Effective Solutions for a quick Business Recovery
Experience has proven that early intervention is critical in terms of maximising the options that are available to businesses and individuals under financial pressure. Our objective is to support clients and their advisors in addressing financial challenges by offering tailored solutions. Recognising the unique circumstances of each client, our approach involves gaining insights into specific issues and understanding the client’s financial position before providing expert advice on potential solutions.
Common issues that businesses tell us they are experiencing
- Cashflow/liquidity problems
- Reduction in profitability due to a drop in revenue or an increase in costs or a combination of both
- Trading losses
- Working capital challenges caused by rapid growth without being sufficiently capitalised
- Unpaid and overdue debts owed to creditors including the ATO
- Lack of access to funds or alternative finance
- Repayment arrangements with creditors
- Creditors initiating actions to recover debts
- Disputes either due to a breakdown in a relationship or with another party
What is insolvency?
Insolvency is characterised by the inability of a company or an individual to meet their financial obligations as they come due. Assessing the solvency or insolvency of a company or individual is not a straightforward task.
The Corporations Act provides that directors have a duty to prevent insolvent trading. Therefore, it is imperative for directors to demonstrate due diligence by regularly evaluating the financial status of the company they oversee. In the presence of insolvency indicators, directors should promptly take suitable action, such as seeking professional advice.
Indicators of insolvency include but are not limited to
- Continuing trading losses;
- Overdue taxes;
- Paying creditors outside agreed terms;
- Implementing special arrangements with creditors;
- Payments to creditors of rounded sums which are not reconcilable to specific invoices;
- Suppliers placing the company on COD, or otherwise demanding special payments before resuming supply;
- Poor relationship with current financier, including inability to borrow further funds;
- No access to alternative finance;
- Inability to raise further equity capital;
- Threats of enforcement action or creditors commencing enforcement action to recover debts;
- Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.
It is crucial not to ignore indicators of insolvency. Experience has proven that early intervention can significantly reduce the impact of an insolvency process.
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Business Improvement & Strategy
Adapting to a fast-changing business environment is crucial for long-term success and sustainability. We understand that every business is unique and therefore there is not always a ‘one size fits all’ solution. Our aim is to establish a collaborative relationship with businesses to gain a deep understanding of the challenges they face, and provide tailored, practical, actionable solutions to navigate issues and drive positive change.
It is important to note that improving the performance of a business is an ongoing process that requires a willingness to adapt and evolve with changing circumstances. This requires a business to regularly reassess their strategies and be open to making adjustments based on feedback and performance metrics.
Small Business Restructuring
The Small Business Restructure (SBR) process commenced on 1 January 2021 in response to the COVID-19 pandemic. The purpose of it was to provide a less complicated and cheaper alternative to other formal insolvency processes. The SBR process has similarities to the Voluntary Administration/Deed of Company Arrangement processes in that it provides directors and the company time to develop and propose a plan to creditors to pay off liabilities either in full or in part, within a period not exceeding 3 years.
To be eligible for a restructuring on the day on which the restructuring practitioner is appointed:
- total liabilities of the company must not exceed $1 million;
- no person who is a director of the company, or who has been a director of the company within the 12 months before the appointment of the restructuring practitioner, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years, unless they are exempt under the regulations; and
- the company must not have undergone restructuring or been the subject of a simplified liquidation process within the preceding seven years.
The SBR process is different to other formal insolvency processes in that it allows eligible companies to:
- total liabilities of the company must not exceed $1 million;
- no person who is a director of the company, or who has been a director of the company within the 12 months before the appointment of the restructuring practitioner, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years, unless they are exempt under the regulations; and
- the company must not have undergone restructuring or been the subject of a simplified liquidation process within the preceding seven years.
Unless extended, within 20 business days after a Restructuring Practitioner is appointed to a company, the company with the assistance of the restructuring practitioner develops a restructuring plan proposal.
Prior to a restructuring plan proposal being sent by the restructuring practitioner to creditors, the company must have (or have substantially complied with the requirement to have):
- paid the entitlements of employees that are due and payable, and
- given returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act).
