ASIC is an independent Australian Government body set up to administer the Australian Securities and Investments Commission Act working mainly under the Corporations Act. More details
AFSA is the Australian Financial Security Authority which is a Government agency responsible for the administration and regulation of bankruptcy or the personal insolvency system in Australia. More details
Insolvency can occur through no fault of the directors when there are sudden changes in the environment driving demand for what your business offers. Economic downturn either local or national, divorce or partnership separations economic factors and poor management of cashflow together with non-payment of substantial monies owed to the company all lead to insolvency.
Company needs to sell assets to pay debts, accountant says liquidity ratio is less than 1, payments to creditors and not reconcilable, you are trying to make special payment plans with creditors and you have along list of unpaid creditors. Company owes money to ATO and/or your accountant is unable to create accurate forecasts due to poor record keeping. You are unable to borrow further funds from your usual bank and no access to alternative finance or equity capital.
Even if you hire someone to look after your company’s finances you must be aware of your company’s financial status. Directors should ask their accountant to do a ‘cash flow’ test which looks at income sources accessible to the company and expenditure payments that are due. Alternatively the accountant is asked to do a ‘balance sheet’ test, which concentrates on the value of the company’s assets and liabilities shown in the company’s books and records. If your company does not have sufficient funds to pay all bills when they are due then it is insolvent. Trading while insolvent is against the law and directors can become personally liable for the company’s debts. Directors should consult a registered liquidator because restructure processes are available if early action which may avoid liquidation.
Since April 2020, company directors are being held personally liable for unpaid Goods & Services Tax (GST), Luxury Car Tax (LCT) and Wine Equalisation Tax (WET) in addition to the usual PAYG and Superannuation Guarantee Charge (SGC) taxation liabilities. Therefore, if your company is struggling financially and unable to meet outstanding tax debts, the director should make it a priority to continue to lodge BAS and SCG returns on time to avoid DPN. Lodging tax debt calculations even when you cannot pay them shows understanding of tax owed which can help negotiate payment options in the future.
The small business restructuring process introduced was introduced in January 2021 to assist small and medium size businesses to negotiate payment of their creditor debts and restructure themselves with directors remaining in control of their business during the restructure process. A restructuring practitioner (RP) must be appointed to oversee the process and jointly develop the debt restructuring plan. The RP must be a Registered Liquidator. Creditors are given 15 business days to vote on the restructure plan and any disbursements to be paid to the RP (in addition to an agreed flat fee). Employee entitlements must be paid in full and more than half of creditors in value must agree for the plan to be carried out. More details
Liquidators are insolvency professionals who must be members in good standing of a recognised accounting industry body in Australia, or its international equivalent and they must meet approved competency standards and / or have practical experience to become licensed or registered as a liquidator. ASIC Registered Liquidator list.
A liquidator is appointed to do the following in accordance with ASIC the government body that enforces the Corporations Law:
- collect, protect and realise the company’s assets
- investigate and report to creditors about the company’s affairs, including any unfair preferences that may be recoverable, any un-commercial transactions that may be set aside, and any possible claims against the company’s officers
- inquire into the failure of the company and possible offences by people involved with the company and report to ASIC
- distribute the proceeds of realisation – after payment of the costs of the liquidation, and subject to the rights of any secured creditor – first to priority creditors, including employees, and then to unsecured creditors
Details for creditors
Details for directors
Liquidation is the process where a business is methodically brought to an end because it cannot pay its bills or directors are in dispute or shareholders wish to distribute retained earnings. A registered liquidator must be appointed to investigate company affairs, effect the sale of company assets and distribute sale proceeds in accordance with the Corporation Act.
A creditor can use this process if they have exhausted all other ways to be paid for debts owed by the company. Firstly the company receives a Creditor’s Statutory Demand and failure to comply within 21 days means the law will deem the company to be insolvent. The creditor can then apply to the court to have the company liquidated or wound up. A company director cannot appoint their own liquidator while the company has a winding up application on foot but can still appoint a Voluntary Administrator.
