Company Liquidation Insolvency

Will Liquidation Of My Company Cause Me Bankruptcy?

Will Liquidation Of My Company Cause Me Bankruptcy? | Insolvency Experts

If you’re a company director in Australia, and you’re having financial difficulty in your business and your company’s affairs, you may be considering working with registered liquidators to liquidate your company.

But when you wind up a company and creditors deal with the liquidator of your company, do you have to declare bankruptcy? Will liquidation cause you to lose your home or cause you to incur any other personal debts? In this blog from Insolvency Experts, we’ll answer these questions and many more. Let’s get started now.

Note: This post is for informative purposes only. Consult appropriate legal counsel before considering insolvency or corporate liquidation.

Bankruptcy Is For Individuals, Liquidation Is For Companies

First, let’s discuss a common misconception that company directors get confused about when they decide to declare that their company is insolvent. Personal bankruptcy is for individuals. If you cannot pay your debts – your personal debts – you may need to file for bankruptcy.

In contrast, liquidation is for companies, and is used when the company is in too much debt to continue operating. It’s for corporate debts – not personal debts.

These two processes are largely unrelated. Because of this, you will not automatically go bankrupt when you decide to liquidate an insolvent company. In fact, it can be that you will not incur any significant personal losses at all when you liquidate a company. Let’s discuss this subject in more detail now.

Company Liquidation Will Not (Usually) Cause You To Go Bankrupt

Even as the director of a company, you are legally distinct from your company. Even if your company is not able to pay its debts from its own resources, you, other directors, and shareholders are not required to pay for those debts personally.

Instead, your company alone is responsible for paying these debts. Even if your company does not have enough money to repay all the debts it has, these will not fall to you – they stay with your company. There are some exceptions, though, which we’ll discuss now.

There Are Exceptions For Company Directors – Understanding What Can Lead To Bankruptcy

There are some circumstances where, if you are a company director, you may be personally responsible for certain business debts incurred by your company. Here are a few examples of exceptions that could lead to personal debt – and even bankruptcy – for company directors.

  • Personal guarantees – A personal guarantee is a type of debt or legally enforceable agreement where, if your company is unable to pay its debt, the guarantor of the loan (usually the company director) will be personally liable for repaying this debt.

Essentially, this means that the lender will have a direct claim on you and therefore your personal assets – you will have to pay the debt, or negotiate an appropriate settlement or you may be forced into bankruptcy. That’s why it is risky to take accounts or loans for a company with personal guarantees attached.

  • Insolvent trading – Insolvent trading is an illegal activity, and can result in stiff legal penalties. If you take on new debt for your company when you know that is already insolvent and cannot pay its current debts when they come due, you may be found responsible for insolvent trading.

If you are found guilty of insolvent trading, you may be held personally liable to repay creditors, which can lead to loss of your assets or even bankruptcy.

  • Tax and super – If you are issued a DPN (Director Penalty Notice) by the Australian Taxation Office (ATO), you can be held personally liable for corporate tax debts. You cannot be held liable for unpaid Company Tax or GST, but you can be held liable for unpaid PAYG taxes and unpaid superannuation. In fact, with changes coming in April 2020, a director may be personally liable for unpaid GST where debts are not reported within 3 months of the due date for lodgement.
  • Breach of director duties – Company directors are held to certain standards. As a company director, you are required to regularly review the finances of the company, take steps to confirm its financial position and solvency, get help from professionals if you notice a problem, and act in a timely manner to resolve solvency issues.

If you take these steps and your company still becomes insolvent, you are less likely to be held liable for its debts. But if it can be proved that you did not adequately perform your duties as a director, you may lose personal assets through claims for insolvent trading and other such issues.

  • Illegal transactions – Illegal transfers of assets, such as a “Phoenix transaction,” where the assets of an indebted company are transferred to a new, debt-free company for the purpose of avoiding claims from creditors, can result in stiff penalties and the loss of personal assets and property, resulting in bankruptcy.

As long as you have not performed illegal or unethical activities, are paid up on your taxes and superannuation, and have not signed any loans with personal guarantees, you likely will not need to worry unduly about your personal assets being taken during the liquidation process.

What To Expect From Liquidation Or “Winding Up” A Company

Liquidation is one of the three common types of insolvency for companies in Australia. The options you have for declaring insolvency include liquidation or voluntary administration. A Deed of Company Arrangement (DOCA) may also be used in a successful voluntary administration.

Of these options, liquidation is typically the most straightforward process for declaring insolvency, and wrapping up a business’s operations. Let’s discuss the basics of the liquidation process now.

  • Creditors Voluntary liquidation – In order to deal with creditors claims, a voluntary liquidation may be used. This process is instigated by the director and shareholders.

If the directors and shareholders choose not to appoint a liquidator, a creditor may petition the court to wind up a company with a winding up application. This legal action will result in a court appointed liquidator of the company.

