Corporate Frequently Asked Questions

Insolvent trading is the ongoing operation of a company that is not able to meet the repayments for their debts. Company directors are liable for insolvent trading if legal action is pursued by the liquidator on behalf of creditors.

It is the duty of the company director to co-operate with the liquidator during the insolvency process by promptly completing their Report as to Affairs form and provide all required company books and records.

The company director is usually not liable for the debts of a company unless they have personally guaranteed debts, have an expired Director Penalty Notice from the ATO (prior to administrator has been appointed), they have been found guilty of insolvent trading or owe certain personal liabilities.

An unsecured debt is where the creditor has not accepted the guarantee of a property/asset in return for loaning money such as a credit card.

A secured debt is where a creditor holds the right to ownership of a property/asset until the debt is repaid such as a home loan.

There are a number of factors that can indicate that your company is experiencing financial distress. Being unable to pay critical creditors, staff superannuation and the Australian Taxation Office are the most common. Below are some of the signs the Australian Securities and Investments Commission (ASIC) states can indicate your company is undergoing financial difficulty:

• ongoing losses
• poor cash flow
• lack of cash-flow forecasts and other budgets
• creditors unpaid outside usual terms
• solicitors’ letters, demands, summonses, judgements or warrants issued against your company
• suppliers placing your company on cash-on-delivery (COD) terms
• overdraft limit reached or defaults on loan or interest payments, or
• overdue taxes and superannuation liabilities.

As a director of a company in liquidation, you no longer have the ability to act on behalf of the company in any capacity. However, you do have the legal obligation to assist the liquidator when requested to do so. Some of the obligations of a director include:

• providing the company’s books and records
• advising the location of the company’s books and records if they are not in your possession
• advising the liquidator of the location of the company’s assets and assisting with their realisation if requested to do so, and
• providing the liquidator with a report as to affairs.

Where a director fails to assist the liquidator as requested, the liquidator may refer the matter to the Australian Securities and Investments Commission (ASIC) for prosecution.

Insolvent trading occurs when a director allows a business to incur debts even though they are aware the business is unable to pay them as and when they fall due, rendering the business insolvent.

It is important to note that the duty to prevent insolvent trading also applies to any person acting in the position of director, even if they are not formally or validly appointed as a director.

A director may be held personally liable to compensate creditors for the amount of the unpaid debts incurred from the time the business became insolvent to the start of the liquidation.

In 2015, the Australian Securities and Investments Commission (ASIC) focused on insolvent trading by directors, noting that the following penalties can apply in certain circumstance:

• Civil penalties: these can apply for contravening the insolvent trading provisions of the Corporations Act 2001, which can include pecuniary penalties of up to $200,000.
• Criminal charges: if dishonesty is found to be a factor in insolvent trading, a director may also be subject to criminal charges, which can include a fine of up to $220,000 or imprisonment for up to five years, or both.

The Corporations Act 2001 provides some statutory defenses for directors. However, directors may find it difficult to rely upon these if they have not taken steps to keep themselves informed about the company’s financial position.

Source, and for further information, please visit the ASIC website here.

A director is not normally liable for the debts of a company unless they have provided personal guarantees. However, there are provisions under the Taxation Administration Act 1953 that make directors personally liable for taxation debts under certain circumstance.

Read more about director penalty notices here.

Similar to the director penalty notice issued by the Australian Taxation Office, the Office of State Revenue (OSR) has the ability to issue a compliance notice pursuant to Section 47B of the Taxation Administration Act 1996 to make directors personally liable for payroll tax debts.

A director can avoid the personal liability associated with the compliance notice, if one of the following is undertaken within the twenty-one (21) day period:

• The company pays the liability in full
• The company comes to a "special arrangement" with the Commissioner
• The company is placed into voluntary administration, or
• The company is placed into liquidation.

Eligible employees are entitled to claim under the Federal Government Scheme known as Fair Entitlement Guarantee Scheme (FEGS), which provides for various employee entitlements upon the insolvency of a business. However, it should be noted that FEGS does not cover outstanding superannuation.

Whilst there is the ability to restructure a company in financial distress, companies that are insolvent or are expected to become insolvent should seek professional advice prior to any efforts to restructure the company. The option of a voluntary administration followed by a deed of company arrangement is available, if professional advice is sought early enough.

