Corporate insolvency

The following are some frequently asked questions we often receive about corporate insolvency.

 

How will I know if my company is in financial difficulty?

There are a number of factors that can indicate that your company is experiencing financial distress. Being unable to pay critical creditors, staff superannuation and the Australian Taxation Office are the most common. Below are some of the signs the Australian Securities and Investments Commission (ASIC) states can indicate your company is undergoing financial difficulty:

  • ongoing losses
  • poor cash flow
  • lack of cash-flow forecasts and other budgets
  • creditors unpaid outside usual terms
  • solicitors’ letters, demands, summonses, judgements or warrants issued against your company
  • suppliers placing your company on cash-on-delivery (COD) terms
  • overdraft limit reached or defaults on loan or interest payments, or
  • overdue taxes and superannuation liabilities.

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If a company is in liquidation, what are the director’s responsibilities?

As a director of a company in liquidation, you no longer have the ability to act on behalf of the company in any capacity. However, you do have the legal obligation to assist the liquidator when requested to do so. Some of the obligations of a director include:

  • providing the company’s books and records
  • advising the location of the company’s books and records if they are not in your possession
  • advising the liquidator of the location of the company’s assets and assisting with their realisation if requested to do so, and
  • providing the liquidator with a report as to affairs.

Where a director fails to assist the liquidator as requested, the liquidator may refer the matter to the Australian Securities and Investments Commission (ASIC) for prosecution.

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What is trading while insolvent?

Insolvent trading occurs when a director allows a business to incur debts even though they are aware the business is unable to pay them as and when they fall due, rendering the business insolvent.

It is important to note that the duty to prevent insolvent trading also applies to any person acting in the position of director, even if they are not formally or validly appointed as a director.

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What are the consequences of trading while insolvent?

A director may be held personally liable to compensate creditors for the amount of the unpaid debts incurred from the time the business became insolvent to the start of the liquidation.

In 2015, the Australian Securities and Investments Commission (ASIC) focused on insolvent trading by directors, noting that the following penalties can apply in certain circumstance:

  • Civil penalties: these can apply for contravening the insolvent trading provisions of the Corporations Act 2001, which can include pecuniary penalties of up to $200,000.
  • Criminal charges: if dishonesty is found to be a factor in insolvent trading, a director may also be subject to criminal charges, which can include a fine of up to $220,000 or imprisonment for up to five years, or both.

The Corporations Act 2001 provides some statutory defenses for directors. However, directors may find it difficult to rely upon these if they have not taken steps to keep themselves informed about the company’s financial position.

Source, and for further information, please visit the ASIC website here.

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When is a company director liable for the trading debts of the company?

A director is not normally liable for the debts of a company unless they have provided personal guarantees. However, there are provisions under the Taxation Administration Act 1953 that make directors personally liable for taxation debts under certain circumstance.

Read more about director penalty notices here.

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What if I’ve received a compliance notice from the Office of State Review?

Similar to the director penalty notice issued by the Australian Taxation Office, the Office of State Revenue (OSR) has the ability to issue a compliance notice pursuant to Section 47B of the Taxation Administration Act 1996 to make directors personally liable for payroll tax debts.

A director can avoid the personal liability associated with the compliance notice, if one of the following is undertaken within the twenty-one (21) day period:

  • The company pays the liability in full
  • The company comes to a “special arrangement” with the Commissioner
  • The company is placed into voluntary administration, or
  • The company is placed into liquidation.

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Will employees receive payment for their entitlements if the company is placed into liquidation?

Eligible employees are entitled to claim under the Federal Government Scheme known as Fair Entitlement Guarantee Scheme (FEGS), which provides for various employee entitlements upon the insolvency of a business. However, it should be noted that FEGS does not cover outstanding superannuation.

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Is it possible to restructure the company prior to appointing a liquidator?

Whilst there is the ability to restructure a company in financial distress, companies that are insolvent or are expected to become insolvent should seek professional advice prior to any efforts to restructure the company. The option of a voluntary administration followed by a deed of company arrangement is available, if professional advice is sought early enough.

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I’ve been told that the bank has taken over a company that owes me money. Can I make the bank pay me what I’m owed?

(Source: ARITA)

A bank, or any other type of secured creditor, which has security over a company’s assets as a condition of lending money to the company (like a mortgage), can choose to appoint a “receiver” if the company has failed to meet its obligations.

The main responsibility of a receiver is to sell the secured assets to pay back the money owed to the secured creditor.  The receiver has no responsibility to report and pay money to unsecured creditors (those was are owed money by the company before the appointment).

