Are you a sole trader or trading through a company or a trust?
Are the following issues weighing on your mind?
- Business debts piling up
- Cash flow problems
- Losing sleep over how you will pay your employees and suppliers
- Being chased for money by creditors, government agencies or suppliers
- You have lost the passion or motivation that you first had for your business
Applying for business insolvency may help clear your state of mind
There are several reasons why businesses find themselves in financial difficulty. It can be from poor cash flow as a result of adverse economic conditions, unfavourable legal action being taken against the company, ATO debt issues or unpaid creditors being some of these reasons.
Regardless of what the matter may be, there are several options available to deal with your debt concerns. These include assistance in reaching an arrangement with your creditors, help required with winding down your business, or support with bankruptcy, administration or liquidation processes.
We, at the Bankruptcy Advisory Centre Pty Ltd have the experience to guide you through these processes and take the burden off your shoulders!
We encourage you to call us at 1300 887 210 for a complimentary, no obligation chat to discuss the right solution for your specific situation.
Business Insolvency and Insolvent Company Trading explained simply
An insolvent company is one that is unable to pay its debts when they fall due for payment. An investigation into insolvency is focused on when the company or person (the entity) ceases being able to pay its debts as they need to be paid, and it is about the inability to pay significant debts. It must be clearly noted that just because an entity was not paying its debts does not mean that is was unable to do so and was insolvent. They may have decided not to pay for some other reason. For insolvency, the business/entity must have been unable to pay the debts from a lack of resources to do so.
Insolvent company trading thus occurs when directors allow their company to incur debts when the company is insolvent, which can result in civil penalties, compensation proceedings and criminal charges. The liquidator is then able to make a compensation claim against a director if those debts are unpaid when the liquidation commences. In such a situation, a director may be held personally liable to compensate creditors for the unpaid debts incurred from the time the business became insolvent to the start of the liquidation.
Which Parties can make Insolvent Trading Claims?
Liquidators will have the first opportunity to make insolvent trading claims. If they decide not to make a claim, creditors may start their own actions, but creditors’ claims are limited to the amount of their individual debt.
Why are Liquidators allowed to make these Claims?
By law, liquidators are obliged under the specific provisions of the Corporations Act 2001 to investigate the existence of any insolvent company trading claim, and if so, take appropriate action. Furthermore, directors have a positive duty to prevent the company from trading if it is insolvent. Under the Corporations Act, failing to stop a company from incurring debts if it is unable to pay is a breach of the directors’ duty. Directors may have to pay compensation to the company for losses creditors have incurred under that breach of duty.
What are the signs to look out for if you may be heading towards and an insolvent company?
- The company is unable to pay its debts as and when they are due and meant to be paid in a timely manner.
- The company is unable to offload assets at short notice to meet any debts owed, without affecting the ability of the company to continue to trade comfortably at a reasonable profit margin.
- Key internal stakeholders have resigned citing concerns about the company’s financial health or trading position.
- Agreements with financiers have gone into default or are likely to go into default.
- Trading losses are continually occurring and/or cash flow is problematic. Sale of stock is slow, and/or debts aren’t collected systematically.
- An absence of a budget or business plan or one that is insufficient to monitor operations and the financial position of the company is not known.
- Funding facilities has reached its limit and you are unable to negotiate a new limit or further financing.
- The company is unable to produce accurate financial information on a timely basis to comply with regulatory requirements or other third part requirements.
- There is no recovery plan even though directors are considering continued funding for trading losses.
- The company is paying your creditors outside of agreed terms, or in amounts that are not specific to invoices or your suppliers have placed you on a cash- on- delivery (COD) terms only.
- Taxation obligations aren’t being paid when due such as PAYG, GST or Superannuation due to cashflow or the reluctance of the directors to lodge such returns.
- Legal actions have been taken or notice has been made of such action against your company.
- The company is making frequent credit payment arrangements and are in default.
Please note that there are only some of the indicators for you or your company to consider in determining whether your company is facing insolvency challenges and directors require appropriate advice, from qualified professionals.
What are the next steps if I think I’m facing business insolvency?
It is important to remember that if you have received reliable advice that you are dealing with an insolvent company, that you cease incurring any additional debt. Unless you have the ability to restructure, refinance or obtain further equity funding, your options are to consider going into voluntary administration or liquidating your company. For more details on going into voluntary administration or liquidation, please refer to the information here.
Need more information about business insolvency? Contact us
As a Trustee in Bankruptcy, Ross Thomson is often required to think outside the box. As well as creative thinking, Ross brings compassion to the table.
For Ross, it’s important to see the people behind the financial problem –not just numbers.
Ross recently helped a bankrupt client who lives in a retirement village with her seriously ill husband.
The unit she & her husband live in is not owned by them, but subject to a 20-year lease.
The money to be repaid by the management was due only at sale, when the client finally left the retirement village.
Sale of the unit was likely to take several years &, if he did sell the couple’s unit, Ross realised he would be effectively evicting them from their home, without resources or family to help them.
Ross decided to contact the retirement village management & put a proposal to them that they prepay some of the moneys they would otherwise pay the client.
The village management considered the proposal & have agreed to prepay some of the moneys otherwise due.
The client is relieved that she will not be evicted & can now concentrate on helping her husband through his health issues.
The moneys paid represented about 75% of what would have been available to creditors if they waited two years.
It is a win for the client and for the creditors.
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