Finding yourself in a situation where your company can no longer pay its bills is stressful and scary. However, there are things you can do to turn the situation around and avoid losing your business. If you’re facing financial difficulties, you need support to explore your options and high-quality information on where to go for help. This blog explores what it means when a company becomes insolvent and offers advice on choosing the right insolvency expert in Australia.
Understanding Insolvency: What Does it Mean for Your Company?
What does it mean when a company becomes insolvent? Insolvency is the state of being unable to continue trading in your business. Fundamentally, it means you’ve run out of money, you can’t pay your debts when they are due and can’t borrow any more funds.
The Difference Between Insolvency and Bankruptcy
Insolvency is a financial situation where a business is unable to pay its due bills whereas bankruptcy is a legal state that can only be declared by an individual or a court. Declaring bankruptcy gives you protection from legal claims by your creditors. However, you’ll be required to give up your assets and financial control when you’re declared bankrupt.
There are long-term consequences of going bankrupt, so it’s not a decision to take lightly. Following bankruptcy, you’re likely to find it harder to get new credit in the future. Being bankrupt could also affect your employment chances and while you’re bankrupt you won’t be able to hold a company director position. You may also have certain restrictions imposed on you if you work in certain professions such as accounting, legal, tax, some trades or as an MP. More information is available from the relevant government agency or professional associations and from the Australian Financial Security Authority (AFSA).
Key Warning Signs of Insolvency
There are some early warning signs that your company may be struggling and at risk of becoming insolvent. These are:
- Profit warnings showing underperformance against forecasts
- Cashflow issues causing you to pay creditors late
- Hitting your overdraft limit on your business current account and limits on your business credit cards
- Being refused credit by your suppliers
- Unable to get bank loans
- Lack of timely and accurate financial management information such as cashflow and sales forecasts, aged debtors and creditors analyses.
- Late filing of accounts and tax returns
- High turnover of senior staff
- Unable to fulfil customer orders because you can’t afford materials, wages and distribution costs.
As the situation escalates, you may also find that you are:
- Receiving statutory demands from creditors, including ATO
- Receiving creditor winding-up petitions
- Fending off bailiffs
- Unable to pay employees and directors on time
- Losing staff who haven’t been paid
For a company showing early signs of insolvency such as paying creditors late or being maxed out on their credit facilities, it’s not too late to turn things around with the right focus. Insolvency experts can help businesses who are showing early signs by identifying the root cause of cashflow problems and outlining ways to fix the issues. By engaging an insolvency practitioner with extensive business knowledge and experience in your industry sooner rather than later, you may be able to save your company.
The Role of Insolvency Experts in Australia
Insolvency experts in Australia operate within the jurisdiction of The Australian Securities and Investments Commission (ASIC) and are usually qualified accountants (an ASIC requirement). In addition, many insolvency practitioners are also members of the Australian Restructuring, Insolvency and Turnaround Association (ARITA) which has a stringent professional code of practice. An insolvency lawyer is a qualified solicitor who also has insolvency qualifications, but it is not necessary to be legally qualified to be an insolvency expert in Australia.
There are a few different roles that insolvency experts might fulfil when dealing with a company in financial difficulty:
- Receiver
- Administrator
- Liquidator
What Is Receivership, Administration and Liquidation?
These terms are often used about companies that are experiencing financial difficulties and although they are linked, there are distinct differences in the processes.
Receivership
A company may be put into receivership by a secured creditor like a bank which holds a security interest, such as a mortgage, over some of the assets. The receiver is responsible for selling the assets to repay the debt to the secured creditor. While in receivership, the company can continue to trade, and it is possible for the company to recover from this position.
Administration
Administration is the next level in the journey towards the closure of a company. A company in administration can still be rescued, though. When big corporates announce that they’ve been put into administration, this is usually in the hope that another company will acquire them. Sometimes it works, sometimes it doesn’t.
An administrator is usually appointed by the directors by way of a directors’ resolution (essentially, a written record of a decision made by the board of directors). Sometimes a secured creditor can appoint an administrator.