(Source: ARITA)

A bank, or any other type of secured creditor, which has security over a company’s assets as a condition of lending money to the company (like a mortgage), can choose to appoint a “receiver” if the company has failed to meet its obligations.

The main responsibility of a receiver is to sell the secured assets to pay back the money owed to the secured creditor. The receiver has no responsibility to report and pay money to unsecured creditors (those was are owed money by the company before the appointment).

The receiver may decide to continue to trade the business in an effort to sell it as a going concern, which generally obtains a better price than just selling the individual assets. The receiver must pay for any properly authorised supplies made to the business by a supplier, or for any property owned by another party and used by them (for example leased company premises or equipment), during the receivership. The receiver is personally liable to pay for these items if the company does not have enough money to make the payment.

(Source: ARITA)

Since 1 July 2012, all notices relating to the appointment of an external administrator (Liquidator, Administrator, Receiver/Receiver and Manager) to a company are published on the Insolvency Notices Website maintained by the Australian Securities and Investments Commission (ASIC) – www.insolvencynotices.asic.gov.au. It is possible to search the website by company name or ACN to check if a company has gone into liquidation. You do not need to be registered or pay a fee to search the insolvency notices website.

Information regarding a company’s status can also be obtained by getting a company search from the ASIC register – www.asic.gov.au. These searches provide more detailed information than the information available from the insolvency notices website but you need to register with a search provider and pay a fee for the search. Details are available on the ASIC website.

Information regarding an individual’s insolvency status can be obtained from a search of the National Personal Insolvency Index (NPII) maintained by the Australian Financial Security Authority (AFSA) – www.afsa.gov.au. You need to register with a search provider and pay a fee for these searches and details are available on the AFSA website.

"Administrators and Liquidators work for the directors"

This is a myth. Insolvency practitioners are appointed by the directors of a company in a voluntary administration, or the company’s shareholders in a voluntary liquidation, and are bound to act in accordance with the Corporations Act and therefore in the interests of all creditors.

In contrast, under a receivership the appointed receiver is generally working for their appointor.

(Source: Australian Securities and Investment Commission)

Shareholders rank behind creditors in a liquidation, although in some circumstances they can claim as a creditor. As a shareholder, limited information is received from the external administrators of insolvent companies.

If a company is placed into administration or liquidation, shareholders cannot transfer shares in the company without permission from the external administrator or the Court.

As a shareholder of an insolvent company, you can realise a capital loss in certain circumstances:

• if a liquidator or deed administrator makes a written declaration that they have reasonable grounds to believe there is no likelihood that shareholders will receive any further distribution in the winding up, or
• if no such declaration is made by the liquidator, the deregistration of a company at the end of the liquidation also enables realisation of any capital loss.

You may wish to seek tax advice about your ability to realise a capital loss if you hold shares in a company which has been placed in voluntary administration or liquidation.

(Source: Australian Securities and Investment Commission)

The most common types of investments are shares, managed funds (also known as managed investment schemes) and unlisted investments such as debentures. Find out more about individual investment types below or read more on the ASIC website.

If you have not received your interest payment by the due date or an anticipated distribution from your investment, you should contact your investment company and seek financial advice on how the non-payment of your investment income will affect your personal circumstances.

A withdrawal (or redemption) freeze on your investment does not necessarily mean that the managed investment scheme or company you have invested in is insolvent. If you have been informed that your ability to withdraw your investment has been frozen and you are concerned, you should contact your investment company for further information.

You should consider seeking financial advice about how a freeze on withdrawing your investment will affect your personal circumstances. This will ensure that you are able to make the most informed decision in relation to your financial future.

With debentures, you lend your money to a business, usually for a fixed term. For this reason, debenture holders are usually creditors of a company.

The effect of the appointment of a receiver and manager, voluntary administrator or liquidator (often referred to as external administrators) will be to place a freeze on any payments to you. The external administrator will then oversee an orderly realisation of the assets of the company and distribute the net proceeds to creditors in the order of priorities set out in the Corporations Act.

