Question: When will I know if the company is in financial difficulty
There can be many factors to consider when looking at financial distress. However initially a company starts off in this cycle by not paying critical creditors such as outstanding taxes, utility providers etc. Slow or not paying creditors is symptomatic of a business that has insufficient cash-flow. Decisive action and professional advice must be taken to identify and evaluate the reasons that this is occurring and what steps can be taken to remedy it if possible.
Question: What is Trading Whilst Insolvent?
There are both civil and criminal offences for a Director if a Court determines that the Director has allowed the company to be traded whilst it is insolvent. Most importantly if found guilty, then the Director’s personal assets are able to be pursued as compensation to the company’s creditors.
Directors should be aware that they have a clear duty to prevent this and if they are encountering difficulties in paying their debts as and when they fall due, they should seek immediate advice from professionals that have necessary expertise in this dynamic area. We advise Directors in this position on a regular basis on the most appropriate manner in which to mitigate their risk in allowing a company to continue to be traded.
Question: What if I’ve received a Director Penalty Notice (“DPN”)?
DPN’s can be issued by the Australian Taxation Office (“ATO”) or the respective Offices of State Revenue in most States. They are typically issued by these Government Departments to recover various classes of outstanding taxes, such as Pay-As-You-Go Withholding (“PAYG”), Payroll Tax and more recently Superannuation Guarantee Charge (“SGC”).
DPN’s isssued by the ATO give the Director twenty-one (21) days to undertake one of the following options:
Pay the debt in full;
Reach a payment arrangement with the Government Department;
Place the company into Voluntary Administration; or
Place the company into Voluntary Liquidation.
Failure to comply with the DPN may result in the Director becoming “personally liable” and therefore places all the Director’s personal assets at risk.
You can be pursued personally and if left unattended can be declared bankrupt. Why unnecessarily expose yourself to such risk and put everything on the line?
If you do receive DPN you should immediately seek advice from Jones Partners to can discuss the options so as to mitigate any personal exposure.
We have advised and acted for many Directors in these situations and understand the stress levels that often come when a DPN is received. It can also be a sign that the financial position of the business is precarious and it is important that Directors adequately discharge their duties under the Corporations Act.
It is also important that you ensure that you keep your residential address updated on the company’s register as maintained with the Australian Securities and Investments Commission (“ASIC”). It is this database that will be used to identify your residential address and if it is incorrect, then you are likely still to be deemed to have received the DPN even though it may have gone to a former address.
Question: If I am a Director of a company that is placed into Voluntary Administration or some kind of Liquidation, does this mean that I can still be a director of other companies?
Should you have been involved with several companies that have been placed into external administration and / or committed other offences for which you have been prosecuted by ASIC, then there may be a banning order that has been placed on you prohibiting you from managing a corporation. You can check whether you are subject to a banning order by going to the ASIC website.
Generally speaking if you have been a Director of more than two (2) companies that have been placed into external administration within a seven (7) year period than ASIC may consider a banning order.
Question: What information will I be required to provide during a Liquidation?
You will be required to provide the Liquidator with a report detailing the assets and liabilities of the company and complete a questionnaire detailing the business conducted by the company. In addition you will be required to provide the liquidator with all books and records (particularly financial) maintained by the company. Failure to do so is an offence and can result in being prosecuted by ASIC.
Question: Will employees receive payment for their entitlements if the company is placed into liquidation?
There is presently a Federal Government Scheme known as FEGS (formerly GEERS & EESS) which provides for various employee entitlements upon the insolvency of a business. FEGS does not cover outstanding superannuation. Upon liquidation, the liquidator would notify and provide all staff with claim forms and assist them with completion based on the company records available.
Question: What about Personal Guarantees I might have given?
Have you been required to give guarantees in relation to the conduct of the company? They can typically be required where leases and trade accounts are involved.
It is important to recognise that should a company encounter financial difficulty, then ultimately these guarantees could be called upon which can expose you personally to pay the debts incurred by the company. We regularly assist Directors in understanding the likely ramifications should this occur. We also take a proactive role in working with Directors to achieve practical solutions when considering and giving guarantees. In addition, we also work closely with other professionals to develop sound strategies regarding structuring of a company and Director’s affairs from inception.