A company in administration usually follows one of two paths: liquidation or a Deed of Company Arrangement (DOCA). The DOCA is a formal agreement between the company and the creditors about how to manage the finances with the aim of the creditors receiving a better result than if the company was liquidated.
Liquidation
Finally, the third step in this journey is full liquidation. In this case, a liquidator is appointed to oversee the sale of company assets and the distribution of resulting funds to the creditors. The final task will be to dissolve the company and deregister the company.
Insolvency Lawyers: Legal Guidance and Representation
Insolvency lawyers are involved in all aspects of helping a company deal with its financial difficulties, advising companies on the best approach for dealing with their specific situation.
This could include agreeing a way forward with creditors to manage the repayment of debt, also known as negotiating a company voluntary arrangement (CVA) to representing the company in court and winding up the company by distributing assets to settle outstanding debts.
Liquidation Experts: Managing Asset Distribution and Closure
A liquidation expert is often appointed towards the end of the insolvency process to manage the distribution of company assets in order of priority to creditors and to finalise the closure and deregistration of the business.
Registered liquidation experts in Australia must submit minutes of any creditor meetings and statutory creditor reports to ASIC. If there is any director misconduct or potential criminal activity, the liquidator also has a duty to report this to ASIC.
How to Choose the Right Insolvency Expert for Your Situation
If your company is facing cashflow and insolvency issues, it’s vital to seek help as early as possible. In many cases, the situation may be retrievable if you act quickly enough. As a company director, perhaps you feel that bringing in support to manage the company finances may be seen as a failure. However, losing the company entirely is a much bigger issue so using an insolvency expert makes the best business sense.
How you choose which type of insolvency expert will depend on the size of the issue facing your company when you start looking for support. If you are in the early stages, an insolvency and restructuring lawyer can help provide you with your options. If the situation is more serious, then you may require a liquidator to help you with insolvency; however, an insolvency and restructuring lawyer can help.
Evaluating Insolvency Expert Credentials and Experience
Appointing the right insolvency expert is crucial to resolving your business financial challenges as quickly and painlessly as possible, so make sure you ask the right questions when looking to hire.
- Check on the qualifications and credentials of your insolvency expert and that they are registered with ASIC, are an ARITA Professional Member and are a qualified accountant (either CPA or CAANZ). Look for testimonials on independent websites as well as the practitioner’s own website.
- Ask your business network for recommendations, particularly your accountant or commercial lawyer who may have contacts.
- Ask to see evidence of the insolvency practitioner’s recent results.
- Ensure the practitioner fully understands the nature of the industry your company is in so they can make informed recommendations that work for your type of business.
Key Factors to Consider When Comparing Insolvency Firms
What do you need to think about when deciding which insolvency firm to engage?
Focus on the specific expertise that the insolvency practice has – some work mainly with small companies and personal bankruptcy whereas others do more corporate insolvency and administration work. Evaluate whether the firm can meet your needs by checking out previous clients’ testimonials.
As always in business, cost is a key factor in any hiring decision, so find out the charging basis the insolvency practice uses. You may wish to engage a boutique insolvency practice who can provide a much more bespoke tailored service rather than a larger firm where your case might be handled by multiple practitioners and you end up repeating yourself.
Moving Forward: Protecting Your Company’s Future
Naturally, all for-profit businesses want to make enough money to provide a return for investors, whether it’s privately or publicly held. Astute financial management reduces the risk of your company running up unsustainable debts in the pursuit of profit. Keeping a watchful eye on your cashflow is one of the most important activities for any finance function – many a profitable business has gone under because of cash mismanagement.
To avoid that same fate, implement regular management reporting of your aged creditors, cash at bank, aged debtors, work-in-progress and inventory to ensure that you aren’t tying up your cash for excessively long periods of time. Review cashflow statements and forecasts to predict and mitigate any periods when your business might be temporarily cash poor.
If there are any of the early warning signs that your company is heading toward insolvency, do your due diligence and hire an insolvency practitioner who can help you turn things around before it’s too late. Maximise your chances of recovery and minimise financial damage by finding the right practitioner.
For guidance on your options, if your company is struggling with financial difficulties, contact me on 0448 000 010, or via LinkedIn.