A company most commonly “goes into receivership” when a receiver (insolvency professional who must be a licensed liquidator) is appointed by a either a court order or by a secured creditor. The receiver’s primary role is to collect and sell enough of the company’s collateral (property) to repay the debt/s as instructed by the court or as owed to the secured creditor.
External administration is a formal process under Australian law used when a company owes money to creditors but is not at the stage of winding up or liquidation. ASIC registered liquidators are the insolvency professionals appointed as external administrators. The external administration process can be voluntary (initiated by directors) or involuntary (initiated by creditors) .
Voluntary administration is a process designed to resolve the company’s future direction quickly and hopefully without liquidation.
An independent insolvency professional who must be a registered liquidator (known as the administrator) is appointed to control the company to work out a way to save the company itself or the company’s business. Based on his/her examination of the company’s affairs, the administrator may be able to restructure the company utilizing a Deed of Company Arrangement (see DOCA in FAQ list). If it isn’t possible to restructure the company or its business, the aim is to administer the affairs of the company in such a way that results in a better return to creditors than they would have received if the company had been placed directly into liquidation. Putting a company into voluntary administration can be done by director/s calling a meeting of the board of the company, resolving that the company is insolvent, or likely to become insolvent, and resolving that a suitably qualified (should be a registered liquidator) voluntary administrator should be appointed.
A DOCA may be agreed to as a result of the company entering voluntary administration. The document outlines the administrator assessment of the best way forward for the company or the company’s business or how to to provide a better return for creditors than an immediate winding up of the company. A formal agreement is created between all participants in a company outlining the way to move forward and to share out a definite amount to creditors. A DOCA is designed to give the business time and a formal structure to continue to trade on in a profitable way.
ASIC Regulation 82 discusses Deeds of Company Arrangements involving a Creditor’s Trust. More details
Safe Harbour is a process that can be used in certain circumstances to extend the time frame for directors to implement a solvent restructure without the risk of being personally liable for debts if the restructure fails. The aim of safe harbour is to encourage directors to seek early advice on how to restructure and save financially distressed companies. Safe harbour may be used a defence against insolvent trading. These amendments to s 588GA(1) of the Corporations Act 2001 (Cth) were designed to provide relief for financially stressed businesses. See Solvency Flowchart here
Personal Property Securities Register (PPSR) is administered by the government and exists to protect creditors. Personal property is an asset other than land and it includes, cars, boats, business inventory, copyright, patents, bank accounts and debts. If you have registered your property correctly on PPSR you are a secured creditor. Contact a registered liquidator or PPSR expert to ensure your registration is correctly registered (also known as “perfected”) otherwise the PPSR may not be valid in the event of insolvency. See also Retention of Title in FAQ list. More details
Entering into a retention of title arrangement usually involves supplying goods to someone on written credit terms with the promise that you'll get the goods back if you don't get paid. This creates a security interest in the goods you've supplied. More details
In other words, when selling goods on credit, a Retention of Title (RoT) clause on all invoices ensures that ownership (or title) of goods specifies ownership of goods is not transferred to the customer until full payment is made, regardless of customer being in possession of the goods. RoT clauses should be written by your lawyer. See PPSR in FAQ list.
Excluded employees are workers who were also a director of the company, or related to a director, in the 12 months before the appointment of an administrator. Such workers have limited priority in ranking for employee entitlements.
In many cases some or all employees are terminated. Employees have the right to be paid their wages and superannuation, outstanding leave and termination pay either by the administrator or the Fair Entitlements Guarantee administered by government. More details
Debtors are a person, business or company that owes money.
This is the way a creditor makes written notification to the company liquidator or administrator how much money is owed to them and how the debt came about. Creditors who lodge PoD and usually able to vote on key insolvency decisions and to receive a distribution of funds when/if money becomes available.