If your scheme is a registered managed investment scheme and is wound up, the winding up is to be conducted in accordance with the Corporations Act and the scheme constitution. If the winding up is ordered by a Court, the Court may make orders relating to the winding up. The investment manager is generally responsible for realising all of the assets of the scheme, deducting reasonable costs (including unpaid creditors) and distributing the balance, if any, amongst members pursuant to the constitution and according to their respective interests in the scheme.

No. The ATO’s priority in respect of unremitted PAYG (and certain other taxes) was abolished in 1993 and the ATO now ranks equally with other unsecured creditors (over 20 years later some people are still unaware of this change).

However, the ATO is in a better recovery position in corporate and personal matters compared to other unsecured creditors because of the ATO’s legislative power regarding, among other things, director penalty notices (“DPNs”), statutory garnishees, PAYG withholding and SGC estimates, departure prohibition orders (preventing a tax debtor from leaving the country) and notices to provide information.

A method by which the ATO can impose personal liability on company directors for PAYG withholding and SGC debts without the delay or expense of taking legal action.

For further information, ask us for a copy of our Fact Sheet on DPNs.

• At BPS Recovery.
• Consult your accountant or lawyer.
• ASIC’s professional register of registered liquidators.
• Last resort – Google!

Unlikely. Shareholders rank behind creditors in a liquidation. However, you can probably realise a capital loss in due course.

You may be an unsecured creditor if you have:

• paid in full for goods or services to be collected or delivered later,
• paid a deposit, such as in a lay-by agreement or interest-free offer,
• bought a gift card or voucher and have not used it,
• returned a product and been issued a credit note,
• provided services or goods to the company on credit, or
• made loans to the company.

An employee who has also been a director of the company, or a relative of a director, at any time in the 12 months before the appointment of an external administrator. Excluded employees are entitled to only limited priority for repayment of their outstanding entitlements.

A liquidator must call a creditors’ meeting if at least one-tenth in value of all the creditors request in writing the liquidator to do so.

$2,000

Generally there are two categories of creditor: secured and unsecured. There are also priority (unsecured) creditors (i.e. employees) and occasionally contingent creditors.

With debentures, you lend your money to a business, usually for a fixed term. For this reason, debenture holders are usually creditors of a company.

The effect of an external administration is usually a freeze on any payments to you. There is then an orderly realisation of company assets and the distribution of net proceeds to creditors, in the prescribed order of priority.

A Deed Of Company Arrangement (DOCA) is a binding agreement between a company and its creditors governing how the company’s affairs will be dealt with.

You must provide the external administrator with all records and information in your possession, and if any company property and records are not in your possession, you must tell the administrator where they are. You must also assist by providing a written report about the company’s assets and liabilities.

Shareholders rank behind creditors in a liquidation, although in some circumstances they can claim as a creditor. As a shareholder you receive limited information from the external administrators of insolvent companies. If a company is placed into administration or liquidation, shareholders cannot transfer shares in the company without permission from the external administrator or the Court. As a shareholder of an insolvent company, you can realise a capital loss in certain circumstances.

In an external administration you are likely to be classified as an employee if you are:

• engaged by the company under an award, Certified Agreement, Australian Workplace Agreement or a contract of employment, and
• paid a salary, wages or commission.

Contractors are not employees. They are ordinary unsecured creditors.

First raise your concerns with the company. If this fails to resolve your concerns, your options include reviewing ongoing trading arrangements, seeking legal advice and lodging a complaint with ASIC.

This usually means that an independent insolvency practitioner has been appointed to the company as liquidator, voluntary administrator or receiver.

Generally, in addition to the requirement to ensure compliance with general and specific laws applying to your company’s operations, your primary duty is to the shareholders.

However, if your company is insolvent, or there is a real risk of insolvency, your duties expand to include creditors (including employees).

Obtain proper accounting and legal advice as early as possible, as this increases the likelihood of the company surviving.

No. It is part of the competitive, free enterprise market economy. What may be illegal is to do nothing, or carry on trading, while the business is failing.

Anyone over 18 years who is not disqualified from management.

But anyone becoming a director should have a good understanding of the issues involved with corporate governance, and be fully aware of their responsibilities, duties and exposure to personal liability.

Insolvent trading claims are usually made by the company’s liquidator.

However, in certain circumstances a creditor may pursue civil liability proceedings against directors contravening the insolvent trading provisions. Generally the creditor needs the permission of the liquidator or inactivity by the liquidator.

