IN THIS ISSUE 01 Indicators of Insolvency
03 Can I Trust my Trust?
Indicators of Insolvency
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Lisa Isaac - Senior Manager | Melbourne ith COVID-19 related restrictions easing in several states of Australia, many Australian businesses are returning to some sense of normal. That normal may be staff returning to offices, businesses being allowed to re-open or restrictions on capacity limits being lifted.
It has been said that the government assistance (such as JobKeeper, COVID-19 disaster payments, tax relief measures, COVID cash flow boost, moratorium on insolvent trading and tenants protected from eviction by landlord) has delayed the inevitable for some Australian businesses. With the return to “normal” and the reduction/withdrawal of many government assistance packages it is no surprise that there has been a slight increase in the number of insolvency appointments. There is no time like the present to review you company’s financial position and assess any associated risks in order to mitigate same. Total Number of Companies entering external administrations and controller appointments
04 Business Improving or Time to Exit with Dignity? Scan to read more articles
Month
2020/21
2021/22
July
373
423
August
275
354
September
298
313
October
279
325
*Data source: ASIC Insolvency Statistics Series 1 - December 2, 2021
How can you tell if a Company is Insolvent? The Corporations Act 2001 defines a company as being insolvent if it “cannot pay its debts as and when they fall due and payable”.
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The question as to whether a company is “unable to pay its debts as and when they become due and payable” is a question of fact to be determined by a number of specific circumstances. In general, a holistic review of a company’s financial affairs is required in the first instance. The main case referenced by all insolvency practitioners when determining “insolvency” is ASIC v Plymin. Liability limited by a scheme approved under Professional Standards Legislation
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This case listed the following key indicators of insolvency: 1.
Continuing losses
2. Liquidity ratios below 1 3. Overdue Commonwealth and State taxes 4. Poor relationship with present bank, including inability to borrow further funds 5. No access to alternative finance or inability to raise further equity capital 6. Suppliers placing the company on COD, or otherwise demanding special payments before resuming supply 7. Creditors unpaid outside trading terms 8. Issuing post-dated cheques or dishonoured cheques 9. Special arrangements with selected creditors 10. Solicitors’ letters, summonses, judgments or warrants issued against the company 11. Payments to creditors of rounded sums which are not reconcilable to specific invoices 12. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts. In practice, the common indicators of insolvency that we see are as follows: ►
The company has failed to remit payment of its superannuation contributions due to its employees as and when they fall due. It is worth noting that a company that does not pay an employee’s superannuation on time must lodge a superannuation guarantee charge statement with the ATO and pay the superannuation (together with any interest and administration charges) to the ATO.
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The company reports trading losses within its formal/ management accounts.
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The company’s sales/revenue has decreased with no or limited expectation of it improving in the foreseeable future.
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The company falls behind in its lodgement of statutory reports (i.e. BAS’, ITR’s, Payroll Tax etc) and consequently the payment of the corresponding statutory amounts due.
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The company’s current assets (i.e. cash, stock, debtors etc) if all converted to cash would be insufficient to meet the company’s liabilities “as and when they fall due and payable”.
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Directors/related parties/shareholders cease providing financial support to the company and the company is not in a position to obtain any further financial support from other avenues.
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The Company receives legal correspondence from its creditors such as a Statutory Demand Notice, a Debt Collections Warning letter and/or a Director Penalty Notice (DPN) from the ATO.
and if so, if a claim exists against a director. The liquidator would be required to determine if there were reasonable grounds for the director to have suspected the company was insolvent. A liquidator appointed over a company, ASIC or a creditor can commence compensation proceedings to recover amounts lost by creditors as a result of a company trading whilst insolvent. Trading a company whilst it is insolvent is also an offence pursuant to the Corporations Act and civil penalties may also apply (up to $200,000). If dishonesty is found to be a factor in insolvent trading, a director may also be subject to criminal charges (up to 2,000 penalty units or imprisonment for up to 5 years, or both. One penalty unit is currently $222). It is not just a Director that a Liquidator can pursue an Insolvent Trading claim against An insolvent trading claim can be pursued against a director, a shadow director or an Ultimate Holding Company. A Shadow Director is a person who effectively acts as a director, even if not formally appointed. An Ultimate Holding Company is a body corporate that is a holding company and is itself a subsidiary of no other body corporate. Defences available to Directors for an Insolvent Trading Claim The Corporations Act provides the following defences to an Insolvent Trading Claim: 1.