Unless the two criteria above have been satisfied the company cannot propose a restructuring plan.
A decision about whether a restructuring plan should be accepted is made by affected creditors. The plan is only approved if it is supported by more than 50% in value of unrelated creditors. If approved, the directors remain in control of the business and the Restructuring Practitioner administers the plan and distributes money to creditors.
Safe Harbour
Recognising the importance of early intervention, and the ability to preserve value with a well-designed and executed turnaround plan, we provide advice around ‘Safe Harbour’. Subject to certain criteria being satisfied, the Safe Harbour provisions of the Corporations Act allow directors of financially distressed businesses to avail themselves of protections from insolvent trading actions.
General Advisory Services
Our experience and knowledge of the likely outcomes under the formal corporate insolvency processes allows us to provide general advice to directors and companies to navigate issues such as negotiating payment arrangements and settlements with creditors.
We utilise the same knowledge when providing advice to creditors as to the merits and commerciality of undertaking actions to recover debts from corporate entities.
Insolvency Services
The terminology associated with corporate insolvency is frequently misinterpreted and employed interchangeably, leading to confusion among stakeholders and creditors who may not be well-versed in the distinct processes involved.
Voluntary Administration
The appointment of a voluntary administrator to a company serves as a temporary step, anticipating a prompt evaluation of the company’s financial position and a decision on the subsequent course of action by its creditors. Typically instigated by directors who perceive the company as insolvent or at risk of insolvency, the appointment of a voluntary administrator underscores the acknowledgment of the necessity for an impartial, adequately qualified and experienced individual to assume control of the company’s operations.
The purpose of a voluntary administration is to provide a company with a temporary halt, allowing for the administration of its business, property, and affairs in a manner that:
- Maximises the likelihood of the company’s survival, or at least the continuation of its business; or
- If continuation is not feasible, ensures a more favourable return for the company’s creditors and members compared to an immediate winding up of the company.
While a company is in voluntary administration there is a moratorium or stay on legal actions by unsecured creditors against the company.
While a company is in voluntary administration there is a moratorium or stay on legal actions by unsecured creditors against the company.
Key advantages to the Voluntary Administration process are:
- Maximises the chances of the company or its business continuing in existence;
- Control is transferred to an independent insolvency practitioner;
- The flexibility and ability to reach a variety of outcomes;
- Enforcement action by unsecured creditors is stayed;
- In the absence of the Court ordering an extension to the convening period, the Administration period is generally short.
What is the Voluntary Administration process?
1. Appointment
The voluntary administration begins on the day that a voluntary administrator is appointed to the company.
The voluntary administrator can be appointed by:
- the directors of a company – most common; or
- a secured creditor (the secured creditor must have an enforceable charge on the whole or substantially the whole of the company’s property); or
- a liquidator (or provisional liquidator).
2. The first meeting of creditors
Within eight business days of being appointed, the voluntary administrator must hold the first meeting of creditors and at least five business days’ notice of the meeting must be given to creditors.
At the first meeting, creditors may replace the administrator and/or form a committee of inspection.
3. Investigations and reporting
Once appointed, a voluntary administrator will investigate the affairs of a company and issue a report to creditors which will include a statement setting out an opinion, with reasons, about the alternative options available to creditors and which option the voluntary administrator believes is in the best interest of creditors. See point four below for further information regarding the options available to creditors.
4. The second meeting of creditors
Unless the Court permits an extension of time, the second meeting to decide the company’s future is to be held within twenty-five business days of the appointment or thirty business days if the appointment is around Easter or Christmas.
At least five business days’ notice of the meeting must be provided to creditors.
At the meeting, creditors have the option to decide:
- That the administration come to end and the control of the company return to the directors; or
- To accept a deed of company arrangement (if proposed); or
- That the company be wound up and a liquidator be appointed.
Deed of Company Arrangement (DOCA)
A Deed of Company Arrangement (DOCA) is a formal agreement between a financially distressed company and its creditors. The DOCA outlines how the affairs of the company will be managed in an attempt to achieve more favourable outcome for creditors than immediate liquidation would provide.
