Is your business struggling financially?
If it is, it’s important for you to seek help as soon as possible. If you are a sole trader or a partner in a partnership please go to the bankruptcy section of our website.
Director’s Liability
If you are a director of a company then you must look at your options as quickly as possible. The reason for quick acting is to allow your company to have the most options available. Please note that even if you are the director of a company, you can be held personally liable for the debts of the company in some instances. This is particularly so when taxes are owed to the ATO. A director can also be liable if the director allows the company to continue to trade when the company is insolvent such that it cannot pay its debts when they are due.
The main personal liability from the ATO is a Director’s Penalty Notice. Once you receive a Director’s Penalty Notice, you must act within 14 days otherwise you will assume a personal liability for the unpaid tax.
Apart from the civil penalties and potential financial losses to directors personally, directors can also be summoned to a public examination in Court under oath. A voluntary administrator, liquidator or even a receiver can apply for a public examination of a director. If you are a director and you are summoned to a public examination, please seek O’Toole Lawyers’ advice urgently.
In certain circumstances if you as a director have been involved in two or more companies that have gone into liquidation within the last seven years and have only paid minimal amounts to creditors then ASIC may disqualify you from managing a corporation for up to five years. This means that you will be banned from being a director for five years.
ASIC may also ban you from being a director if you have managed two or more companies which have failed within seven years that have relied on FEG (Fair Entitlements Guarantee) Scheme to pay company employee entitlements. In other circumstances ASIC can apply for a director to be banned for up to 20 years if they have been a director of two or more companies that have failed in the last seven years and the way in which the companies were managed was found to contribute to the failures.
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Company’s Finances
Sometimes it is difficult running a business whilst maintaining a firm grasp on the company’s finances. Directors should be aware of numerous insolvency signs, such as:
- Incomplete financial records or disorganised internal accounting procedures;
- Absence of a business plan;
- Lack of cashflow forecasts and budgets;
- Lawyers’ demands, summonses, judgements, or warrants;
- Suppliers changing terms of supply to “cash on delivery” terms;
- Special arrangements with selected creditors;
- Problems obtaining finance;
- Change of bank, lender or increased monitoring or involvement by the bank;
- An inability to raise funds from shareholders;
- Board disputes;
- Director resignations or loss of management personnel;
- Increased level of complaints or queries raised with suppliers;
and then the obvious signs such as:
- Ongoing losses;
- Poor cashflow;
- Increased debt;
- Problems selling stock or collecting debts;
- Unrecoverable loans to associated parties; and
- Creditors unpaid outside usual trading terms.
Do not wait in the expectation that the next big job or sale will save the company, but contact O’Toole Lawyers as soon as possible. We will liaise with you and with suitably qualified accountants to ascertain whether your company is indeed insolvent and then what type of measures should be taken to provide as much protection to you as a director, and the company itself.
Options for Struggling Companies
Since COVID there have been a number of insolvency reforms especially for small businesses.
Those reforms are typically debt restructuring processes for small companies and simplified liquidation processes, again for small companies.
Other options for a struggling company are small business restructuring plan, voluntary administration, liquidation, and receivership.
Each of these options have different advantages and disadvantages and the advice as to which path to proceed along, will depend upon the characteristics of your company including the debts owed by the company and to the company, the number of employees and the assets of the company.
Small Business Restructuring Plan
The Small Business Restructuring Plan (SBRP) allows certain small companies to enter into a Restructuring Plan with creditors whilst assisted by a restructuring practitioner.
But there are certain limits on which companies can enter into the Small Business Restructuring Process.
The advantage of a SBRP is that whilst the process is underway, the directors are allowed to retain control of the company, whilst at the same time restructuring its affairs and paying creditors.
Voluntary Administration
A voluntary administration is when an independent registered Liquidator (also known as a voluntary administrator) takes full control of the company to try and save the company’s business. Usually, the voluntary administrator administers the company’s affairs with the goal of entering into a Deed of Company Arrangements (DOCA). The DOCA will usually provide some return to creditors and enable the company to continue to trade. If the voluntary administrator is unable to resolve the debt with a DOCA, it is likely that the company will go into liquidation.
Liquidation
An independent registered liquidator takes control of the company in order to wind it up as quickly and properly to best benefit the company’s creditors. During a liquidation, the liquidator will investigate the actions of the directors which could lead to directors being personally liable for certain debts of the company.
Receivership
Receivership normally occurs when a Receiver is appointed by a secured creditor who holds a security interest over some of the company’s assets or property. Most commonly a receiver will be appointed by a bank or other secured creditor. The receiver’s goal, unlike the liquidator’s goal which is to obtain the best return for creditors, is to collect and sell enough of the company assets to repay the debt owed to that secured creditor. None of the other creditors’ rights will be protected.
