Here we present some general advice to the directors of companies in financial difficulty to help you avoid insolvency, or if that is not possible, to minimise the damage brought about by business distress.
The Critical Importance of Early Action
We have seen many instances where directors have waited too long before taking decisive action to deal with their company’s financial difficulties. In some cases, the outcomes which may have been achievable from an early voluntary administration are diminished or lost completely, due to the build-up of trading losses and other damage, including the crystallisation of directors’ guarantees on leases and equipment finance contracts which are in default.
Director Penalty Notice! What are they, and what are the consequences?
The Australian Tax Office may issue a DPN against you if your company does not pay PAYG (pay-as-you-go) tax deducted from employee wages, GST and superannuation guarantee amounts on time. If you receive a DPN, you must act immediately.
What is a Statutory Demand? What impact does it have?
A statutory demand is a notice to a debtor company (issued under section 459E of the Corporations Act) requiring payment of a debt due (or to secure the debt or enter into an agreed payment arrangement) within 21 days. The debt must be $4,000 or greater.
Non-compliance with a statutory demand is the most common basis for a creditor to file an application for a winding up of a debtor company.
What is Insolvent Trading?
Can I be made personally liable for my company's debts?
Company directors have a statutory duty to ensure their company remains solvent – that is, able to pay its debts as and when they fall due.
How business failure destroys value in company & personal assets
When a business gets into financial difficulty, invariably there is loss of value in the company’s assets. Loss of value in personal assets often follows. Loss can occur in many ways, and affect all types of assets.
Read more to see examples of value destruction.
Proactive communication with creditors is critically important
Everyone wants to be paid on time!
But some debtors are chronically late payers, and this means all businesses require an effective system for prompt debtor follow up.
In most cases, if you don’t pay you can expect a call from an accounts receivable person in your supplier company. Continued non-payment is likely to result in an escalating series of calls or emails, followed by letters of demand and legal recovery proceedings.
Why your business may be running out of cash
There could be many factors which together have strangled your cash flow. Your business may even be profitable on paper, but still be suffering a liquidity crisis.
Slow paying debtors or bad debts are starving your business of cash flow
We have seen time and again, the owners of profitable businesses (on paper) become frustrated at the behaviour of slow paying debtors.
A major contract has become unprofitable
In industries where a small number of high value contracts are entered into each year (eg the building industry), one unprofitable contract could wipe out all the profit earned on other contracts for the year and put your company into a loss position.
Your bank has refused to extend the overdraft or another lender has refused finance
Business owners facing a cash flow deficiency may approach their own bank or an alternative bank to seek new or increased overdraft facilities.
However, banks are naturally risk averse and there may be other options.
Key staff have left because they could see “the writing on the wall”, leaving you with critical staff shortages
Sometimes staff in key areas of financial responsibility become aware of a company’s difficulties through their position, or in discussions with other members of staff. Once rumours start to circulate, it may be difficult to get the genie back into the bottle.
If accounting and finance staff believe that financial failure is imminent, they may leave to find jobs elsewhere. Your company could be placed in difficulty if key managerial personnel leave at a critical time for the company.
Depending on circumstances, it may be possible to mitigate the damage through an early business restructuring program.
If you’re affected by key staff resignations, call us now to discuss your options.
Importance of good record-keeping
It’s critically important for all businesses to maintain accurate books and records, to regularly monitor performance and take proactive steps when the business shows signs of deterioration.
You’re not sure what it costs to produce the goods and services that you sell
As a manufacturer or service provider, you may be operating on ‘rules of thumb’ in the calculation of your production costs. Unless you have a proper costing system, you may not know your true costs of production.
You need to retrench staff due to a downturn in the business, but can’t afford to pay their entitlements
The key consideration in these circumstances is, will the business be viable after the retrenched staff are paid out, if finance can be sourced?
If the answer is yes (and we can assist in a ‘future viability’ assessment) the preferred course may include sourcing finance facilities in conjunction with a Business Turnaround strategy. If the business seems destined to continue struggling after downsizing then an alternative strategy such as Small Business Restructuring or a Deed of Company Arrangement may be appropriate. At IRT Advisory, we have the experience to advise you in relation to all of these matters.
Always seek quality, professional advice when your business is struggling.
You believe you could trade out of trouble if only you could get creditors off your back for 12 months
Sometimes, otherwise well managed businesses are hit with a one-off event, such as a major bad debt or short term period of unprofitable trading, which gives rise to temporary illiquidity. As the owner or director, you may believe that you can trade out of difficulty, given time.
You need to restructure or sell the business, but you’re paralysed from taking action by fear of what is to come
We understand the human emotions associated with financial difficulty. As the debtor, or the director of the debtor company, you may feel embarrassed to admit to people you have dealt with for years, that you cannot pay them in full and on time.
Your BAS returns are in arrears and you’re worried about finding the money to pay GST, PAYG and superannuation liabilities
It’s common for businesses running short of cash to use unremitted GST, PAYG tax deductions and superannuation contributions as working capital.
Your superannuation contributions are a long way in arrears
The law treats employee superannuation contributions with one of the highest priorities for payment. There are severe penalties applying to businesses who do not pay superannuation obligations on time.
The ATO has garnisheed your bank account or key book debts
The ATO has wide powers to enforce the collection of taxes. One of these powers is the garnishee of book debts owed to the taxpayer or credit balances held in bank accounts.
Your bank has appointed an investigating accountant to review your business
As the secured creditor, your bank will have a number of powers in the event of any default occurring, including the right to appoint an investigating accountant at your expense to review the business and make recommendations to the bank on what action it should take.
These types of engagements are often expensive.
Marital problems and their potential impact on your business and personal assets
Marital breakdown can lead to many issues for a business owner. In the case where one party has built up the business, and the ex-spouse now wants a share in the context of a family law proceeding, the business must be valued for the purpose of the proceeding.
You have already sold your business or company assets, and there is not enough money from the sale to pay all your company’s creditors
This is a not uncommon scenario. It is important to deal with the situation appropriately, rather than to just grab the cash and abandon the company.