  • An independent, registered liquidator is hired – Once a liquidation has begun, a liquidator will appointed. Regardless of whether the liquidator is appointed by the Court or the shareholders, they work as an independent, neutral party, free of any conflicts of interest. They work for the benefit of the creditors of the company.

The duties of the liquidator are to wind up the affairs of the company, develop an understanding of the assets & property of the company, distribute assets among creditors, and investigate and report to the ASIC the circumstances of the company’s insolvency.

  • The liquidator conducts an investigation of the company – The liquidator will work with the company director and personnel to get an understanding of the company’s assets and liabilities, and they will look at financial statements, transactions, and other information to determine the cause of insolvency.

Legal action may be taken against the director(s) – In cases (such as those mentioned above) where a company director’s actions has contributed to the failure of a company, legal action or penalties may be levied against the company director.

  • All company assets are collected – A full inventory of all corporate assets will be created, and all company assets will pass into the legal control of the liquidator.
  • Creditors may make claims to the liquidator for outstanding debts – Secured creditors, unsecured creditors, and other creditors who have a claim for debts incurred by your business may seek claims from the company in liquidation. The liquidator will take control of the company’s assets to pay them off, based on the priority of their claims. When all of your assets are realised and debts have been paid to the extent possible, the process is concluded.

This is just a basic overview of the process. For more details, you can consult this guide from ASIC.

Learn More About Insolvency & Filing For Liquidation From Insolvency Experts

As licensed and registered liquidators and administrators, the team at Insolvency Experts can help you understand the entire Australian liquidation and winding-up process for businesses.

If you are having financial trouble at your business and are exploring your options for insolvency, we’re here to help. Contact us now, and get the information you need to make the right decision for yourself, your business, and your employees!

Company Liquidation Insolvency

If My Company Goes Into Liquidation, Will I Lose My House?

If My Company Goes Into Liquidation, Will I Lose My House | Insolvency Experts

If you are considering working with an insolvency practitioner and your company may go into liquidation, you might be wondering what’s going to happen to your personal assets. Do you have personal liability for debts taken on by your company? Will you have to declare bankruptcy, or will you lose your home if your company goes into liquidation?

At Liquidation Experts, we have more than 30 years of experience in liquidation, corporate administration and insolvency in Australia – and we’re here to help. In this article, we’ll discuss the basics about liquidation, bankruptcy, and the potential impact of liquidation on your assets property – including your personal home.

Note: This information is for informational purposes only. Consult with the appropriate legal counsel before making any decisions about liquidation, insolvency, and other such corporate restructuring changes.

You Are Not Responsible For Company Debt – Your Personal Assets Are Protected

As the director of a limited company, you have limited liability when it comes to company debt. You will not be held personally liable for the debts, in most cases – meaning your personal assets are protected, and there is no need to file bankruptcy, or worry about your house being taken when you go into liquidation.

If your company only has unsecured debt, you have no reason to worry about your house being taken if you enter liquidation. Your creditors will not have any claims on your personal assets – even if your corporate funds have run out and the liquidation process see creditors unable to be fully repaid, they will have no claim on your home, your property, or your personal assets, and you will be fully protected, unless insolvent trading or similar is found to have occurred.

In the vast majority of cases, this means that you will not have to worry about bankruptcy – or losing your house – after your company has been declared insolvent and has entered the liquidation or winding-up phase.

However, there are some situations in which it could be possible to lose your house during liquidation. Let’s discuss these in the next section – and how you can avoid these problems.

Is It Possible To Lose My House During Liquidation?

Unfortunately, there are some issues that could occur during liquidation that may affect your personal assets – and could lead to bankruptcy and the loss of your home.

  • Loans with personal guarantees – A personal guarantee is exactly what it sounds like. This is a type of loan where one or more persons (usually the company director) agrees to take on personal liability for business debt when the company cannot pay.

The loan or credit is issued to the company, and can be repaid by the company – but if it is not repaid, the creditor has a direct claim on the guarantor and potentially their personal assets. Even if you enter winding-up/liquidation procedures with your company, you may still be held liable for such debts if you took out a loan or credit with a personal guarantee.

The best way to avoid this issue is to never sign personal guarantees. This may be difficult for new business owners, and it can be tempting to sign a personal guarantee to get credit or a loan – but it could lead to the loss of your home or personal assets.

  • Secured loan on your home – If you’ve taken out a home equity loan against the value of your home for your business, or you have taken out a business loan that is secured by the value of your property, you will still be held liable for these debts after your company enters insolvency.

If you are not able to repay the loan or work out some kind of payment plan, you may have to declare bankruptcy or be forced into bankruptcy – or the lender may be able to foreclose on your house directly, depending on the circumstances.

  • Director loan accounts – It’s common for directors at any size company to have director loan accounts, from which they have borrowed money – or deposit money to be used in loans. If you have an overdrawn director loan account (you owe money to your company) this debt will not be discharged in liquidation – you will still be responsible for paying it.