A secured creditor has security for a loan. Security is an asset promised to guarantee the repayment of a debt. Security is intended to cover the debt amount if the debtor can’t pay it back. See PPSR in FAQ list.
The most common form of unsecured creditor does not have security for a loan they made to the company because the money or property or goods they supplied to the company have not been correctly listed on Personal Property Securities Register. See PPSR in FAQ list. More details
You are usually classified as an unsecured creditor under the Corporations Act if you paid for goods or services to be collected or delivered later or paid a deposit for a lay-by agreement or an interest-free deal. Unfortunately unsecured creditors are also those who buy gift cards or vouchers that has not yet been used or people who have returned a product and been given a credit note because under the law a liquidator is not obliged to honour these items and there are not usually any funds to repay these amounts. If you delivered services or goods to the company without Retention of Title clause on the invoice or without PPSR you are most probably an unsecured creditor. See Retention of Title in FAQ list. More details
Not necessarily. However, if you gave any personal guarantees for company debts it is possible creditors may want to recover debts from you personally. Liquidators may pursue you for payment if you were trading while insolvent.
NB. If you are owed money by an insolvent company, you are a creditor. Check table below for how you may be impacted.
If you are a ………………
ASIC Information Sheet 42
ASIC Information Sheet 43
If there are not enough assets to sell to pay all fees and costs, a liquidator is sometimes only partially paid for the work they do. Most external administrators in Australia including liquidators, use a scale of hourly rates, with different rates for each category of staff working on the external administration. The hourly charge out rates do not represent the actual hourly wage for staff because the liquidator is running a business with non-staff related overheads such as rent, IT, office equipment, insurances, taxes and staff who are not charged out such as personal assistants.
If your company does not have sufficient funds to pay their bills when they are due then the company is insolvent and the directors or shareholders are required by law to take action. More details
ASIC publishes lists of insolvency and deregistered businesses. More details
Depending on the Australian state or territory, there are various times frames (3-6 years) to commence proceedings from date debt became due under a valid contract.
More details in ASIC Regulatory Guide 96 – Debt collection guideline: for collectors and creditors.
It is possible to start a new company but the process is complex. ASIC says “directors should be wary of dishonest advisers who approach financially distressed businesses and offer to help restructure a company, especially when that advice will enable the business to continue trading without having to pay its debts.” More details
The liquidator and team must first comply with corporate insolvency laws to assess the financial status of the company, hold meetings with creditors and eventually sell assets to pay the company’s debts which means pay employees and creditors. This process can take several months.
If you did not receive full payment of wages and entitlements when your employment was terminated you should notify the liquidator or administrator in writing that you were an employee of XYZ company and how much money you are owed if known. Request the appropriate form from the liquidator.
You must have lost your job due to the company's insolvency (on or after the appointment of a liquidator) to get paid from government funds and you can only apply for Fair Entitlements Guarantee after the liquidator has completed their processes. More details
Debentures involve lending money to a business which usually means the holders are some type of creditor of the company. Administration usually freezes payments being made to you. There is a prescribed order of priority to distribute payment to creditors after assets are sold. More details
Very unlikely. In liquidation, shareholders are ranked behind creditors however you may be entitled to a capital loss in time to come and you should seek appropriate tax advice at the relevant time.
Yes, if the liquidator believes it would be in the best interests of the creditors to continue to trade fully or partially. The liquidator must get Court approval to trade the business for longer than 3 months.
No. However the ATO does have legislative power to compel payment via statutory garnishes, PAYG withholding and SGC estimates, departure prohibition orders (preventing a tax debtor from leaving the country), notices to provide information and director penalty notices (“DPNs”) and listing director names and debts with Credit Reporting Bureaus.
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About Auxilium Partners
Auxilium Partners is a WA owned and operated insolvency, forensic accounting and mining advisory firm based in West Perth.
Our partners Bob Jacobs and Andrew Smith are Registered Liquidators with ASIC and Paul Cockburn is a Certified Fraud Examiner.
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