- Increasing debt;
- Problems selling stock or collecting debt;
- Overdraft limit reached or default on a loan;
- Inability to raise funds from shareholders; and
- Special arrangements needed with creditors to help meet payments.
Safe Harbour Provisions
Under Section 588G(2) of the Corporations Act 2001 company directors are personally liable for company debts if they are the director at the time the company incurs the debt, the company is insolvent at the time the debt is incurred or becomes insolvent by incurring that debt, and if there were reasonable grounds of suspecting that the company was insolvent or would become insolvent at that time.
However, section 588GA of the Corporations Act provides a “Safe Harbour” from insolvent trading provisions while a company is attempting to restructure or turnaround its financial position.
The provisions under s 588GA of the Corporations Act allows directors to be excluded from this liability if once they begin to suspect insolvency, they start developing courses of action as advised by their accountants and lawyers that are reasonably likely to lead to a better outcome for the company and its creditors. The proposed course or courses of action must be documented and be reasonably likely to lead to a better outcome for the company. A “better outcome” means an outcome that is better for the company than the immediate appointment of an administrator or liquidator of the company.
What to do if you suspect insolvency- what is likely going to lead to a better outcome?
1. Obtain legal advice about the option to take advantage of the safe harbour provisions for directors who are seeking to address their company’s risk of insolvency.
2. Properly inform yourself of the company’s financial position by engaging with your accountant and potentially an insolvency practitioner to assess the company’s solvency.
3. Ensure the company is keeping appropriate financial records.
4. Contact creditors. Try to re-negotiate payment terms with creditors to spread impending payments over a period of time.
5. Chase up any money owing to you from debtors for immediate payment.
6. Check that any outstanding employee payments have been paid and that the company is meeting all its tax reporting obligations.
7. Obtain advice from one or more qualified entities regarding:
Injecting personal money into the company. This can be a risky move if the business does end up failing. Thus this option is not always encouraged.
The consideration of alternative financing options. This could be through selling off some company assets or obtaining an invoice finance to allow a third-party provider to buy your unpaid invoices for an upfront fee.
The restructuring of the business. This could include looking at outsourcing options, staffing levels, and renegotiating existing contracts.
COVID-19 reforms
In response to the coronavirus pandemic, the government has introduced new insolvency reforms which apply to incorporated small businesses with liabilities of less than $1 million. These reforms include a new debt restructuring process and a simplified liquidation process.
The restructuring process allows eligible companies to retain control of the business and its affairs while it develops a plan to restructure the company’s affairs with the assistance of a restructuring practitioner and to enter into a restructuring plan with creditors.
More information about the reforms and their eligibility requirements can be found on ASIC’s website here.
Other options
If you have exhausted all other options and your company is insolvent, do not incur further debt. Your options are now liquidation, voluntary administration, or receivership.
Liquidation
In liquidation, an independent liquidator takes control of the company to wind up the affairs of the business and to ensure the remaining assets are distributed in a fair and even manner for all creditors.
Voluntary Administration
An appointed voluntary administrator takes full control of the company intending to try to save it. They aim to administer the company’s affairs to obtain a better return to creditors than if the company had been placed straight into liquidation.
Receivership
A secured creditor who holds security over some or all the company’s assets will appoint a registered liquidator to act as a receiver. The receiver’s role is to collect and sell enough of the company’s assets to repay the debt owed to the secured creditor.
Nicola Maltman – Law Clerk – Matthies Lawyers
Should you have any queries regarding insolvency and your options, please contact Matthies Lawyers for an obligation-free consultation or call +61 3 8692 2517 today.
Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.