To avoid issues related to this, be ethical in how you use director loan accounts – and keep tight controls on how they are used to prevent borrowing from the company from spiraling out of control. Large, unpaid director loan accounts will need to be paid.

  • Tax/super debts – If you have unpaid PAYG taxes and unpaid superannuation, you may be hit with a Director Penalty Notice (DPN) from the Australian Taxation Office (ATO). Even in liquidation, you will be held personally responsible for paying these unpaid taxes. From 1 April 2020, this will also relate to unpaid PAYG in certain circumstances.

To avoid tax and super debts, ensure that your company is paid up on GST/PAYG taxes and superannuation at all times. Minimizing the amount of unpaid tax/super debts from the ATO will help safeguard you from personal liability.

Unethical behavior as a company director such as Insolvent Trading – Illegal, unethical behavior as a company director can result in a wide variety of penalties being levied against you – and even the loss of your personal assets, if judged appropriate by the court.

For example, if you are found to be responsible for insolvent trading – taking out more loans and debts when you were already unable to repay your current debts – you could be penalized heavily, and ordered to repay debts from your personal assets. This could result in bankruptcy and the loss of your house.

Another issue that could result in penalties is a “Phoenix transaction,” where company assets are transferred from one heavily-indebted company to a company without debt – with the intent of avoiding repayment to debtors during the insolvency process.

You may also be subject to penalties if you’re found to be in breach of your duties as a company director – not paying attention to the solvency of your company, failing to do due diligence on your financials, and so on.

As a company director, the best step to avoiding the loss of your house during liquidation is to be a diligent, reputable, and ethical company director. All of these above issues can be avoided if you are responsible – and avoid loans secured with your personal property, do not over-utilize director loan accounts, pay your taxes on time, and perform your job duties responsibly.

Consult WIth Liquidation Experts – Prepare For Insolvency & Liquidation The Right Way!

If you’re worried about losing your house when your company is found to be insolvent and is liquidated, we understand. The stress of winding down a company can be very difficult to deal with, particularly if you’re worried about your personal assets.

Need help understanding the process of company insolvency, and preparing for your own company to be liquidated? If so, Liquidation Experts is here to help. As ASIC-licensed, registered liquidators and administrators, we can help you understand what will happen throughout the liquidation – and give you the advice you need for a successful company liquidation in Australia.

We offer free advice 24/7, and can help you find the solutions you need to wind your business up successfully while protecting your personal assets. To get started, just give us a call at 1300 767 525, or contact us online.

Company Liquidation Insolvency

Top 10 Reasons People Choose Voluntary Liquidation

Top 10 Reasons People Choose Voluntary Liquidation | Insolvency Experts

The thought of liquidating can be scary. The idea of losing everything you’ve worked so hard for is terrifying. You don’t know what to expect. You don’t know the process. You probably don’t even know the right questions to ask to see if liquidation will help you.

All you know is things are not working. You’ve got bills you can’t pay. Your relationships are suffering and so is your health. Each night you stare at the ceiling wondering what will happen. Will they send you to jail? And everyone is screaming at you to make things right.

That’s the feeling many of our clients have before speaking with us and before they make the decision to liquidate.

But once they decide, most of our clients report that liquidation helped them move on and improve their lives.

So, here are the Top 10 reasons why people choose Voluntary Liquidation.

  • You Can Choose The Liquidator

If you don’t choose the liquidator, the Court will appoint one chosen by your creditors.

So, if you can choose, what do you want in a Registered Liquidator? 

Apart from being qualified and knowledgeable, most people want a liquidator that is: 

  • Always Available 
    • Clients receive our mobile phone numbers so that contact is always possible, 24 hours a Day and 7 days a week. We are always available to help.
  • Approachable 
    • Throughout the process, our clients know they can discuss any issue at any time.
    • Our clients are always treated with courtesy and respect.
  • Sensible & Understanding
    • We know people don’t set out to go into liquidation.
    • We also know the process impacts not only creditors, employees etc but directors and their families too.
    • We aim for balance in our approach so that all parties are taken care of as far as is possible.
  • Commerciality 
    • Sometimes issues arise during the process that need to be resolved.
    • We believe all issues should be resolved in the most sensible, cost effective and timely manner possible. Where our clients hold similar views, the best results are achieved.
  • Immediately End The Stress Of Continual Creditor Harassment

If you don’t choose to voluntarily liquidate, creditors will continue to hassle you for payment. The calls will not stop!

And this can go on for months if not for years as it takes a long time and costs a lot of money for a creditor to go to court. They would far prefer to continue trying to extract money from you rather than spend more going to court.

However, you need to know from the moment you place your Company into Liquidation, you don’t need to answer any more calls or deal with any demands for payment.

