Colleagues - The Official SV Partners Newsletter - Issue 31 March 2021

IN THIS ISSUE 01 What do you do when the Merry-go-round stops?

03 Where’s my money? I want to be paid and that means now!!!

04 The DPN and GST have been going steady for 1 year!

Scan to read more articles

svpartners.com.au 1800 246 801

What do you do when the Merry-go-round stops?

W

Stuart Otway - Director & Travis Olsen - Associate Director | Adelaide

ith the stimulus and protection measures introduced by the Federal Government coming to an end, companies may face pressure from creditors once again.

Any prudent director of a company facing financial difficulties should seek the advice of their accountant or solicitor before taking any steps to address financial difficulty.

Where appropriate, the expertise of a suitably qualified insolvency professional may be required.

When experiencing financial difficulties, we suggest: Viability Assessment The first step in navigating the way through any financial difficulties is to consider the viability of the underlying business and whether there are any changes to the business operations that can be made to ensure that the business can be viable into the future.

A business that is not viable will likely fail at some future time. A director who puts their personal assets into the business without a well-advised plan, may limit the options available to them at a later stage.

RESTRUCTURING VIABLE BUSINESSES Where the underlying business is viable and the directors wish to work out of the financial difficulties, the following restructuring options are available: Informal arrangements These can take on any form and are simply negotiations between the company and its creditors as to repayment of all or part of the debts owing.

Informal agreements will only bind those creditors who enter contractual arrangements with the company. If a creditor does not participate or is not included, they may be able to take steps to wind up the company and undermine the informal restructuring process.

These informal arrangements may be combined with the Safe Harbour provisions in order to potentially protect the directors from any insolvent trading claim should the arrangements fail, and the company is wound up.

Voluntary Administration (VA) A VA has been the most commonly utilised method for restructuring in the last 20 years. It involves an Administrator being appointed and taking control

Liability limited by a scheme approved under Professional Standards Legislation

2

SV Partners

Travis Olsen Associate Director

Stuart Otway Director

of the company and its business, including trading the business.

During the Convening Period (usually 20 business days), an interested party (usually the directors) may submit a proposal for a Deed of Company Arrangement (DoCA). The Administrator is also required to investigate the affairs of the company and at the end of this period, convene a meeting of creditors to consider the proposal along with a report which: ►

reports on the company’s history, cause of failure and financialaffairs;

►

considers the recovery of transactions in the event the company is wound up;

►

provides details of the proposal to creditors; and

►

provides the opinion of the Administrator as to whether the proposal is in the creditors’ best interest to accept.

Creditors have the option of accepting the proposal, winding up the company or terminating the VA. If the proposal is accepted and the DoCA signed, control of the company usually reverts to its directors who may continue the company’s trading operations. Once the terms of the DoCA are complete, all claims bound by the DoCA are extinguished.

Small Business Restructuring The VA process can be costly depending on the circumstances of the company and smaller businesses may not have the funds available to utilise this restructuring tool. Accordingly, the Government has implemented a new Small Business Restructuring (SBR) regime.

There are certain eligibility criteria that must be met in order to utilise SBR, however the main

one is that a company must have less than In addition, directors may be exposed to an $1,000,000 in creditors. insolvent trading claim and/or a breach of director’s duties claim in the event that the The SBR process involves the appointment of company continues to trade whilst insolvent and a Small Business Restructuring Practitioner is later wound up.

(Practitioner), who assists the company with preparing a plan usually within 20 business days Similar options exist for a company facing to be put to the company’s creditors. financial difficulties with an unviable business.

They include: A key difference between a VA and the SBR appointment types, is that in an SBR, the ► Informal arrangements directors retain control of the company and ► Voluntary Administration subject to certain controls, may continue the ► Creditors Voluntary Liquidation trading operations without the Practitioner’s input. ► Simplified Liquidation Once the plan has been provided to creditors, the Practitioner will provide a report on the company’s ability to comply with the plan, which is then voted on by creditors. Further differences between the SBR and VA process are that related parties are not able to vote on the SBR plan and the plan must be completed within 3 years (a DoCA does not have any time limitation).

Types of Proposals We are often asked what types of proposals can be put to creditors and what will creditors likely accept. We have sought to answer these questions in this article.

Information regarding the various types of proposals are set out in an article located at svpartners.com.au/proposals-to-creditors/

If accepted, the Practitioner assists the company with implementing the plan and the creditors Time is of the Essence are then paid in accordance with that plan. If the proposal is rejected by creditors, there is Time is of the essence when advising your client no obligation on the directors to do anything experiencing financial difficulties. further (e.g. place the company into liquidation).

A typical example that we see is where a Like the VA, unsecured creditors who do not director fails to act on a winding up application participate in the process are caught by the in a timely manner and attempts to appoint a plan and their debts are extinguished at the VA the day before a winding up hearing. In such completion of the plan. circumstances the Courts are likely to terminate the VA and wind up the company.