As a company officer you must assist any insolvency practitioner (liquidator, receiver or administrator) appointed; in particular you must provide reports as to affairs, records, information and other assistance, in order to avoid penalties.

Receivership is a unique form of administration that has developed historically largely through case law from the law of contract.

There are a number of categories of receivership. The purposes of receivership are varied but a common purpose is to appoint an independent person, known as a receiver or receiver/manager, to collect or make safe income or assets or both, usually for the purpose of realisation or at least protection, so as to benefit a particular party, or parties, or protect a party’s contractual rights.

One of the most common forms of receivership is the private appointment of a receiver by a charge or debenture-holder, the power for which arises from a contractual agreement between a lender or supplier and the company, and whose contractual objective is the repayment of moneys owing to the lender/supplier.

In the case of an insolvent entity, if the company is being wound up voluntarily (or goes into liquidation following a voluntary administration) or through the Courts, the liquidator must be a Registered Liquidator.

A Registered Liquidator is a person qualified by registration with ASIC to act as liquidator under the Corporations Act.

For a solvent company, the liquidator need not be a Registered Liquidator if the company is an exempt proprietary company, but in practice a Registered Liquidator is often chosen.

It is a demand for immediate payment of an outstanding debt by a creditor against a company. If the company fails to comply with the demand to pay, it is presumed to be insolvent and that presumed insolvency may be used as a ground for winding up by the creditor who made the demand, by any other creditor or by any other applicant for winding up.

Where a debt the subject of a demand is in substantial dispute between the company and the creditor, deemed inability to pay debts will not result.

A shadow director is a person on whose directions and instructions the directors of a company are accustomed to act.

Any such persons who exercise a strong influence over the board of directors, or even a majority of the board, can be classified as directors and can be liable for insolvent trading.

In an Court Liquidation, the liquidator is appointed by the Court, although the applicant can usually nominate a liquidator.

The shareholders appoint the liquidator in a Creditors’ Voluntary Liquidation and usually the directors appoint the administrator in a Voluntary Administration. In both regimes, creditors have the opportunity at the first meeting of creditors to replace the liquidator / administrator with the qualified professional of their choice.

Lease creditors have as security their goods subject to the relevant lease. If they suffer a shortfall after repossessing and selling their goods, the shortfall is an unsecured claim that has no priority.

Put simply, a preference is a transaction which has the effect of giving one creditor preference or advantage over other creditors in general.

The transaction must have occurred within 6 months of the company going into liquidation.

The rationale of the Corporations Act preference legislation is to enforce equal treatment of creditors by invalidating transactions that are preferential.

As soon as possible. Certainly when you receive notice from a liquidator that a dividend is to be paid, a claim should be submitted immediately. In any event, it is prudent for creditors (and useful for the liquidator’s investigation) to lodge their claims as soon as possible and to obtain acknowledgement of receipt of the claim.

Companies are liquidated and individuals bankrupted.

Two separate pieces of legislation are involved: liquidations are governed by the Corporations Act and bankruptcies by the Bankruptcy Act. At the finalisation of a liquidation, the company is deregistered, i.e. it ceases to exist, while a bankrupt survives bankruptcy. While a bankrupt loses their assets at the date of bankruptcy, one of the principal aims of the bankruptcy process is to provide a mechanism for the financial rehabilitation of bankrupts.

No. Even if the directors are guilty of a criminal offence, liquidators do not have the power to pursue criminal matters (and you only go to jail for criminal matters). Liquidators are duty bound to report criminal matters to the Australian Federal Police, ASIC and AFSA, but only these organisations, in conjunction with the Department of Public Prosecutions, can pursue and prosecute someone for a criminal offence.

Insolvency refers to a person or company being unable to pay their debts when those debts are due. If they are in this situation a person or company is considered to be 'insolvent'. From a legal perspective, the Corporations Act 2001 defines a person who is not solvent as being insolvent (s.95A (2)).