The only thing you need to do is to provide us the information we need to deal with the Company’s issues and creditors.

We can place your company into liquidation within hours, provided you’re happy to assist us as needed.

  • Immediately Divert Creditor Attention From You To The Liquidator’s Office

The first thing we do is write to the creditors and tell them the Company is in liquidation and that they need to deal with our office. 

We tell creditors the time frames involved and what to expect from our work.

From that point onwards, any interest in the Company is directed to us and diverted away from you. Creditors can only seek answers from us.

You don’t need to answer endless calls for payment anymore.

  • All Legal Proceedings Cease Immediately Upon The Appointment Of A Liquidator

If you don’t liquidate, and there are legal proceedings or claims involving the Company, you will be forced to spend money on legal fees.

But, the moment a company is placed into liquidation, there is an automatic stay on civil proceedings that cannot be continue without leave of the Court.

That means, all legal actions and spending stop. Full stop.  

  • Protection From Possible Personal Liability For Insolvent Trading And Unpaid Taxes

By liquidating you can immediately;

  • Avoid further risk of being found to have traded the business and incurring credit while insolvent. If such a finding were made, you could lose your personal assets including your home.
  • Avoid the potential of being held personally liable for certain company taxes by the Australian Taxation Office. We can tell you all about the Director Penalty Regime particularly where directors can avoid personal liability. But as this only applies if you act within a set time frame, you should act quickly.
  • Eliminate any claims you’ve breached your Director duties as set out in the Corporations Act. Again, if such findings were made, you could be held personally liable for certain actions.
  • Bring To An End The Unwinnable Fight That Has Been Fought For Years

So many times our director clients say they wish they liquidated sooner.

They say they often battled on, without advice, and by doing so, they lost their houses and in many cases, far more, such as important relationships, not to mention their health.

If things are not working out, directors should seek professional advice as early as possible to see if there are realistic changes that can be made to improve the situation. 

Then, and only if one is confident of a new plan, where results are monitored and measured on a regular basis, should a person consider putting in their assets, or borrowing from family and friends, into a failing business. 

The best advice is to seek help early and act quickly if results are not achieved.

  • Company Liquidation will assist Employees

If you have been unable to pay your employee’s wages and entitlements, you should know that as soon as a company is placed into liquidation, those eligible employees can claim and recover entitlements under the Fair Entitlements Guarantee Scheme 

If a company is not placed into liquidation, the scheme is not available and you may be left dealing with angry employees.

  • Being Able To Concentrate On Obtaining A Regular Income

What’s the point of being in business if you’re not getting paid? 

And worse, directors have often put in all their money, and borrowed money from family and friends, to put into a failing business.

But as soon as you liquidate, you are expected to go out and earn a regular income, either by finding paid work or starting another, hopefully successful business.

Liquidate early and get on with earning a regular income.

  • Being Able To Improve Health And Personal Relationships

It’s been said before but is worth saying again, the stress of a failing business and constant creditor harassment takes its toll on directors. Close relationships and health often suffers.

Voluntary liquidation immediately ends the stress and stops the phone calls. This will allow you to focus on what’s really important – your health and personal relationships.

  • Get On With Life

The minute you place your company into liquidation is the moment when you hand your burden onto the liquidator. 

You are expected to immediately get on with life and earning an income, tending to your health and personal relationships and leaving the company’s troubles behind you.

Liquidation is not the end of life. It’s often the start of a new and brighter future.

The Insolvency Experts are Registered Liquidators – Licensed and Trusted Insolvency Professionals who will listen and assess your financial situation before letting you know everything you need to know about how Liquidation may affect you and whether it is appropriate for you.

The advice we provide is tailored to your specific circumstances. We will talk you through formal and informal options and discuss what’s best for you. 

Our goal is to provide you with unbiased information to enable you to make a fully informed decision that is best suited for you and your family in what are invariably difficult situations.

Call The Insolvency Experts on 1300 767 525 – Anytime 24/7

Company Liquidation Insolvency

What is Voluntary Liquidation?

Under the Corporations Act, a company that is insolvent may be wound up in a number of ways. 

The most common types of liquidation are: 

A Court Liquidation

  • Where an aggrieved creditor applies for a Court Order to have a compulsory liquidation imposed.
  • The creditor or the Court selects the liquidator to wind up the Company under this course of action. 

A Voluntary Liquidation:

  • The company director(s)/shareholder(s) select and appoint a liquidator when this type of liquidation occurs. 

The Purpose of Liquidation

The purpose of company liquidation is to enable the orderly winding up of a company’s affairs and the legal structure itself.

It is also a way in which the directors of a company are relieved of the stress of constant creditor calls.

What’s required of Directors?

Regardless of how it is commenced, the liquidation process itself is virtually identical and requires the liquidator to undertake a detailed forensic examination of the company, its transactions and the conduct of its directors and officers.