The person had reasonable grounds to expect and did expect, that the company was solvent.
2. The person had reasonable grounds to believe and did believe that a competent and reliable person was responsible for providing that person adequate information about whether the company was solvent. 3. Because of illness or some other good reason, the person did not take part in the management of the company. 4. The person took all reasonable steps to prevent the company from incurring debts. Tips for accountants if they think their client is facing insolvency may include: ►
Ensure company records including management accounts are up to date, accurate and a true reflection of the company’s financial position. This will assist in completing a holistic review of the company’s financial position.
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Complete a pro-active review of ATO client portal records to determine if clients have completed lodgements and the extent of liabilities due.
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An open conversation with the client regarding the potential issues (indicators of insolvency) they have identified.
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Determine whether the client can rectify the issues identified (i.e. bring compliance up to date, find further funding to meet liabilities etc).
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Should the issues not be able to be rectified, professional advice should be sought to avoid and/or reduce any personal liability exposure and maximise the chances of a company’s business continuing.
Consequences of Insolvent Trading
The burden of proving a defence is on the Director
A company’s director has a duty to prevent a company from trading whilst insolvent. A company director may be held personally liable for debts, which remain unpaid and were incurred between the date the company became “insolvent” and the date a liquidator is appointed over the company.
As with many things in life, being proactive and taking preventative measures is imperative to navigating these challenging times. Early intervention may help to avoid and/or reduce any personal liability exposure should a company be or become insolvent and may maximise the chances of a company’s business continuing.
A liquidator is required to complete investigations into a company’s affairs and in particular, determine whether a company is insolvent
To learn more about how SV Partners can assist, call us on 1800 246 801 or via email at contact@svp.com.au. Liability limited by a scheme approved under Professional Standards Legislation
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Can I Trust My Trust?
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rusts have become a fairly common feature in asset protection in Australia, particularly over the last 20 or so years. Lawyers, accountants and financial planners often advise clients to structure their affairs in order to offer the best possible chance of protecting assets, which often involves assets being placed into a trust structure. On the face of it, trusts offer an additional layer of protection (amongst other benefits, including tax benefits). However, when things don’t go well, we are often told “But it’s in a trust, you can’t get it”, which unfortunately is not always the case. This article explores some of the common methods insolvency practitioners use to look beyond a trust in order to recover assets for creditors. Note that a trust must have a trustee and the trustee holds title to any assets “on trust” for the beneficiaries. Any references below to assets owned by a trust or claims against a trust are done so for simplicity and illustrative purposes only.
Issue 1 - Transferring Assets to a Trust The first thing to consider is – how did the asset get into the trust? Often, we see situations where an asset was owned by an individual or a company and that asset was simply transferred to a trust as part of an asset protection restructure. If there was no payment by the trust to the original owner in exchange for the transfer, it is usually pretty easy for a Liquidator or Bankruptcy Trustee to overturn the transfer and look to claim the asset. For example, John owns his house which he purchased on his own 15 years ago. Along the way, John sets up a business and is advised to set up a trust and transfer his house into the trust to help protect the house in case his business fails. John establishes a trust and transfers the title of the property to the trust with no money received in consideration for the transfer. John subsequently goes Bankrupt due to a failed business venture. On face value, John’s Bankruptcy Trustee could void the transfer of John’s house to the trust and claim it for the benefit of John’s creditors.
