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To Your Questions.
Insolvency can be complicated. Fortunately, we have the knowledge to shed a light on some of your queries. If you have a question that isn’t listed here, please don’t hesitate to contact us.
Corporate Insolvency FAQ
Ask yourself: ‘is there sufficient cash available to pay debts in full as and when they fall due?’ If the answer is no, then your company may be insolvent.
Symptoms of insolvency can include being unable to afford to pay all creditors as per their trading terms, entering into instalment repayment agreements, ongoing trading losses, an inability to borrow funds, being issued demand notices from creditors, having cheques dishonoured, or an inability to produce accurate financial records.
If your company is insolvent, it is important to prevent any further activity that would allow it to incur further debt. You will then need to determine the most appropriate course of action, like a suitable insolvency option like voluntary administration or company liquidation. However, you may also be able to restructure, refinance or obtain equity funding to recapitalise your company. SM Solvency Accountants can assist with your options.
There is no set time or general rule of thumb that informs a liquidation process’ duration. The length of any liquidation process depends on a company’s size, the complexity of its business operations, and more important the complexity of its financial situation.A liquidation process could be as little as six months or it could take years. Its speed is also impacted by company directors and other stakeholders’ willingness to comply with a Liquidator in an efficient manner.
The role of a Liquidator is much the same as that of a Trustee throughout the course of a bankruptcy. The liquidator will investigate the financial affairs of the company and ascertain whether or not improper or illegal transactions have been made. This could include actions such as void transactions or preferential payments, insolvent trading or offenses committed by company officers.The Liquidator will also thoroughly investigate a company’s books and records – a responsibility governed by the Corporations Act, ASIC Regulations and Professional Standards. Usually a liquidator’s investigation will delve into the possibility of insolvent trading, whether the directors committed any offences, whether there are any recoverable payments to particular creditors, whether there are any hidden assets to be recovered or if there are any other legal actions to consider.
Liquidation can be broken into three separate types:
• Creditors Voluntary Liquidation – When shareholders agree under a special resolution that the company must be wound up because it cannot pay debts as they fall due. This is the most common type as it represents a decision made when it is clear a company is insolvent.
• Members Voluntary Liquidation – When company executives meet with company members to collectively agree to wind up the company, even though it is still solvent. Whether the company has simply reached the end of its usefulness or the directors and members believe that now is an ideal time go their separate ways, a company that is able to meet its financial obligations may decide to wind up for numerous reasons.
• Court Liquidation – When court orders a company into liquidation as a result of an application made by creditors. Once creditors convince the court that the company is insolvent, an official liquidator is appointed on behalf of the company.
Personal Insolvency FAQ
There are a number of implications of bankruptcy, and these will affect different people in different ways. If you have any uncertainty, it is best to talk generally with a Trustee, seek independent legal advice, or contact the Australian Financial Security Authority. Implications of bankruptcy include, but are not limited to, restrictions on obtaining credit (both during and possibly after your bankruptcy ends), prohibitions on being a company director, possible restrictions or suspensions of certain professional membership bodies or other personal accreditations, restriction on overseas travel (unless with the permission of your Trustee), and having to surrender certain assets to your Trustee (known as ‘divisible property’).
You will need to understand the role of Trustee as they play a vital part in bankruptcy. Essentially, a Trustee is a licensed practitioner who can be privately appointed or appointed on your behalf and is in charge of handling the administration of bankruptcies or personal insolvency agreements. A Trustee can monitor and control your finances, take control of or sell certain assets and oversee income contributions. All in the name of settling debts with creditors and helping you to reach the other end of bankruptcy with minimal damage.
Trustee must be unbiased in their approach and must maintain the highest standard of professionalism ethics to ensure that the bankruptcy process is handled legally and fairly.
For more information on the role of Trustees, visit our page ‘What is the function of a Trustee in bankruptcy?’
Yes, you may continue to earn an income. However, if you earn above a certain net income threshold, you are required to pay ‘income contributions’, which are compulsory payments that your Trustee will use to repay your debts.
Income contributions are calculated by your Trustee but must be half of money you earn over the predetermined income threshold. As at March 20, 2020, the net annual income contribution threshold for a bankrupt with no dependant is $59,031.70 (after tax). The thresholds are periodically indexed and rise in increments based on the number of dependants that you have. For example, if you have more than four dependants during bankruptcy, you can earn $80,283.11 before you need to make income contributions.
During bankruptcy your Trustee will generally register themselves on the title of the property and take steps during the bankruptcy to sell your interest in the property. The Trustee may firstly attempt to sell your interest on to the co-owner or another party via an off-market transaction, prior to listing the property on the open market.