To determine if a company is actually insolvent the following question is asked: Is the company financially able to pay (in full) all of its debts as and when they are due? To answer this question the following must be considered:

• Cash reserves and what will be available at the time when debts are due
• Working capital, current cash flow and expected cash flow (i.e. is the company nearing a boom time for sales, like Christmas)
• Access to available and reliable sources of funding
• Ability to borrow
• Assets that would be available for realisation and their value (i.e. can assets be sold to cover debts)
• Times, dates and restrictions of the debt (i.e. can the due date be extended)
• Reliability of creditors who have made promises to pay

If it is determined that a company is insolvent it is an offence if the directors of that company continue to operate and incur more debts.

If you are a Company Owner or Director in NSW and you think you might be trading insolvently, you should immediately contact an Insolvency Lawyer to discuss your situation and obtain advice.

According to ASIC, there are a number of early indicators that can help a company identify if they are on the road to insolvency. These include:

• Disorganised, or non-existent, internal accounting procedures
• Incomplete and/or misleading financial records
• Noticeably poor cash flow (in comparison to other years)
• Absence of structured budgets and future corporate strategic plans
• Continued loss making activity
• Accumulating debt and excess liabilities over assets
• Defaults on interest or loan payments
• Involvement of a financier (to monitor cash flow and spending)
• Outstanding creditors of more than 90 days
• Judgement Debts (where the Court has determined that is a sum of money is due)
• Difficulties in obtaining finance, investment and loans
• Difficulties in realising assets
• Loss of key employees (management, senior executives, etc)
• Instalment arrangements entered into to repay trade creditors

If you are a Company Owner or Director in NSW who is experiencing more than one of these early indicators, you should contact one of our Insolvency Lawyers to discuss your situation and obtain advice.

There are three options available to companies that are found to be insolvent. They are:

1. Liquidation
Liquidation is often referred to as 'Winding Up' and involves realising all assets (including property) to cover debts. A 'Liquidator' is appointed who determines the value of assets and sells them, whilst taking into the rules established by the Corporations Act. The company will then be deregistered and will cease to exist.

2. Voluntary Administration
Administration is a statutory process provided by the Corporations Act. It is a form of insolvent administration by which either the company's directors or, sometimes, a secured creditor, appoints a Voluntary Administrator who takes control of the company, investigates its history and financial affairs and makes a recommendation to creditors about how they should vote in respect of the company's future. Creditors may decide one of three things, that is, either to return the company to its directors (although in practice this rarely happens) or to place the company into liquidation or finally, if the directors have proposed a Deed of Company Arrangement (DOCA), to allow the company to continue trading subject to the terms of the DOCA which usually requires the directors to establish a fund for payment out to the creditors of a dividend in respect of their claims. The benefits of a DOCA are that the company may continue to trade and the creditors usually receive more than they would receive if the company were to be placed into liquidation.

3. Receivership
The term "receiver" usually applies to the appointment of a controller whose appointment comes either from the terms of a debenture or charge given by the company to a secured creditor such as the bank. It also applies to a person appointed by the Court to take control of specific assets for a particular purpose as, for example, when there is a breakdown in a personal relationship between trading partners who are not able to agree on how their company should be conducted. Broadly speaking, a receiver's responsibilities are usually to a single secured creditor such as the bank whereas a liquidator's responsibilities are to the general body of unsecured creditors.

If you are a Company Owner or Director in NSW who is operating a company that could be insolvent and you are not sure which of these options will apply to your situation, call an Insolvency Solicitor to obtain advice.

The term "Insolvency" is a generic term which applies equally to companies and to individual persons. As discussed above, any person or company who is not able to pay his/her/its debts when they are due is said to be insolvent. If a company becomes insolvent then it may enter into some form of insolvent administration, either liquidation or external administration, as discussed above. If an individual person becomes insolvent then he or she may enter into some form of personal insolvency administration such as one of the following:

Bankruptcy
If a person is unable to pay his or her debts when they are due, then a creditor to whom there is owed at least $5,000.00 may apply to the court for an order sequestrating the debtor's estate (which means placing them into bankruptcy). If a person is insolvent and wishes to obtain relief from his/her creditors he may file a debtor's petition admitting himself to bankruptcy. As with corporate insolvency arrangements under the Corporations Act, the Bankruptcy Act provides some other less formal debtor arrangements such "debt agreements" and "personal insolvency agreements" (sometimes referred to as Part X agreements). These provide some measure of relief against creditors without the harsh consequences of bankruptcy.