The moment appointed, a liquidator becomes the proper officer and will take control of the company and its assets for various purposes including distributing what remains.  At the same time, the directors powers are suspended.

As a director, you will be required to submit a Report on the Company’s Affairs and Property (ROCAP) – a document that describes the financial position of the insolvent company at the date of liquidation.

You will also be required, under the Corporations Act, to provide the books and records of the Company to the liquidator and to provide reasonable assistance, as may be required from time to time, by the liquidator in respect of his investigations.

How long does Liquidation take?

The Insolvency Experts can have your company placed into liquidation in as little as 24 hours.

While there is no set time limit for completion of a winding up process, we try and complete the process in as little as 4-6 months, where there are no major issues. The reason why the process takes this time is that liquidators are required to report to various government departments and then await the clearance of various steps to be able to move through to completion.

Sometimes however, a liquidation may take substantially longer but this depends on the complexity of the company and the issues involves including pursuing any legal claims that may exist.

Get expert advice 24/7 – Call The Insolvency Experts on 1300 767 525

In selecting a Liquidator, a director should ask any question whatsoever and be satisfied they understand the process of liquidation before commencing. 

The Insolvency Experts are Registered Liquidators who are forthright, sensible and commercial and who are able to provide real and practical advice on the process of liquidation. 

Is company liquidation the best step for you?

Before you place your company into liquidation you need to know :

  • whether company liquidation is the best step for your company and yourself personally and financially.
  • if there are other alternatives that are better for you and your family
  • what risks exist

As every case is different, we encourage you to call, 24 hours – on 1300 767 525 so that we can provide tailored advice to your specific circumstances.

The Process of Selecting a Liquidator yourself:

  • Only speak with a Registered Liquidator such as The Insolvency Experts (Registered Liquidator 296215) to ensure liquidation is appropriate for your company’s circumstances.

You can speak with us FREE of charge and obligation, 24 hours a day, everyday, on 1300 767 525.

Once the decision to liquidate has been made, and a Fixed Director Contribution toward the cost of the winding up agreed, we will prepare and send by email, all the documents needed to place the company into liquidation. 

These documents include:

  1. Minutes of a Meeting of Directors – the directors resolve the company is insolvent and call a meeting of the shareholders who will consider the insolvency and the appointment of a liquidator.
  2. Consent to Short Notice – normally it takes 21 days to call the meeting of shareholders however this period may be waived if 95% of shareholders sign a Consent to Short Notice. This enables the shareholders to meet immediately.
  3. Meeting of Shareholders – the shareholders resolve to appoint a Liquidator of their choosing.
  4. Various forms for lodgement with ASIC that are required to advise and formalise the appointment.

Once the company is in placed into Liquidation, the Liquidator will immediately write to all known creditors and advise them of the appointment and the need to deal only with the liquidator rather than continuing to pursue the Company director. Most directors find this immediately reduced the stress of the situation.

Initial Information to Creditors, includes:

  • A short report on the financial position of company.
  • A Notice of any Meeting of Creditors that has been called.
  • A Summary of Affairs – effectively a balance sheet position of the company at the date of liquidation 
  • A listing of all creditors names, addresses and amounts owed
  • Various ASIC information sheets – such as guides to the liquidation process, creditors rights, as well as details of the calculation and amount of the Liquidator’s remuneration.

The Insolvency Experts – 24 hours, 7 day – 1300 767 525


How is Insolvency Calculated

When a company is experiencing financial difficulties and is later placed into liquidation, the appointed liquidator must undertake a detailed forensic investigation into the affairs of the Company and the conduct of its officers to explain the reasons for the Company’s failure.

This will include a determination as to whether the Company was allowed to continue to trade while insolvent.

Company Directors will often ask how does a liquidator prove insolvent trading – and what does the liquidator look for when performing this role.

What is Solvency?

One should understand the definition of solvency is set out in section 95A of the Corporations Act. It states;

  • A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.

What is insolvent trading?

Insolvent trading occurs when a Company Director allows their company to trade and incur debts when it is insolvent and unable to pay those debts as and when they fall due for payment.

What Sections of the Corporations Act deal with Insolvent Trading?

Section 588G of the Corporations Act 2001 (Cth) states a Director has a positive duty to prevent insolvent trading by a company and that the section will apply if:

  • A person is a director of a company at the time when it incurs a debt;
  • The company is insolvent at the time, or becomes insolvent by incurring that debt;
  • At the time, there are reasonable grounds for suspecting the company is insolvent or would become insolvent

A person contravenes the section if:

  • They are aware at the time there are such grounds for suspecting insolvency
  • A reasonable person in a like position in a company in the company’s circumstances would be so aware.

Section 588M provides for recovery of compensation for loss resulting from insolvent trading from a director personally for a breach of this duty.

Insolvent Trading – penalties apply

If a director allows a new debt to be incurred knowing the company is insolvent and unable to pay those debts, the director may be guilty of insolvent trading and may become personally liable for the repayment of debts to the company or its individual creditors.

