What actions to take if you suspect Insolvency

Transcript of Video

Hi and welcome to the Insolvency Experts — I’m Steven Kugel.

So you suspect your company may be insolvent — what do you do?

Clearly the law requires you to do something as if you do nothing you risk the potential of an Insolvent Trading claim by a liquidator or creditors and the loss of personal assets.

The first thought of most directors will be to invest in their company — that is mortgage the house or sell personal assets, borrow from family and friends to prop up the business. And these ideas are perfectly acceptable but should only ever be done if the business has good prospects moving forward. If there is not excellent evidence that the company will perform well in the near term, the idea of putting personal assets into the business in many cases is a recipe for disaster.

Alternative Solutions

Alternatively, you may consider doing what a lot of people have been doing over the past few years since start of the Global Financial Crisis, and that is to go out and renegotiate your debt with your creditors including the Australian Taxation Office. That is rescheduling your debt.

In recent times, the ATO had been agreeable to rescheduling debt by entering into repayment arrangements over 12 or 24 months — often without interest or penalties.

There is an argument that if your creditors are prepared to accept such arrangements, that a debt that was otherwise due and payable now is only going to be due and payable in small slices as each month in the cycle passes — this can mean the difference between a company being solvent rather than insolvent.

Another thing that can be done is to trade on a COD or Cash on Delivery Basis. If you can trade on a COD basis, you are not asking for credit that you cannot repay as and when it falls due and you are certainly not worsening the insolvency or increasing the liabilities of the company. Continued trading on a COD basis is perfectly acceptable and will not expose a director to an insolvent trading claim if the company later enters liquidation.

Of course another alternative that needs to be explored is the idea of a formal appointment such as a Voluntary Administration through which an attempt could be made to save and restructure the business and reach a formal compromise position with the creditors and if that is not possible, one must explore ceasing to trade the business and perhaps the liquidation of the company.

Whatever the case, a director is required to take positive steps to ensure a company does not trade while insolvent and this is particularly important in terms of protecting a director’s personal assets from risk.