Guide to what you should consider if your business is insolvent.

What is insolvency?

The definition of insolvency is that a business cannot pay its debts when they fall due. As a director, it is important not to continue to trade the company whilst you are insolvent as this is an offence and can incur civil and/or criminal penalties.

If you have concerns about the ability of your business to continue to trade you should seek advice as soon as possible. You will typically need the help of your accountant, a lawyer and an administrator or liquidator. Be careful to avoid unreputable advisors.

Be seeking help you will be invoking Safe Harbour provisions of the Corporations Act 2001 and relief from some of your directors’ duties. These provisions protect Directors from incurring personal liabilities and prosecution. This allows them time to continue to trade the company, with the view to trying to turnaround the company.

Directors’ duties are a part of the Corporations Act 2001 and it is especially important when facing insolvency that you act in accordance with the law to fulfill your duties.

What are your options if your business is insolvent?

Restructuring & Turnaround

There are many options when restructuring your business and this can involve renegotiating key contracts, debts, leases and loans and reviewing expenses. This may often impact your company’s employment matters, leasing and other obligations that your company has. We can assist in renegotiating debt and terms with lenders and banks and others that you owe money to or have contracts with.

Having an insolvency lawyer act on your behalf can change the tone of the negotiation and often leads to a faster and better result than individuals can obtain. Banks, lenders, debtors and Tax Office officials can be more flexible in restructuring debt or reducing fees and penalties when liaising with a lawyer.

There is often a presumption in such circumstances that the seriousness of your financial situation is being portrayed and handled professionally and responsibly, namely that professional advice can lead to a more productive outcome.

Any individual or company can undertake restructuring and insolvency to remedy their businesses finances. However, if a sole trader or partnership structure cannot resolve their issues through this process they may have to consider bankruptcy.

If you are a company, then you have further options.

Voluntary Administration, Liquidation or Receivership – What is the difference?

What is Voluntary Administration?

Voluntary administration is where you appoint an external administrator. They assess the business and decide the best course of action to remedy the solvency issue. Often companies go into administration and can continue trading rather than being liquidated. If the company cannot be restructured and debts renegotiated, then they will place the company into liquidation.

If action is taken early enough, voluntary administration can save the company and liquidation may be avoided.

Companies can negotiate debts via placing their company into voluntary administration or if they can’t the only solution is liquidation. Receivership is different as they act strictly for the creditors.
Once you appoint an external administrator you are no longer in control of the company’s affairs.

The administrator does not act for you but, in the best interests of the company. So it is important to ensure that you obtain legal advice if a dispute occurs or require your own legal advice. They are not acting in the best interests of you – only your lawyer and accountant are.

The creditors of the company and other stakeholders must agree to new terms, which usually means that they will reduce their amount due and entitlements. This is usually arranged and negotiated beforehand and there will be a meeting of the creditors to vote on accepting a Deed of Company Arrangement (DOCA). The DOCA lays out the new debts amounts and a repayment schedule and is a legally binding document.

Often, retailers will use this process to break or renegotiate a lease so that they can return to profitability off a lower cost base. Other times during administration the business may be sold.
If agreement can’t be reached by the creditors or sold then the company is placed into liquidation.

What is Liquidation?

Appointing a liquidator is similar to the appointment of an external administrator. They are independent and the liquidator, once appointed, will take control of the company. You are no longer able to act as the director of the company and the company’s affairs are firstly assessed.

The directors will be required to hand over all the company records and books to the liquidator.

Creditors are established and notified. The liquidator will assess who is a secured creditor and who is unsecured. Secured creditors have a claim against an asset of the company and unsecured creditor do not. Each creditor will have voting rights depending on the amount owing.

Given that the company’s assets will then be in the control of the liquidator, the liquidator will usually assess and sell what they can to distribute funds to the creditors after they are paid their fees.
A liquidator is independent and will report to ASIC at the finalisation of the liquidation process. If disputes arise or they find any illegal conduct by the company directors they will refer the matter to ASIC to investigate. They will also report on the director’s conduct throughout the liquidation and if you don’t comply with their requests you can also be referred to ASIC.

Liquidators are appointed either by a director or a creditor. In instances where creditors have appointed a liquidator, then the process is usually more hostile.

Disputes involving liquidators can be tricky for directors to navigate as they may be overreaching and requesting documents and information that falls outside their scope. If you are unsure you obtain legal advice as to your options.

What is Receivership?

The process of receivership is similar to voluntary administration and that of liquidation, however the receivers have a duty to act in the interests of a creditor. They are not independent and certainly not acting in the interests of the directors.
A company may continue to trade whilst a receiver is appointed and is typically used where there is a specific agreement in place that specifies the appointment of a receiver.

ASIC – The Corporate Watchdog

ASIC is the governing body that regulates and prosecutes all corporate affairs and contraventions of the Corporations Act 2001. All registered Insolvency practitioners, being external administrators and liquidators etc, are to report to ASIC on the insolvency. ASIC may investigate any conduct by the directors and pursue them for breaches of their duties. This can also extend to failing to comply with a liquidator’s requests.

If successful in prosecuting a director there several types of penalties that could be awarded such as disqualification from being a director or officeholder, fines or imprisonment.
It is important that during the process of administration and liquidation that you as a director are advised and protected from any further action by ASIC where possible. An insolvency lawyer is experienced in advising and resolving disputes about such matters when they arise.

Not all liquidations and administrations are seamless and where there are particularly aggrieved and difficult creditors you may need more advice and support from an insolvency lawyer.

Beware the so-called Advisor

There are many advisors that claim they can assist you with renegotiating debts and restructuring and this has lead to warnings from the Small Business and Family Enterprise Ombudsman. They are not fully skilled or knowledgeable in the legal aspects and the services they offer and fees charged can leave some business owners worse off. It is important to seek advice from professionals who understand the practicalities and the legalities of company insolvency.

How we can help…..

We understand that the process of insolvency is daunting for all business owners. If you seek advice early you will understand the process, make better decisions and may discover that have more options than you thought. Time is key to reaching a better result in insolvency so don’t wait until a creditor makes the decision for you seek legal advice today.

It is important to have competent and professional advisors help you who not only understand the commercial aspects of insolvency and procedures but also the legal components.

To speak to one of our experienced insolvency lawyers on confidential basis, call us on 1300 907 335 or complete alternatively complete the online enquiry form on this page.

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Please note: the above article is not legal advice. 
Every circumstance is different. 
It is critical that you obtain legal advice in relation to your personal circumstances before taking any action.

© PCL Lawyers 2020