The receiver may decide to continue to trade the business in an effort to sell it as a going concern, which generally obtains a better price than just selling the individual assets. The receiver must pay for any properly authorised supplies made to the business by a supplier, or for any property owned by another party and used by them (for example leased company premises or equipment), during the receivership. The receiver is personally liable to pay for these items if the company does not have enough money to make the payment.

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How can I check if a company has gone into liquidation?

(Source: ARITA)

Since 1 July 2012, all notices relating to the appointment of an external administrator (Liquidator, Administrator, Receiver/Receiver and Manager) to a company are published on the Insolvency Notices Website maintained by the Australian Securities and Investments Commission (ASIC) – www.insolvencynotices.asic.gov.au. It is possible to search the website by company name or ACN to check if a company has gone into liquidation.  You do not need to be registered or pay a fee to search the insolvency notices website.

Information regarding a company’s status can also be obtained by getting a company search from the ASIC register – www.asic.gov.au.  These searches provide more detailed information than the information available from the insolvency notices website but you need to register with a search provider and pay a fee for the search.  Details are available on the ASIC website.

Information regarding an individual’s insolvency status can be obtained from a search of the National Personal Insolvency Index (NPII) maintained by the Australian Financial Security Authority (AFSA) – www.afsa.gov.au.  You need to register with a search provider and pay a fee for these searches and details are available on the AFSA website.

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Administrators and Liquidators work for the directors

This is a myth. Insolvency practitioners are appointed by the directors of a company in a voluntary administration, or the company’s shareholders in a voluntary liquidation, and are bound to act in accordance with the Corporations Act and therefore in the interests of all creditors.

In contrast, under a receivership the appointed receiver is generally working for their appointor.

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Insolvency: what are my rights as a shareholder?

(Source: Australian Securities and Investment Commission).

Shareholders rank behind creditors in a liquidation, although in some circumstances they can claim as a creditor. As a shareholder, limited information is received from the external administrators of insolvent companies.

If a company is placed into administration or liquidation, shareholders cannot transfer shares in the company without permission from the external administrator or the Court.

As a shareholder of an insolvent company, you can realise a capital loss in certain circumstances:

  • if a liquidator or deed administrator makes a written declaration that they have reasonable grounds to believe there is no likelihood that shareholders will receive any further distribution in the winding up, or
  • if no such declaration is made by the liquidator, the deregistration of a company at the end of the liquidation also enables realisation of any capital loss.

You may wish to seek tax advice about your ability to realise a capital loss if you hold shares in a company which has been placed in voluntary administration or liquidation.

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Insolvency: what are my rights as an investor?

(Source: Australian Securities and Investment Commission).

The most common types of investments are shares, managed funds (also known as managed investment schemes) and unlisted investments such as debentures. Find out more about individual investment types below or read more on the ASIC website.

What if my interest payments or distributions have not been paid?

If you have not received your interest payment by the due date or an anticipated distribution from your investment, you should contact your investment company and seek financial advice on how the non-payment of your investment income will affect your personal circumstances. Read more.

What if my ability to withdraw or redeem my investment has been frozen?

A withdrawal (or redemption) freeze on your investment does not necessarily mean that the managed investment scheme or company you have invested in is insolvent. If you have been informed that your ability to withdraw your investment has been frozen and you are concerned, you should contact your investment company for further information.

You should consider seeking financial advice about how a freeze on withdrawing your investment will affect your personal circumstances. This will ensure that you are able to make the most informed decision in relation to your financial future. Read more.

How does insolvency affect me if I am a debenture holder?

With debentures, you lend your money to a business, usually for a fixed term. For this reason, debenture holders are usually creditors of a company.

The effect of the appointment of a receiver and manager, voluntary administrator or liquidator (often referred to as external administrators) will be to place a freeze on any payments to you. The external administrator will then oversee an orderly realisation of the assets of the company and distribute the net proceeds to creditors in the order of priorities set out in the Corporations Act. Read more

How does the winding up of a managed investment scheme affect me?

If your scheme is a registered managed investment scheme and is wound up, the winding up is to be conducted in accordance with the Corporations Act and the scheme constitution. If the winding up is ordered by a Court, the Court may make orders relating to the winding up. The investment manager is generally responsible for realising all of the assets of the scheme, deducting reasonable costs (including unpaid creditors) and distributing the balance, if any, amongst members pursuant to the constitution and according to their respective interests in the scheme. Read more

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