Consequences of Personal Insolvency
Personal insolvency puts the bankrupt in a position of financial disability for a period of three years or such further period as may apply when the period of bankruptcy to which the bankruptcy might be extended. It means that they must forfeit to their trustee any real estate they own, together with money held in bank accounts, motor vehicles and other personal property for distribution to the creditors of their bankrupt estate. They may not, without permission, apply for credit or loans and may not otherwise incur debt. If they are in employment they must make contributions to their bankrupt estate for the benefit of their creditors. One of the most enduring consequences of bankruptcy is a permanent record on their credit rating. Generally a bankrupt may not travel outside of Australia without permission of their trustee while they are bankrupt.

If you are a Director of a company that becomes insolvent there are some serious consequences to consider:

• You could lose your job if the company is unable to recover and have trouble finding a new job
• You could lose your house and other assets in order to pay the debts
• You might be disqualified as a Director and be unable to gain employment as one in the future
• You could face heavy fines and, depending on the circumstances leading to insolvency and the size of the debts owed, you could even face jail time
• You will personally and financially affect an average of 30-40 people (depending on the size of the company) as a result of your company becoming insolvent and being declared bankrupt

Insolvency is serious and is something that all company owners and directors should avoid at all costs. If you are a Company Owner or Director in NSW who wants to avoid insolvency you should contact one of our Insolvency Lawyers to begin putting in place processes and procedures designed to identify the early indicators mentioned earlier and protect against them.

Yes, the Commonwealth FEG scheme protects the rights of employees when a company is liquidated.

Access may be approved pursuant to the requirements of the appointee and provided your PPSR obligations having been met. Please refer to information on our website found here.

If there are funds left over after payment of the costs of the liquidation plus payments to other priority creditors, including employees, the liquidator will pay these to unsecured creditors as a dividend. Generally, the order in which funds are distributed is:

1. costs and expenses of the liquidation, including Liquidator’s fees
2. outstanding employee wages and superannuation
3. outstanding employee leave of absence (including annual leave, sick leave where applicable, and long service leave
4. employee retrenchment pay
5. unsecured creditors

The creditors are included in the process and within a month after the appointment of an Administrator, there are two meetings with creditors. Creditors learn what is happening, whereas previously in court liquidations, a creditors' meeting might not be held until months after the appointment of a Liquidator. In the Voluntary Administration (VA) process creditors are included, and included early.

Whilst an Administrator may have been appointed by the Directors of a company, the Administrator represents the interests of the creditors of the company. An Administrator is independent of the Directors.

Most creditors are supportive of the VA process. If proposals from Directors of companies are apparently achievable, administration is regarded by creditors as a better option than liquidation because they are likely not only to receive higher dividends, but have retained an on-going customer. What is the benefit of a Voluntary Administration - is it a cost advantage? The Voluntary Administration (VA) regime enables a mechanism for staying creditors’ actions and winding up proceedings whilst reconstruction and rehabilitation strategies are implemented. Certainly cost is an issue. A Voluntary Administrator does not have to deal with many matters imposed upon a Liquidator and as a consequence, reflects favourably on costs. But the flexibility of a VA is its main virtue, offering opportunities for companies to survive long term for the benefit of directors and creditors. Similarly, if it's apparent a company can't survive long term, then the flexibility available in VA would mean the company's assets could be handled in such a way as to achieve the best possible financial result for both it and its creditors. Regulatory requirements of liquidators generally prove to be costly for companies one way or another.

All bank accounts are frozen. Where there are no funds to pay off overdrafts, interest will continue to accrue. An Administrator would open a new bank account in the name of the company, but would include in the title of the account "Administrator Appointed". The Administrator then deposits all monies received into this new bank account.

Yes. As Voluntary Administrator of a company which is trustee for a trust, the Administrator is able to control the trust’s assets. A general proposition of law is that a trustee of a trust has a right of indemnity against the trust assets.

No. A partnership is not a corporate entity and VA’s relate only to companies under the Corporations Act. However the VA process is very similar to the Part X principle of the Bankruptcy Act 1966, whereby individuals can come to arrangements with creditors so as to avoid bankruptcy. A similar arrangement philosophy governs the Voluntary Administration process.