The voluntary administrator will work with the company’s directors and stakeholders to develop a proposal for the DOCA. This proposal outlines how the company’s debts will be dealt with and may include repayment plans, compromises, or other arrangements.
There is flexibility in terms of the proposals in a DOCA and will depend on the particular circumstances of the company. The types of proposals include:
A Deed of Company Arrangement (DOCA) is a formal agreement between a financially distressed company and its creditors. The DOCA outlines how the affairs of the company will be managed in an attempt to achieve more favourable outcome for creditors than immediate liquidation would provide.
The voluntary administrator will work with the company’s directors and stakeholders to develop a proposal for the DOCA. This proposal outlines how the company’s debts will be dealt with and may include repayment plans, compromises, or other arrangements.
- A simple moratorium freezing claims for a prescribed period;
- A composition – usually creditors agreeing to accept payment by way of instalments of less than the sum owed;
- A reconstruction;
- Any combination of the above
In the event that creditors vote for a proposal that the company enter a DOCA
(by 50% in number of the creditors who are voting and 50% in value), the company must sign the deed within 15 business days of the creditors’ meeting, unless the court allows a longer time. If this doesn’t happen, the company will automatically go into liquidation, with the voluntary administrator becoming the liquidator.
The DOCA binds the company, its officeholders and shareholders along with all unsecured creditors, even if they voted against the proposal. It also binds owners of property, those who lease property to the company and secured creditors (if they voted in favour of the deed). In certain circumstances, the Court can also order these people be bound by the deed even if they didn’t vote for it.
A deed administrator oversees the company’s management under a DOCA. Generally, the voluntary administrator will become the deed administrator on the basis that he or she has an understanding of the company’s affairs and it is therefore impractical and potentially more costly to replace the incumbent.
The key advantages of a DOCA include:
- A great deal of flexibility. This enables a DOCA to be tailored to an individual company’s circumstances;
- Maximising the chances of the company continuing in existence;
- Providing for a better return to creditors than liquidation;
- The avoidance of liquidation and certain recovery provisions only available to a liquidator being pursued i.e. insolvent trading, unfair preferences and uncommercial transactions; and
- Another potential benefit is the ability to offset trading losses against future profits;
Liquidation
When a company is in liquidation its financial affairs are being wound up.
Liquidation doesn’t always occur as a result of insolvency. A solvent company can be wound up and this process is called a Members’ Voluntary Liquidation.
The more common processes in terms of the winding up by a liquidator of an insolvent company are Creditors’ Voluntary Liquidation and Court Liquidation. The liquidation of an insolvent company allows an independent registered liquidator to assume control of a company so its affairs can be wound up in an orderly and equitable way to benefit creditors.
What is the liquidator’s role when winding up an insolvent company?
A liquidator has a duty to a company and its creditors. Their role is to:
- Preserve, protect, and realise (where it is commercial to do so) company assets;
- Investigate and report to creditors about a company’s affairs including any potential recovery actions or existence of transactions which have resulted in property being dealt with in an improper manner i.e. illegal phoenix activity and any rights of action against officers of the company;
- Inquire into the failure of the company and report offences to the ASIC;
- Following the distribution of monies in the accordance with the priorities of the Corporations Act, finalising the winding up.
Creditors’ Voluntary Liquidation
Generally, a Creditors’ Voluntary Liquidation (CVL) is initiated by members (shareholders) who have resolved that a company is insolvent and company to be wound up. As the name suggests, the process involves the voluntary appointment of a liquidator.
The key advantages of a CVL include:
- The stakeholders are in control of the timing and appointment a liquidator;
- Control is transferred to the liquidator. The appointment of an independent person from outside of the company generally provides creditors with a sense of closure and some comfort that a company’s affairs are being dealt with in an orderly and equitable way;
- Minimises the likelihood of risk in terms of the personal liability that attracts to directors in relation to insolvent trading;
- Once appointed, the liquidator and his or her office deal with creditors. This can relieve the pressure on stakeholders and staff of a company from having to take phone calls from creditors and respond to emails and letters;
- Following the appointment of a liquidator to a company, unsecured creditors cannot commence or continue legal proceedings without leave of the Court.