Unviable businesses Seeking advice at the earliest opportunity can As noted above, unviable businesses may fail at provide the best outcome for your clients by some point in time, depending on the financial way of providing multiple options that may exist resources at the disposal of the directors. should they eventually require it.

It should be noted that where a company is In addition, seeking advice should enable you to insolvent, a director is required to consider advise your client with the worst-case scenario the company’s creditors as part of their duties. in mind.

Liability limited by a scheme approved under Professional Standards Legislation

SV Partners

3

request that a Bankruptcy Notice be issued to the Debtor.

Daniel Luckman Senior Manager

Where’s my money? I want to be paid and that means now!!!

There is no doubt 2020 was a year that turned the world upside down, inside out and changed the way the word “unprecedented” will be used forever.

Initially, there was good reason to be patient and allow debtors further time to pay their debts. It was after all “unprecedented” and this is what Mr Morrison PM so politely asked us to do…

Fast-forward into 2021, many months after Covid-19 first made its way to our shores, and your customers’ debts continue to go unpaid.

You’ve had enough. You are no longer sure whether the excuses provided by customers are genuine and even if they are, quite frankly, you just can’t keep “carrying the can”.

or lawyer. For a large number of debtors, this is the prompt they need to get the debt paid.

A demand letter may also be the catalyst to consider a resolution without the need to commence legal proceedings. You might be wondering why you might consider compromising the debt and accepting a lesser amount at this point, particularly when there are no good reasons the debt shouldn’t be paid. The answer is that money has a time-cost value, litigation can be both costly and time consuming and there is no certainty as to the outcome.

When you are seeking to recover a debt, you should keep in mind the old adage “a bird in the hand is worth two in the bush”.

Typically, you have already issued your invoice for payment, sent a letter or email setting out the amount owed (including how to make payment) and followed this up with numerous phone calls, emails and maybe even confronted the customer in person and placed their account on stop credit.

3. Commence legal proceedings to recover the debt

So, what do you do now?

Just the action of commencing legal proceedings can sometimes elicit a response from a debtor, similar to the response shown when a demand letter is received. You should be aware that once you commence legal proceedings, it is not always as simple as “walking away” from your claim if you no longer wish to pursue the matter or the costs outweigh the benefits. The Court has certain processes which must be followed before a claim can be withdrawn.

This article will explore the typical steps taken to enforce recovery of a debt and some of the commercial and practical considerations that should be considered throughout the various stages.

1. Identify the entity that owes the debt (the Debtor) In most cases, this will be relatively straight forward. You will have an account application form, purchase order or contract that clearly states the entity or entities that owe you the debt. It is however important you correctly identify the type of entity (that is, a company, person/individual, partnership of companies or individuals) that owes you the debt as this determines your options in the later stages of debt recovery.

You may need to seek assistance from a professional (such as a debt collector or lawyer) to identify the correct entity as it is not always easy, particularly in more complex dealings.

2. Engage a debt collector or lawyer to issue a demand letter It is remarkable how many debts get paid after a stern demand letter is sent by a debt collector

If demands are ignored or you otherwise aren’t getting anywhere, the most common action to take is to commence legal proceedings to recover the debt.

The purpose of commencing legal proceedings is usually to obtain judgement against the Debtor for the amount owed to you (although there can sometimes be multiple purposes). A judgement is formal recognition through the Court system that you are owed a debt by a party.

Obtaining a judgement allows you to pursue further options to enforce recovery of the debt, most commonly to issue a Statutory Demand or Bankruptcy Notice (although it is not always necessary to obtain a judgement to issue a Statutory Demand).

4. Issue a Statutory Demand or Bankruptcy Notice If your debt isn’t disputed and/or you have obtained a judgement for the amount owed, you are able to issue a Statutory Demand or

Both a Statutory Demand and Bankruptcy Notice are formal demands for the payment of a debt, which, if not complied with, constitute events of insolvency.

If the Debtor is a company, a Statutory Demand is issued to the Debtor. If a company fails to comply with a Statutory Demand, it is presumed to be insolvent.

If the Debtor is an individual, a request needs to be made to issue a Bankruptcy Notice to the Official Receiver (a delegate of the Australian Financial Security Authority, the Federal Government Department that regulates and controls personal insolvency in Australia).

To issue a Bankruptcy Notice, you must have obtained a judgement against the Debtor. If a Bankruptcy Notice is not complied with, the Debtor is deemed to have committed an “Act of Bankruptcy” .

5. Commence Court proceedings to wind up or bankrupt the Debtor Once a deemed event of insolvency has occurred, you can instruct a lawyer to commence Court proceedings to have the Company placed into Liquidation or the Individual made Bankrupt. You can rely on the Debtor’s failure to comply with the Statutory Demand or Bankruptcy Notice to support your application.

If you are successful with your application, in the case of a Debtor Company, a Liquidator will be appointed to wind up the Company. In the case of an Individual Debtor, a Bankruptcy Trustee will be appointed to administer their Bankrupt Estate.

