These are difficult times for Australian businesses, with increasing interest rates, global supply chain issues and continuing uncertainty over COVID-19, and its ongoing variants.
Many companies are struggling financially and may face insolvency and liquidation.
This article looks into the Small Business Liquidations process for small businesses. We will discuss some of the pros and cons of a company going into liquidation and highlight some of the potential pitfalls for a company director.
Types of liquidation?
Types of liquidation for insolvent companies:
- Creditor’s voluntary liquidation
The most common type of liquidation. This is a decision made by
- A majority of creditors voted for the company to be put into liquidation during the voluntary administration process
- A decision by company shareholders/directors to appoint a liquidator and wind up the company.
- Court liquidation
A liquidator has been appointed by a court, most commonly following an application by one of the company’s creditors
The warning signs of insolvency
A company is deemed to be insolvent when it is unable to pay its debts.
There are warning signs a company is struggling financially and may become insolvent. Some of the things to look out for include:
- Declining sales and stock not turning over.
- When your income slows or stops, insolvency is almost certain
- Problems with creditors
- Perhaps you are already paying creditors later than agreed, or you are receiving demands for payment
- Missing payments to the ATO
- If you are not making your payments to the Australian Taxation Office (ATO) in full and on time, this can have serious consequences, including directors being held personally liable for the debts (read more under the “ATO tax obligations not fulfilled” heading, below.)
- Unable to raise funds
- You are unable to raise funding or raise credit to help cover your debts.
These are all signs you are heading for insolvency. As soon as you become aware of any of these problems, seek professional financial help. There are solutions available to ensure your business continues trading successfully.
What are the benefits of liquidation for directors?
For a company director, having an insolvent company can be worrying and stressful, with suppliers, employees and other creditors demanding payments you are unable to make. Appointing a liquidator to take over the company and wind it up can help free you from distress.
Company directors in Australia have duties and obligations. These remain even when the company is insolvent and failing and you intend to wind it up. The following have serious consequences for the directors involved:
- Illegal “Phoenix” Activity
This usually happens when unethical directors start a new company using the business and/or assets of their insolvent company. This leaves the company entering liquidation with all outstanding debts but no assets to pay creditors or employees.This is illegal with potential penalties including long prison sentences and fines.
There have been instances where directors of struggling businesses have been approached by “unofficial” financial advisors who offer options to keep the business running. These may lead the director to break the law inadvertently. Always make sure you only seek financial advice from reliable, trusted professionals.
- Trading While Insolvent
This occurs when company directors know, or suspect, their business may be insolvent yet continue to trade. Employees won’t be paid and supplier’s invoices for goods or services won’t be settled.This is also illegal, punishments may include imprisonment and heavy fines.
Claiming to not know your company was insolvent is not a defence. Part of the duties of a company director is to always be informed and aware of your company’s financial situation.
- ATO tax obligations not fulfilled
An obligation, for a company director in Australia, is to ensure the company’s tax and superannuation are reported to the ATO and paid when due.A company director will become personally liable for their company’s unpaid:
- Goods and Services Tax (GST)
- Superannuation Guarantee Charge (SGC)
- Pay As You Go Withholding (PAYGW)
- ATO-issued Directors Penalty Notices (DPNs)
In the event of a company not paying their tax and superannuation obligations, as above, to the ATO on schedule, the ATO will issue a Director Penalty Notice to each director of the company, subject to certain criteria.The director penalty is a parallel liability. This means if the company has more than one director, each director is likely to owe the same amount to the ATO. If one director pays part of the outstanding debt, the amount due is reduced, by the value paid, for each director’s penalty.
If the debt is not paid in full, after 21 days the ATO will recover the outstanding amount from each director by
- Beginning the legal process to recover the outstanding debt
- Offsetting tax credits against the director’s penalties
- The issue of garnishee notices – the garnishee notice may be issued to:
- Your employer, to withhold wages until the debt is settled
- A bank, or other financial institution where you have an account, to pay the amount owing to the ATO
- An organisation owing you money, from the proceeds of a house sale, or rental income, for example
- Trading While Insolvent
It is highly recommended you seek financial advice, urgently, if you are issued a DPN.
What are the downsides of liquidation?
Creditors will lose money. Their debts are likely to be partially settled by the liquidation process. Some may receive nothing
The liquidator will sell property and assets owned by your company to raise funds to cover their fee and repay outstanding debts.
What is the Small Business Liquidation Process?
The Small Business Liquidation Process was introduced to help ease some of the pressures faced by smaller businesses during the Coronavirus pandemic and consequent lockdowns.
The Small Business Liquidation Process is aimed at making the liquidation and winding-up process more efficient and less complex.
Criteria for the Small Business Liquidation Process
- The process is only available for a company in a creditors’ voluntary liquidation
- The winding-up process must not have begun before 01 January 2021
- The company’s liabilities must not be greater than $1 million.
- The company does not expect to be able to repay all debts, in full, within 1 year
- The directors must provide the liquidator:
- A report on company activities and property (ROCAP)
- A declaration stating they believe the company is eligible for the small business liquidation processThis must be done within 5 days of the decision to begin voluntary liquidation.
- None of the company’s directors has been a director of any other company subject to the small business liquidation process, or restructuring, within the last 7 years.
- The company has not been subject to the small business liquidation process, or restructuring, within the last 7 years.
- The company has provided all documentation, such as statements, notices and applications as required by the Income Tax Assessment Act of 1997
Before the liquidator may start the Small Business Liquidation Process, they must ensure:
- They are confident the criteria, above, have been satisfied
- They have been appointed for less than 21 days
- They have provided the following, in writing to each creditor:
- Confirmation the company is eligible for the process
- An outline of the process
- Details of how the creditors may stop the process
The small business liquidation process will not take place if more than 25%, in value of outstanding debt, of creditors request the process not be followed.
At a high level, the liquidator’s role is to identify and sell company assets to repay the debts of the creditors. They will also investigate the company’s failure, seeking evidence the directors committed any offences, as above.
How the Small Business Liquidation Process differs from a full company liquidation
- Meetings of creditors are not held.
- The liquidator provides a single report to creditors detailing:
- work performed by the liquidator
- When the process is expected to be finalised
- The value of any dividend likely to be paid to the creditors
- A single dividend payment will be made. There is no allowance for an interim dividend payment.
Are there alternatives to liquidation?
Early action is best. When a business starts to have financial issues, they will rarely “go away if you wait and see”!
When you spot signs your company is beginning to have problems with cash flow, seek professional financial advice as soon as possible.
At Corporate Lifeline, we have saved many Australian companies from financial disaster, returning them to successful and profitable trading.
Our team will investigate your company’s financial situation and structure. We may assist with a restructuring of the business or we might identify additional funding to help you through your difficulties and into future growth.
Our consultants are experienced and understand your situation. We will work alongside you to restore your business.
Contact one of our professionals today.