  1. A liquidator or an individual creditor may commence legal proceedings for an order that a director pay compensation for the damages incurred by the company or an individual creditor.
  2. A director may be disqualified from acting as a director if they are found guilty of insolvent trading.
  3. Further, fines of up to $200,000 may be applied as well as a gaol term for up to 5 years.

To determine whether a Company was solvent or insolvent and unable to pay its debts as and when debts fell due for payment, a liquidator will collect and examine the books of the company.

The liquidator will look for evidence of insolvency such as;

  • suppliers stopping credit and placing the company on COD.
  • suppliers demanding payment of the outstanding debt before resuming supply
  • whether at the time the company was generating ongoing and unsustainable losses
  • the company has poor cash flow and does not have sufficient funds to meet its short term needs
  • the company has exceeded its overdraft limit
  • the company is unable to obtain or access further credit or finance
  • creditors are demanding payment and threatening to commence legal recovery action
  • creditors are not being paid or are paid well outside of usual terms
  • debt continues to increase
  • unable to pay statutory obligations such as debts to the Australian Taxation Office for overdue taxes
  • asset being sold to fund trading
  • high staff turnover
  • incomplete books and Financial Records
  • essential maintenance of assets being postponed or ignored
  • issuing post-dated cheques and dishonoured cheques

If you are worried that your company may be showing signs of insolvency, contact The Insolvency Experts.

Call 1300 767 525

Directors have a positive duty to avoid insolvent trading

Directors must:

  1. stay constantly aware of the financial affairs and position of the company.
  2. prepare the books of the company and review its financial information regularly in order to determine whether the company can repay its debts as and when they fall due for payment.
  3. take positive steps to confirm the position of the company and realistically assess the available options if there is a question as to solvency.
  4. seek advice from a suitably qualified person if solvency is an issue
  5. act appropriately and in a timely manner to address any solvency issue

Are there defences to a claim for Insolvent Trading

A director being pursued for an insolvent trading may claim;

  1. There were reasonable grounds to expect the company was solvent at the time the debt was incurred
  2. The director relied on information produced by a competent and qualified person that lead to the view the company was solvent
  3. The director, was not involved in the management of the company for good reason, at the relevant time
  4. The director took all reasonable steps to stop the company from incurring the debt

Often these defences are difficult to access.

If you need help, call The Insolvency Experts on 1300 767 525


The Perils of Loud Letters of Demand

I thought I would pass on an article written by the solicitor, leading insolvency commentator and author of the Insolvency Bible, Michael Murray.

Source: The perils of loud letters of demand

A creditor being paid its debt following a letter of demand can be a Pyrrhic victory if the debtor ends up in insolvency and the liquidator or trustee demands the payment back from the creditor as an unfair preference.

The liquidator or trustee has to show that the creditor reasonably suspected that the debtor was insolvent for the payment to be recoverable.

Communications by the creditor may be evidence of that suspicion, in particular, if the demand letter is written in CAPITAL letters, and impugns the debtor’s solvency.

In Trenfield v HAG Import Corporation (Australia) Pty Ltd (No.2) [2018] QDC 129, there were email exchanges in standard font, in which the creditor, in fact, wrote that it was

“quite clear … that you have no intention of paying your account as per our trading terms, that is ‘as and when they fell due’ and this raises the issue of your trading position with regard to the Corporations Law (sic)”.

That was then followed by, as the Judge said, an email from the creditor

“in a much larger font, which I suspect is the email equivalent of shouting”.

The debtor “replied (in a standard font size)” with what the Judge said was “the ancient plea for more time”.

The judgment concerned the costs to be paid, in particular, whether indemnity costs should be ordered against the creditor for unduly resisting the liquidator’s claim.

While the capitalised email helped the liquidator’s case, a later email in standard font confirmed the indemnity costs order.  The creditor had emailed saying the debtor

“is unable to meet our overdue account ‘as and when it has fallen due’ and the inescapable consequence is the Robins is actually trading whilst insolvent””.

The lesson

In referring to the ‘ancient plea’, the Judge referred to the Bible, Matthew 18:26:

“Since the man was unable to pay, the master ordered that he be sold to pay his debt, along with his wife and children and everything he owned. Then the servant fell on his knees before him. ‘Have patience with me’, he begged, ‘and I will pay back everything’”.

However, unlike the creditor in this case, the master,

“had compassion on him, forgave his debt, and released him”.

The further lesson

Courts will not necessarily assume a suspicion of insolvency from a creditor’s robust letters of demand, which in some quarters are standard practice.

The potential for the necessary suspicion is raised if supported by other indicia.

But if ‘shouting’ is perhaps not always a giveaway, a creditor who ‘inescapably concludes’ insolvency is.