There are obviously other areas of consideration for Directors. Whilst we believe that careful consideration should be given to being appointed a Director, we also recognise that certain events can occur during a company’s life cycle which sometimes are outside of the Director’s control. We seek to provide Directors with the practical advice and solutions required in an ever changing and dynamic regulatory environment.
Question: What about Restructuring the company prior to appointing a Liquidator?
We have seen many instances where Directors endeavour to restructure the assets of a company at a time when it is or likely to be insolvent. Such efforts typically are capable of being unwound or clawed back by a Liquidator in circumstances where there has been a detriment caused to creditors. As such they are usually unsuccessful. It is more prudent when there is a realisation that the company may be in some form of financial crisis that professional advice is sought.
The law in this area is ever evolving and there have recently been several cases initiated against advisors and Directors who seek to restructure the affairs of an insolvent company.
Question: What is the impact of bankruptcy on assets and income?
When an individual enters into bankruptcy, the Bankruptcy Act places certain restrictions on the value of assets and income that the bankrupt can retain / earn whilst an undischarged bankrupt. The link below provides certain information in this regard:
Question: Who Can Take Recovery Action?
Creditors you owe money to such as credit card providers, trade suppliers, the Australian Taxation Office are able to commence formal legal proceedings in the Courts to recover amounts due to them. If left unattended by you, it could ultimately see you declared bankrupt.
Have you recently received or been served any of the following documents:
If you have received any of the above documents you should seek urgent advice from Jones Partners who will be able to discuss the ramifications and options available to you. Receipt of some of these documents can constitute an act of bankruptcy and it is important that the right advice is obtained.
Question: When should I consider getting professional advice concerning my financial affairs?
If you are experiencing difficulties in making payments on time, ie credit cards, loan payments or other amounts and there is unlikely to be any significant change to this situation in a short period (such as obtaining gainful employment), you should speak to an insolvency professional. There are many service providers that will offer short-term finance and other options as a means to deal with financial difficulty. We believe that an action plan implemented and monitored by a professional is typically required in these situations. Obtaining short-term finance can invariably increase the level of financial difficulty if the core issue is not addressed.
Question: How long am I bankrupt for?
Generally three (3) years although this can be extended if there are certain non-disclosures or other offences committed by you. At the end of three (3) years the individual is automatically discharged. Thus no application required by the bankrupt to be discharged. Usually your Trustee will notify shortly after you have been discharged.
Examples of where the bankruptcy period may be extended to five (5) years are:
Bankruptcy can be extended to eight (8) years in certain circumstances such as:
Question: What happens to creditors that I owed money to when I’m bankrupt?
After bankruptcy you are discharged from all provable debts. Provable debts are debts for which a claim can be made in your bankruptcy. Generally the position is as follows:
Unsecured creditors: these may consist of credit card providers, personally guaranteed liabilities, school fees etc. Such class of creditors can take no further action against you once bankruptcy is declared and have a claim in the bankruptcy.
Secured creditors: this class of creditor typically has security against an asset whereby they are able to take enforcement action in a bankruptcy scenario. This would generally be the case if were behind in repayments as at bankruptcy and such arrears position continued. Regard would also be had to the value of the security. The most common example of this type of creditor would be a Bank or Financier that has a registered mortgage over real estate.
If the secured creditor entered into possession of the asset under the terms of their security and incurred a loss, they are then entitled to lodge a claim in the bankruptcy. Typically if continued use of the asset is desired (ie family home) then there will need to be correspondence with the secured creditor accordingly. Further, the Trustee will be required to assess what equity (ie surplus over the debt value) there is in the asset and seek to realise it for the benefit of creditors.
It is important to note that there are certain debts that aren’t discharged as a result of bankruptcy. Common examples are certain fines/penalties for law breaches, accumulated HECS debt and Child Support.
Creditors who were owed amounts up to the date of bankruptcy should be directing their enquiries to your Trustee once they are aware that you are bankrupt. You should ensure that creditors who continue to contact you are directed to your Trustee.
Question: Can my bankruptcy be cancelled early?
Yes this is done via a term known as “annulment”. It generally involves creditors accepting something less than payment in full or alternatively you paying all creditor’s debts and Trustee’s fees.
Question: Can I travel if I am declared bankrupt?