- Providing they are eligible, former employees should be able to make a claim to the Fair Entitlements Guarantee (FEG) scheme in respect of unpaid entitlements owed to them.
A CVL may also come about if creditors of a company in Voluntary Administration resolve at the second meeting of creditors that a company be wound up or following the termination of a deed of company arrangement.
Simplified Liquidation
A Simplified Liquidation is a type of creditors’ voluntary liquidation (CVL) which can be adopted after a company has been placed into a CVL. To be eligible for the Simplified Liquidation process certain criteria must be met including that a company must not have liabilities in excess of $1 million (excluding contingent liabilities) and it must up to date with its tax lodgements. The simplified process is intended to be more cost effective due to reduced investigation, reporting and distribution requirements however much of the process remains the same.
Court Liquidation
A Court Liquidation is a process that involves a party applying to Court for a company to be wound up. If it can be established that a company is insolvent, The Court will make an order that a company be wound up in insolvency. The most common ground for establishing insolvency is the non-compliance with a statutory demand (a demand for payment) served by a creditor. If the Court makes a winding up order, it will appoint a liquidator to administer the winding up.
Provisional Liquidation is a type of liquidation used by courts to preserve the assets of the company when a liquidation is pending.
Receivership
Receivership is often confused with liquidation.
A company will generally be placed into receivership by a secured creditor, or in special circumstances by the Court. The secured creditor can appoint a receiver because they hold a security interest over a company’s assets that allows them to appoint a receiver. The powers of the receiver are set out in the security agreement, appointment documentation and the Corporations Act. Under the terms of their appointment, if a receiver has the power to manage the company’s affairs, they are known as a receiver and manager or a managing controller.
The receiver’s main duty is to the secured creditor that appointed them. Generally, the receiver’s role is to:
- collect and sell enough of the secured assets to repay the debt owed to the secured creditor (this may include selling assets or the company’s business)
- pay out the money collected in the order required by the Corporations Act
- report possible offences or other irregular matters they come across to ASIC.
Personal Service Offerings
(Bankrupty and Personal Insolvency Agreements)
With rising interest rates and cost of living expenses, it comes as no surprise that more individuals are finding themselves in financial difficulty and unable to manage their debts. We provide advice to individuals in financial distress about the alternatives available to them. (DEFINITION?)
General Advisory Services
Our experience and knowledge of the likely outcomes under formal personal insolvency processes allows us to provide general advice to individuals to navigate issues such as Director Penalty Notices and negotiating payment arrangements and settlements with creditors.
We utilise the same knowledge when providing advice to creditors as to the merits and commerciality of undertaking actions to recover debts from individuals.
Bankruptcy
Bankruptcy relates to the insolvency of an individual. There are similarities between the liquidation of a company and bankruptcy of an individual in terms of the commencement. That is, a person may become bankrupt voluntarily or a creditor can make a person bankrupt by way of an application to Court for a sequestration order.
Bankruptcy will generally provide a person with relief in terms of creditors pursuing most debts and allow a fresh start. There are however consequences to a person becoming a bankrupt, which include but are not limited to the following:
- A trustee will be appointed to manage the bankruptcy administration;
- A bankrupt is required to keep this or her Trustee informed of any changes to their circumstances;
- A bankrupt must obtain permission for his or her trustee prior to travelling overseas;
- A bankrupt cannot participate in the management of a corporation;
- All divisible property of the bankrupt at date of bankruptcy vests in his or her trustee and the trustee may sell those assets. Certain property does not vest in a bankruptcy trustee. This property generally includes most household effects, life and superannuation policies and basic and equity in a motor vehicle and tools of trade up to a prescribed amount;
- A bankrupt will be required to pay compulsory contributions to his or her estate if he or she earns an income in excess of a prescribed threshold;
- A bankrupt is unable to incur credit of approximately $6,850 without disclosing his or her bankruptcy.