Issue 2 - Loans to the Trust In issue 1, we looked at a simple case where an asset is transferred to a trust without payment. Often what happens is that a loan account would
Adam Kersey - Associate Director | Brisbane be created in favour of the person transferring the asset to the trust. In the example provided, a loan from John to the trust would be created for the value of the house. If the trust did not repay that loan and John went Bankrupt, John’s Bankruptcy Trustee would demand payment from the trust and often look to wind up the trust, therefore leaving the house available for recovery to repay the loan owing to John. Issue 3 - Contributing to Trusts Assets Another common issue we come across is an individual or company directly contributing to assets held within a trust. Often, trusts are established as part of advice provided to a client by a lawyer, accountant or financial planner and the client may not understand or appreciate the separation between trust and individual. This can create issues when the individual directly contributes to an asset. If we go back to John’s background above, let’s assume that John’s trust has been established for years and has accumulated funds. The trust uses its own funds to pay the deposit for a property and finances the rest with a bank loan. Over the years, John has personally been paying the mortgage repayments and the trust’s only real contribution has been the deposit, despite the mortgage being in the trust’s name. When John goes Bankrupt, his Bankruptcy Trustee will claim that the property is held on Resulting Trust (yes, another type of trust!) for John given he has been paying the mortgage, and will look to realise the property. General Observations The law on trusts is a complex area that is often not easy to navigate. Notwithstanding potential law reform that may be coming (long overdue and will hopefully simply our jobs), there are pitfalls for individuals and companies looking to structure their affairs through trusts. Unfortunately, it’s not as simple as thinking that something in a trust is safe when a Liquidator or Bankruptcy Trustee comes knocking. The above examples may seem basic (and are certainly not exhaustive) but are fairly common occurrences which often catch people by surprise. Generally speaking, trusts are great when things are going well. When things don’t go well, relying on a trust may not provide the protection first believed. If you have any concerns about how your client’s trust may stack up if circumstances change for the worse, we suggest you contact an advisor to understand where assets may be at risk. Liability limited by a scheme approved under Professional Standards Legislation
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Business Improving or Time to Exit With Dignity?
Malcolm Field - Director | Perth
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t’s finally December and time to reflect upon the year at a personal level. It’s also an opportune time for staff to make a self-assessment of performance for the last 6 months and to sit down with their manager/director for some feedback on what has been and to discuss what goals should be set for the year ahead. They say that what you fail to measure and set benchmarks/KPIs for will not change. Well not for the better anyway! Of course that is true of all performance – staff results, customer service and profitability. Like driving a truck down a highway, some distractions are inevitable and will cause the driver to slow down - a cheeky mobile call with a friend or being so focused on the upcoming exit lane and the rest of the journey that the speed drops to 80 in the 100 zone. How often do we see that? Business owners and managers are only human and can get distracted by the volume of correspondence, calls, meetings and other tasks which collectively soak up their days while aiming to meet client/ customer needs. It’s not surprising then that financial difficulty creeps up in the businesses we ultimately see and even more so once personal/family issues weigh in for business proprietors. Financial support from the Government through COVID cash flow boost, Jobkeeper, Jobmaker and Homebuilder programs and for those businesses that could/can access capital, instant asset writeoff and temporary full expensing, have gone a long way to grow the Australian economy out of the June 2020 recession that at times seems long forgotten.
Just as the Federal Government has been weaning us off financial stimulus (carrot), there is a post-election debt collection campaign (stick) lurking in the background. Since April 2020, the ATO collection processes have been turned off which has been great to see businesses survive some really tough financial times (lockdowns) while other businesses have virtually been “on steroids” riding a wave of stimulus success. But even for the building industry, high volumes of work have caused high demand for trades and subcontractors and in turn overheated prices for certain goods and services – a recipe for financial trouble if business managers and owners are not maintaining strong financial controls/discipline. Relationship bankers will be a good “check in” point for some businesses, getting a sanity check on business performance, be that compared to industry trends and otherwise against statutory obligation compliance. For others, perhaps with less substantial banking facilities, their accountant will be the check in point for BAS compliance and hopefully engaging in conversations around the 3-12 month cash flow forecasts for the business. The ATO has told us that notices including warning letters and Director Penalty Notices are in the immediate pipeline, so be on the look out for these and in the meantime make sure director home addresses are correctly recorded with ASIC. While obtaining court judgments, winding up orders and court ordered bankruptcies are not expected until the middle of the 2022 calendar year, there is potentially a once in a life-time opportunity right now to negotiate outcomes with the ATO while they are in support mode and have even used the words “supporting an exit with dignity”.
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