Upon bankruptcy your Trustee may require you to surrender your passport. Failure to surrender it is an offence.
It is only in the case of overseas travel that you need to seek the permission of your Trustee. You will be required to provide details to your Trustee regarding the reasons for the anticipated travel. For instance is it:
As part of considering the request for travel, your Trustee is likely to consider the following aspects:
In certain circumstances such as those described above your Trustee may refuse permission to travel.
There are serious impacts if you travel overseas without your Trustee’s consent. This can include an extension to your bankruptcy, in addition to possible criminal offences, ie up to three (3) years imprisonment.
How and when should I apply for permission?
As soon as you become aware that you may need to travel overseas you should contact your Trustee and discuss your request. You should then provide to your Trustee the following details:
Please ensure you provide your Trustee with adequate time and details in order to properly consider and deal with your request.
Question: If I am bankrupt can I be a director of a company?
No during the term of a bankruptcy the Corporations Act specifically precludes disqualifies you from being a director of a private or public company. This is an important pre-bankruptcy consideration if you are a director of a company(s).
Question: If I am bankrupt will this affect certain licences that I may hold?
Depending on the type of licence (EXCLUDING DRIVERS/MOTOR CYCLE LICENCE), bankruptcy may result in the possible cancellation of it. A common example is a builders licence. As there are many forms of licences available you should discuss this aspect with your Trustee when considering personal insolvency options.
Click on the link below for further details regarding what licences or memberships may be affected by bankruptcy.
Question: What Assets will I be able to retain?
Upon bankruptcy, certain assets are able to be realised by your Trustee. Such assets could includes (but are not limited to):
In addition certain assets that you may acquire during the course of your bankruptcy will be available to your Trustee. This includes items such as:
There are certain classes of assets that are protected by the Bankruptcy Act which means they cannot be realised by your Trustee. Such property protected includes necessary household furniture, personal effects, limited tools of trade, life insurance and superannuation policies and the primary means of transport up to a certain limit in value (eg. car or motor bike).
Question: Can I have a bank account if I am bankrupt?
Generally there are few issues with maintaining a bank account whilst bankrupt. However, consideration should be given in relation to what other facilities/products (ie loans) you may have with the bank. There are occasions where the bank may be able to exercise a right of offset.
Some consideration also needs to be given to the accumulation of significant funds that may occur during the course of the bankruptcy. Excess funds constitute “after acquired” property and are realisable by your Trustee
Question: Does bankruptcy affect my employment and what payments may I need to make from my income?
Generally bankruptcy does not enable your employer to terminate your employment. However, reference is made to the impact it may have on certain memberships or licences you may have.
Whilst bankruptcy serves to put a “line in the sand” and take the pressure off, during the course of your bankruptcy, your Trustee is required to assess your income annually and assess whether you are required to pay income contributions. The determination of such assessment varies depending on various factors. Click below to see if you may potentially be required to pay income contributions:
Bankruptcy Income Contribution Estimator
Question: What will happen to my credit rating?
We encourage individuals to apply to Veda Advantage to get a copy of their credit during and post bankruptcy so they are aware of what is listed and that any errors can be corrected. However generally:
There are many other questions that can arise when an individual is in financial crisis. Through our experience we are in a position to help you through the maze of fact and fiction.
Question: What about tax refunds and Income Tax Returns?
Any tax refunds that relate to income earned prior to entering into bankruptcy represent a divisible asset that may be realised by your Trustee.
If however during the period of your bankruptcy a refund is payable it will be treated as income for the purposes of determining if you are liable to pay income contributions. We also note that if the Australian Taxation Office is a creditor, then they may seek to offset any refunds which are payable after the date of bankruptcy against the outstanding debt.
Notwithstanding that you are in bankruptcy you are still responsible for lodging your Income Tax Returns.
There are many other questions that can arise when an individual is in financial crisis. Through our experience Jones Partners are in a position to help you through the maze of fact and fiction.
Question: Voluntary Administration - A Guide for Employees
Question: Voluntary Administration - A Guide for Creditors
Question: Liquidation - A Guide for Creditors
Question: Receivership - A Guide for Creditors
Question: Independence of external administrators - A Guide for Creditors
Question: Approving Fees - A Guide for Creditors
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Helping individuals, directors and business owners effectively deal with financial distress and a focus on the future.