A company is insolvent when it is unable to pay its debts when they become due and payable and it is a director’s duty to prevent insolvent trading pursuant to section 588GA of the Corporations Act 2001 (NSW), by placing the company in administration or liquidation.
This primary position, has been altered by the safe harbour reforms that came into effect on and from 19 September 2017. The reforms are designed to protect directors who actively attempt to better the outcome for the creditors of the company, through an established strategy and proper professional advice.
The reforms provide that
- if, when a director starts to suspect the company may become or be insolvent,
- the director starts developing one or more courses of action that are reasonably likely to lead to a better outcome (i.e. not the immediate appointment of an administrator or liquidator),
- the director will be protected from any insolvent trading in performance of such a course of action.
The Court will consider, among other things, the below conduct in determining whether the director’s course of action was reasonably likely to result in a better outcome for creditors:
- if they informed themselves of the company’s financial position and maintained appropriate financial records;
- if they prevented misconduct by company officers and employees;
- if they obtained proper professional advice; and
- if they developed and implemented a restructuring plan.
It is important to note are that the company must continue to pay all of its employee entitlements and lodge all reports in relation to tax.
Please contact Walker & George to either discuss how we may assist your company or advise you in your capacity as director to ensure you are protected under the safe-harbour provisions.
Receivership, administration and liquidation all involve another party being appointed to manage the affairs of the company in place of the directors or board of the company.
A receiver can be appointed either by a secured party pursuant to a security agreement or by the Court. Typically, it is the former. The receiver is appointed to preserve and, or realise the secured assets of the company.
The difference between a receiver and an administrator or liquidator, is that the receiver’s primary responsibility is the interests of the secured party who appointed them. Whereas an administrator or liquidator’s responsibility is to the company including its creditors and shareholders.
An administrator may be appointed by the company’s directors, a secured creditor or the Court to prepare and implement a restructuring plan for a company that results in a more favourable outcome for the company’s creditors.
During the administration, it will be necessary for the administrator to consider any deed of company arrangement (DOCA) put forward by the director/s or a third party. Subject to a vote by the creditors (in which the administrator may have the deciding vote) the administrator will then typically become the deed administrator. If the DOCA is not approved then the administrator will likely cause the company to be placed into liquidation.
A liquidator may be appointed either by the shareholders, creditors or the Court.
The role of the liquidator is to realise and distribute the assets of the company and to investigate and report on the affairs of the company. Subject to the liquidator’s opinion and, either being funded or having funds available to them, the liquidator may pursue debtors of the company and the company’s directors personally for breach of duties or voidable transactions.
It is important to realise that various stakeholders may have an interest in a company. The above roles are typically appointed to a company when a controlling or majority of stakeholders (including the Australian Taxation Office or the Australian Securities and Investments Commission) no longer believe the company is operating profitably and, or appropriately.
Please contact Walker & George to discuss how we may assist your company if you find yourself in these circumstances.
Broadly, insolvency is when a company is not able to pay its debts when they become due and payable.
The Victorian Supreme Court case of ASIC v Plymin, Elliott & Harrison  VSC 123 is widely acknowledged by those in the insolvency space (including the Courts) as providing an agreed list of indicators of insolvency. This list of indicators, along with our brief comments on each (where necessary) is as follows:
- Continuing trading losses;
- Liquidity ratios below 1 – A liquidity ratio involves a comparison between a company’s current relatively liquid assets and its current liabilities. The purpose of which is to determine whether a company can pay off its debts with its realisable assets – a liquidity ratio below 1 means that it can not.
- Overdue Commonwealth and State taxes – typically includes Company (income) tax, capital gains tax, goods and services tax, payroll and land tax;
- Poor relationship with present bank or lenders, including inability to borrow further funds – usually as a result of defaults, overdrawing and, or credit extensions;
- No access to alternative finance – where a company is unable to obtain a loan from a financial institution other sources of finance may include, cash injections from the director or securing third party investors such as through debt capital;
- Inability to raise further equity capital – the Company may not be able to dilute its issued shares any further or alternatively, there may be no prospective investors / buyers willing to buy the Company’s shares;
- Suppliers placing company on cash on demand terms, or otherwise demanding special payments before resuming supply;
- Creditors unpaid outside trading terms;
- Issuing of post-dated cheques;
- Dishonoured cheques;
- Special arrangements with selected creditors;
- Solicitors’ letters, summonses, judgments or warrants issued against the Company – this may include letters of demand issued to the Company and debt recovery proceedings commenced against the Company;
- Payments to creditors of rounded sums which are not referrable to specific invoices;
- Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts – for example failing to maintain satisfactory financial statements for the Company.
All of the above are relevant for directors in the context of the following:
- directors must not trade a company whilst insolvent (s 588G, Corporations Act 2001 (Cth); and
- the powers of a liquidator to pursue a director personally for any transactions made whilst the company was insolvent (s 588FC, Corporations Act 2001 (Cth)).
Relevantly, section 588GA of the Corporations Act 2001 (Cth) provides for safe-harbour provisions to protect directors if the company is, or should reasonably be suspected to be, insolvent. These safe-harbour provisions will be the subject of a subsequent post.
Please contact Walker & George to discuss how we may assist if you suspect your Company is insolvent.