A Liquidator or Bankruptcy Trustee will investigate the Company’s/Individual’s affairs and where it is permissible under the Corporations Act or Bankruptcy Act and it is commercially viable to do so, seek to recover assets of the Company/ Individual. The Liquidator or Bankruptcy Trustee will provide you with reports on the financial position of the Company/Bankrupt Estate and advise the likelihood of a dividend payment.

The debt owed to you is claimed in the Liquidation or Bankruptcy and you are entitled to receive dividends paid to creditors. In some cases, you will not receive a dividend payment and there are no other options for you to be paid your debt (in which case, the debt will need to be written off as not recoverable).

The payment of all or part of your debt (that is, a dividend payment) largely depends on the amount of funds recovered into the Liquidation/ Bankruptcy, the costs of conducting the Liquidation/Bankruptcy and the amount of funds owed to other creditors of the Company/ Individual.

In Australia, your options to recover an unpaid debt are varied (particularly if all or part of the debt is disputed). This article has not covered all options available. You should seek specialist advice from an accredited debt collection expert or lawyer if you intend to take formal steps to recover a debt.

Liability limited by a scheme approved under Professional Standards Legislation

4

SV Partners

Can you believe it has been 1 year (give or take a few days) since GST1 finally hooked up with the Director Penalty Notice (DPN) Regime? It was a relationship we all saw coming for years, but as timing has it, it did not attract as much attention as it ought to have, thanks to a certain virus you may have heard of (I acknowledge that PAYG and SGC are also shacked up with DPN – but I don’t judge).

The DPN and GST have been going steady for 1 Year!

The one working hardest to push these lovebirds together, the Australian Taxation Office (ATO), has not had the opportunity to flout its success over the last year, in part as it was overwhelmed with Covid-related tasks but mostly because the timing would have been a major PR and economic misstep.

However, as the economic impact of Covid passes for the majority and the ATO staff catch their breath, we know the ATO will start to refocus its agenda toward recovery, and this will include outstanding GST through the DPN regime.

We have circulated the technical details of the DPN regime previously, so here is a quick recap: From 1 April 2020, GST joined the DPN regime. As such, company directors may now find themselves personally liable for GST, pay as you go withholding (PAYG) and superannuation guarantee charge (SGC) - or technically the ATO may impose a penalty on the director equal to those outstanding liabilities. This can happen in one of two ways: Non-lockdown DPN For GST and PAYG, where the company lodges its business activity statements (BAS), reporting GST and/or PAYG liabilities, with the ATO on time, or within 3 months of the due date; or

Matthew Bookless - Director | Gold Coast These are; pay the debt, appoint a voluntary administrator or appoint a liquidator. If none of these are done, the director will become personally liable upon the expiration of the notice.

It is important to note, if the company enters into a repayment arrangement with the ATO, whether inside the 21 days or not, the personal liability will continue to apply for the director so long as the DPN has been issued and expired.

Lockdown DPN For GST and PAYG, where the company fails to lodge its BAS, reporting GST and/ or PAYG liabilities, with the ATO on time, or within 3 months of the due date; or

For SGC, where the company lodges an SGC Statement with the ATO by the deadline for the payment of super (note no additional 3-month window for SGC);

For SGC, where the company fails to lodge an SGC Statement with the ATO by the deadline for the payment of super;

and the debts remain outstanding, the ATO will be required to issue a notice (the DPN) to the director showing the outstanding debt (only GST, PAYG and SGC) which they seek to enforce under the DPN regime. The DPN will provide three (3) options to the director to remit their personal liability if undertaken with 21 days of the DPN date.

then the director will be automatically personally liable for those debts as soon as the relevant lodgement becomes outstanding per the above timeframes.

When the ATO seeks to pursue the director in this instance, a DPN must be issued, as somewhat of a formality, however there are no options available for the director to avoid becoming personally liable.

1 GST, Wine Equalization Tax (WET) and Luxury Car Tax (LCT) have all been included in the DPN regime from 1 April 2020, however for the sake of simplicity I have just referred to it as GST in this article.

It is important to note that any incoming company director will become personally

liable for the company’s outstanding GST (relating to 1 April 2020 and beyond), PAYG or SGC that predates their appointment if they do not take steps to do one of the following within 30 days of their appointment: ►

Pay the outstanding debts in full;

►

Appoint a small business restructuring practitioner;

►

Appoint a voluntary administrator; or

►

Appoint a liquidator.

Resigning within 30 days of the appointment will not protect the individual from the personal liability. Accordingly, it is critical that the company’s lodgement history and outstanding GST, PAYG and SGC forms part of the due diligence review prior to installing a new director to a company.

It can be tempting to tune out to firstanniversary announcements, public declarations of love and the like, but this is one to ensure your clients take notice of!

SV Partners is well placed to advise your clients on their personal exposure under the director penalty notice regime.

Seeking advice early can be instrumental in securing a superior outcome and accordingly our insolvency experts make themselves available for cost and obligation free meetings with clients at short notice at our many office locations.

Liability limited by a scheme approved under Professional Standards Legislation