What happens to your debt depends entirely on the type of debts you have. There are unsecured and secure debts. Unsecured debts are not tied to a specific property or asset, like a house, and are typically covered by bankruptcy which means you don’t need to pay them. These include credit and store cards, unsecured personal loans and pay day loans, utility bills, overdrawn bank accounts, unpaid rent or medical, legal & accounting fees. You are still liable for some unsecured debts, so it is important that you speak to your trustee and contact creditors directly to discuss payment options.
Secured debts are those that are tied to specific assets or property, for example mortgages, car loans or items of a certain value obtained by hire purchases or rent-to-buy. Secured debt on an item that you wish to keep, like a vehicle under finance that you need for work, must be paid. If you cannot pay secure debts, creditors have the right to take the property in order to settle the debt.
Bankruptcy typically ends after three years and one day, a period which begins after your completed Bankruptcy Form, or Statement of Affairs form, has been lodged and accepted by the Australian Financial Security Authority.
You can also have your bankruptcy annulled. Attaining annulment generally requires your creditors to agree to accept a proposal you put to them during your bankruptcy or the Trustee is able to pay all your creditors’ provable claims in full.
A declaration of bankruptcy does not mean you automatically lose everything. Assets are separated into those that must be made available to your Trustee to help settle your debts, and assets which are exempt from the hands of creditors.
Assets that can be available for the benefit of creditors (as at the date of your bankruptcy) include:
• Real estate,
• Motor vehicles (subject to a market value threshold and other conditions)
• Trailers, caravans and boats
• Tools of trade (subject to a market value threshold),
• Cash, shares, and
• Business assets (if you trade as a sole trader or in a partnership).
A number of assets are exempt from being made available to your Trustee, and these include, but are not limited to:
• Essential household furnishings and electrical items,
• Superannuation held in a regulated fund (subject to conditions),
• Personal property of a sentimental nature (subject to conditions),
• Some damages claims
• Tools of the trade (under a certain value), and
• Property which creditors agree you can keep.
Employees Made Redundant FAQ
If you do not know what your outstanding entitlements are following your redundancy, the Liquidator will typically provide an itemisation to you. However, if the records of your former employer are inadequate, this may not always be possible. If you can provide a reasonable estimate of your entitlements owed, you can submit a claim in the Liquidation and vote at creditor meetings (you can always submit a revised claim at a later date). Subject to the size of your employer, your employment agreement, and other factors, generally redundancy entitlements include a payment in lieu of notice and a redundancy amount.
If these can be produced from the Company’s records, the Liquidator will typically do their best to make these available. However, this may not always be possible, in which case it is recommended that you contact the Australian Taxation Office about alternative arrangements.
The Commonwealth Government operates a Fair Entitlements Guarantee Scheme which provides funding to eligible employees for entitlements owed arising from the liquidation or bankruptcy of their employer. The scheme does not cover superannuation and has a number of restrictions and conditions, including you must have been an Australian citizen or the holder of a permanent visa or special category visa that allows you to stay and work in Australia at the time your employment ended. You must make your own enquiries about your eligibility for Centrelink or other allowances. The Administrator or Liquidator will typically provide you with a written letter of termination which may assist.
If you have provided personal guarantees to creditors, those creditors may use the appointment of a Liquidator as an opportunity to call upon the guarantee. During a Voluntary Administration there is a moratorium on personal guarantees being called upon. If you have been a director of multiple insolvent companies, you may risk being disqualified from being a director by the Australian Securities and Investments Commission. It is always prudent for company directors to seek their own independent legal advice about any potential personal ramifications of a potential external administration appointment.
Corporations legislation makes it an offence for directors to trade and incur debt if their company is insolvent. A Liquidator (or other eligible parties) can also seek monetary compensation from a director equivalent to the loss suffered by insolvent trading. There are defences stipulated in the legislation which directors may be able to avail themselves of. It is always prudent for company directors to seek their own independent legal advice about any potential personal ramifications of a potential external administration appointment.
No. An Administrator and Liquidator must act, and be seen to act, independently and without bias from any stakeholders (including directors). It is your responsibility to co-operate with an Administrator or Liquidator. Typically, Administrators and Liquidators will understand and appreciate the difficulties and stress you may be experiencing and will be available to answer your queries as best as possible.
Liquidation does have an effect on a director’s credit rating. Credit reporting agencies will keep a director’s name and the company in liquidation on record, which could affect the ability to secure business-related credit as lenders will have access to this information during background checks.
However, it is important to know that liquidation does not have a significantly negative impact on a director’s personal credit rating. A company is a separate legal entity to a director and the company’s directors are not automatically liable for a company’s debts. Therefore, unlike bankruptcy, company liquidation is unlikely to affect a director’s ability to secure personal loans or non-business-related lines of credit.
Your ability to act as director for other companies will be affected if the Australian Securities and Investments Commission (ASIC) finds a pattern of corporate insolvency that indicates you are unsuitable for the job.
If you have been a director of two or more companies that entered liquidation within the last seven years, you can be banned from acting as a director for up to five years under the Corporations Act.