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What is the bankruptcy trustee’s role?
Typically, a bankruptcy trustee role entails the following:
- Giving notice of the bankruptcy to creditors and information about the administration of the estate to a creditor who reasonably requests it;
- Investigating a bankrupt’s affairs to determine the existence of property that may be realised for the benefit of the estate and any potential recovery actions that may be void against the trustee i.e. a transfer of property;
- Preserving, protecting, and realising (where it is commercial to do so) divisible property that forms part of the bankrupt estate;
- Reporting to creditors about a bankrupt’s affairs and the likelihood of creditors receiving a dividend from the estate;
- Taking whatever action is practicable to try to ensure that the bankrupt discharges all of the bankrupt’s duties under the Bankruptcy Act;
- Considering and reporting offences against the Bankruptcy Act to the relevant authority; and
- Adjudicating the claims of creditors and distributing monies in the accordance with the priority provisions of the Bankruptcy Act.
How does a bankruptcy administration end?
Unless a trustee has lodged an objection, a person will receive the benefit of being automatically discharged from bankruptcy 3 years and 1 day from the day that the Official Receiver accepts his or her Bankruptcy Form. Certain types of debts are extinguished when a person is discharged from bankruptcy, the exceptions to this are:
- Penalties and fines imposed by a Court in respect to an offence against a law.
- Damages claims from accidents (e.g. car accidents) unless, before bankruptcy, the sum of damages has been fixed by a Court judgment or the debtor has a written agreement with the other party as the quantum of damages.
- Debts under maintenance agreements or orders (which includes child support debts).
- Certain student (HELP) debts.
- Debts incurred by fraud.
It is possible for a bankruptcy to come to end earlier if it is annulled.
A bankruptcy will be annulled if:
- Creditors accept an offer of composition (an offer to pay creditors an amount in full and final settlement of debts) made by the bankrupt pursuant to Section 73 of the Act;
- If all debts and costs of the bankruptcy administration are paid in full;
- The bankrupt may apply to the Court for an order annulling the bankruptcy on the basis that the debtor’s petition should not have been accepted or that the sequestration order should not have been made by the Court.
A Personal Insolvency Agreement (PIA) under Part X of the Bankruptcy Act is a flexible way for an individual to come to an agreement with their creditors to settle debts without becoming bankrupt.
Personal Insolvency Agreement
A Personal Insolvency Agreement (PIA) under Part X of the Bankruptcy Act is a flexible way for an individual to come to an agreement with their creditors to settle debts without becoming bankrupt.
A PIA may involve:
- a lump sum payment to creditors via the trustee either from the debtor’s own money or money from a third party or parties (for example, from family or friends);
- an assignment to the trustee of property to be sold, with the net proceeds distributed to creditors or the payment of the sale proceeds of the property paid to the trustee for distribution to the creditors;
- periodic payments to the trustee to be distributed to creditors;
- any combination of the above.
Except with leave of the Court, an individual who enters into a PIA is precluded from managing a corporation until compliance with all of the terms of the agreement has been satisfied. To limit the period of ineligibility, an individual may therefore opt to put forward a proposal that can be accepted and complied with in a short term.
For the proposal to be accepted, it must be passed by a special resolution at a meeting of creditors. That is, a majority in number and at least 75 per cent in debt value of the voting creditors must vote in favour. It must be noted that there is no guarantee that creditors will accept the proposal.
Debt Agreement
A debt agreement, also known as a Part IX, is a legally binding agreement between an individual and their creditors. Eligibility criteria applies in terms of the maximum debts, assets and income a person can have/earn. Whilst we have a working knowledge of debt agreements, we do not offer this service.
Part IX of the Bankruptcy Act provides for a debtor putting a proposal to their creditors regarding repayment of provable debts. Creditors will then vote as to whether to accept or reject the proposal. The proposal will specify the amount creditors will receive and the period over which the debtor will pay the total.
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