And writing strong letters of demand can be a two-edged sword, written carefully; but letters impugning the debtor’s solvency are best avoided.

The question why a creditor has to repay the money if it suspects or knows their debtor is insolvent is not clearly explained in insolvency law or policy.  It seems to stem from some sense of morality about the unfairness of a creditor knowingly taking the money resulting in other creditors being worse off.

At the same time, extracting a payment is not in breach of any law.

Keay’s Insolvency (10th ed, 2018, Ch 5) queries the reality of a stated purpose of preference law being to deter ‘the race of diligence’ of creditors to dismember the debtor before bankruptcy …’.

Would a creditor be deterred by the distant and uncertain prospect of a preference recovery?

Fingers crossed

Rather, the position is better stated in Nationwide v Franklins [2001] NSWSC 1120.

“There is nothing compelling a creditor somehow to remain pure by shunning a payment in respect of which there exists some theoretical future possibility of its proving to be preferential.

A normally motivated creditor would be inclined to accept such a payment conscious of any risk of disgorgement, and with fingers crossed to the extent indicated by the circumstances”.


Though it should be noted that creditors subject to model litigant obligations, such as the ATO, may decide not to accept a payment arrangement if the ATO is not satisfied that the debtor’s other creditors are being paid: PS LA 2011/14; and that if a demand for payment of a preference is made, the ATO may decide to repay under settled criteria.

Read more by Michael Murray: Demands by Liquidators – Trying their luck


Replacing a Liquidator – It Ain’t Easy!

Recent reforms under the Insolvency Law Reform Act intended to make the replacement of an External Administrator/Liquidator easier for creditors to achieve but in reality, it may have had the opposite effect.

In the past, liquidations instigated by the directors/shareholders required the appointee take the lead and put a resolution to creditors within 18 days of appointment that would allow either to confirm the liquidator or enable creditors to nominate and select an alternate.

Now, in the early stages, a liquidator is under no obligation to convene a meeting of creditors or to put a resolution regarding a replacement liquidator unless specifically directed by a sufficient percentage of creditors who know their rights, are proactive and understand the process.

It is true the reforms make replacement of a liquidator possible at any time during the winding up. However, while that may be useful where dissatisfaction with an incumbent liquidator’s performance exists, in reality, a replacement will rarely occur as the process and its associated costs are onerous and creditor interest tends to wane over time.

Assuming creditors know their rights, it is possible to replace a liquidator in the early stages of a liquidation – but it is a process that can be denied.

  1. If within the first 20 days after the resolution to liquidate is passed, less than 25%, but more than 5% in value of the creditors, in writing, direct the External Administrator to do so, the incumbent liquidator must convene a meeting of creditors.
  1. However, the External Administrator, acting in good faith, may form an opinion the request is unreasonable if:
  • Complying would substantially prejudice the interests of one or more creditors or a third party and that prejudice would outweigh the benefits of complying.
  • There is not sufficient available property (funds/assets) to comply.
  • A meeting dealing with the same matter has already been held or would be held within 15 business days after the direction is made.
  • The direction is vexatious.
  1. However, the incumbent forming that opinion cannot maintain that view as a request may become reasonable where:
  • Directing creditors agree to bear the cost of complying with the direction;
  • Directing creditors provide security for the cost of complying before the meeting is convened.

If creditors are sufficiently interested to overcome these hurdles, they will need to obtain and provide with their written direction

a) A Consent to Act; and

b) A Declaration of Independence, Relevant Relationships and Indemnities from the proposed alternate liquidator who may need to be satisfied as to how his fees and costs will be met in circumstances where there are limited funds available in the liquidation.

But fear not, if creditors fail to act in the first 20 business days after liquidation, they may still direct the incumbent to convene a meeting for the purpose of replacing the liquidator if;

  • At least 25% in value of creditors direct so in writing; or
  • Less than 25%, but more than 10% in value of creditors direct, and they provide security for the cost of holding the meeting before the meeting is convened.

Now if creditors get that far, they only need to worry about passing the resolution that requires 50% in number and 50% in value to vote in favour of the replacement.

  • If both are not achieved, the resolution will fail; and
  • There is no requirement that the incumbent use the casting vote

So, replacing a liquidator is possible, but it certainly ain’t easy!


ATO & ASIC Raid Pre-Insolvency Firms

The war on unregulated and unlicensed Pre-Insolvency advisers is gathering pace with 120 ATO, ASIC and Federal Police raiding businesses and homes across Melbourne and on the Gold Coast.

According to the linked article, the authorities are concerned that unregulated Pre-Insolvency firms are advising clients on how to avoid paying tax.

ATO and ASIC raid “pre-insolvency” firms allegedly encouraging phoenix activity

According to a recent press release by Smart Company, a raid of 13 properties linked to “pre-insolvency” firms allegedly found them to have been in some way encouraging phoenix activity.

The raid was linked to 2 specific Pre-Insolvency firms that have not as yet been named. The specific issues being targeted involve allegations of encouraging and facilitating tax avoidance, GST evasion, and “phoenix” activity.

Phoenix activity involves the transfer or sale of assets (at undervalue or for no consideration whatsoever) from one company to another.

Usually, the company selling or transferring its assets is hopelessly insolvent and has debts that far exceed the value of its assets.

The Company receiving the assets is usually, but not always associated with or under the control of the old directors. The purpose of the transfer is to remove the assets and relieve the failing company from having to pay its creditors.

The ATO and ASIC believe “pre-insolvency” advice can relate to “how to phoenix a company”. Such transactions are illegal and may result in directors being jailed.

Warning for your business

The peak Insolvency body, ARITA says small and medium businesses should seek advice from qualified practitioners if their businesses encounter financial trouble.

Regulation and qualification is all important as the ASIC representative says many pre-insolvency advisers don’t have much experience, and they may give advice that goes against the law.


Pre-Insolvency Adviser Convicted & Sentenced

This press release highlights ASIC’s continuing war on Pre-Insolvency business advisers who offer advice to companies in financial distress. The bottom line is that business advisers must give lawful advice or they will be held personally responsible for the illegal actions of their clients.

Business adviser guilty of aiding a director’s breach of duty

An ASIC press release says a Pre-Insolvency adviser who provided business advice to directors of struggling companies was convicted and issued a fine. Investigations conducted by ASIC found the adviser provided assistance that resulted in a director dishonestly using his position to conceal company assets from an appointed Liquidator.

A business adviser has been found guilty of dishonestly aiding or counselling a director to breach their director duties under the Corporations Act.

The press release says that in following the pre-insolvency adviser’s advice, the director had attempted to prevent the Liquidator from having access to the company assets and to retain the benefit of those assets for himself, rather than the creditors of the company.

Read the full ASIC media release here.

Advice from Unlicensed and Unregulated Advisers – ASIC says Don’t Risk it with Untrustworthy Advisers

ASIC Commissioner Greg Tanzer said ‘… business advisers, are trusted to give advice that is lawful and in the best interest of their clients…This outcome … sends a clear message to business advisers and other gatekeepers that they will be held personally responsible for knowingly providing advice to clients that causes their clients to act illegally’.

Apart from being convicted and fined, the adviser has also been disqualified from managing a corporation for a period of five years.


ATO Ramping Up Debt Collection

The ATO Tax Commissioner and the Second Commissioner have recently given speeches to the Tax Institute and the Tax Teachers Association. Both speeches point to a new and more aggressive approach to debt collection.

The attitude adjustment comes on the back of the ATO’s desire to achieve willing participation in the tax and superannuation systems.

Following a consultative process, stakeholders told the ATO that willing compliance may be achieved by:

  • Improved ATO service and efficiency
  • A simplified user experience
  • Simpler compliance and removal of red tape
  • More certainly and clearer communication
  • Security of data
  • Fair and respectful treatment
  • The ATO acting against those not complying

Based on the above, “Reinventing the ATO Blueprint” was developed and will guide the tax office in the coming years.

Acting Against Those Not Complying

The Commissioners acknowledge that litigation remains an important component of the ATO’s dispute and debt management strategy. They also noted that despite its increased efforts, the amount of outstanding debt has continued to rise in recent years.

As a result, the ATO is making changes to its debt recovery strategy. 

While the ATO says it will increase help and support for people who are trying to do the right thing, including giving them a more empathetic hearing and a more flexible and tailored approach to formulating payment arrangements, it does intend to:

  • Intervene earlier to prevent debts from escalating beyond control
  • Take legal action earlier where there is evidence a taxpayer is insolvent and should be placed into company liquidation or bankruptcy
  • Use is power earlier where a business has failed to pay its employees superannuation entitlements

The Commissioners point out that in the past, the ATO had waited for a taxpayer’s debt to escalate on average, to over $300,000 & $340,000 before initiating bankruptcy or company liquidation proceedings respectively.

The Commissioner went to the effort of comparing this practice against the practices of commercial creditors who take action at around $35,000 for individuals and $93,000 for companies.

So What Will Happen Next?

We have already seen the introduction of strengthened personal liability for company directors through the Director Penalty Regime – but what is going to happen next?

At what level of debt will the ATO now act to pursue individuals into bankruptcy and companies into liquidation? Will they act as early as commercial creditors?

Will we see more companies forced into liquidation? Certainly in recent weeks, there has been a dramatic rise in the number of winding up applications lodged by the ATO.

Speeches of the Tax Commissioners, Chris Jordan and Andrew Mills


This article is not to be construed as legal advice but is presented for information and research purposes only. No guarantee implied or expressed is given in respect of the information provided and accordingly no responsibility is taken by The Insolvency Experts or any member of the company for any loss resulting from any error or omission contained within this article.