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FAQs.

Insolvent trading occurs when a company incurs debts when there are reasonable grounds to suspect that the company will not be able to pay its debts as and when they fall due. The directors of the company may be held personally liable for any unpaid debts incurred during the period that a company is insolvent. Note that the term ‘director’ in this instance may include persons other than those officially appointed as a director of the company.

No. The sooner action is taken the more likely a positive result will be able to be achieved. If creditors are not able to be paid within terms they are more likely to be supportive if a decision to deal with the financial situation is taken as early as possible and before the company, and the position of its creditors, becomes more severe.

Yes. Having spoken with Rodgers Reidy you are not obligated to take any immediate action, however, you will be much better informed of your options and the likely costs and risks of those options.

An ATO Garnishee Notice is a notice which the ATO may issue to a party that owes money to a company. The effect of this notice is that the party must pay the amount owed to the ATO instead of to the company. This can have a devastating effect on the company’s cash flow and highlights why professional assistance should be sought if a company is unable to meet its obligations to the ATO.

Yes.  A notice issued by the Australian Taxation Office (ATO) may automatically make the directors personally liable for the tax debts owed by the company.  Once issued the only way to avoid personal liability is to have the company wound up (liquidation), an administrator appointed, pay the amount owing or comply with a repayment plan agreed to by ATO within 14 days from the notice being issued.  If the repayment plan is not completed, the directors will be automatically personally liable for any shortfall.

It is important to understand that the ATO only has to send the notice under Section 222AOE to the director’s personal address as last advised to the Australian Securities and Investments Commission.  If the notice is not received or delivery is delayed then directors may become personally liable for the debt before they have any knowledge of the notice.  It is therefore imperative that companies seek immediate advice if ever they are unable to meet their obligations to the ATO.

We do not charge for initial telephone conversations or meetings to discuss your circumstances and options. Charges only commence once an appointment is proceeding. A schedule of our charges is available upon request.

Rodgers Reidy will promptly take control of the assets of the company. If the company is operating a business, its operations will be swiftly assessed and a decision made as to whether the business will continue to trade. The trading of any business is monitored on an ongoing basis. The company’s affairs will be investigated and reports will be provided to creditors. More specific information in relation to the circumstances of a particular company and its options may be discussed with Rodgers Reidy.

Once a decision to appoint has been made, most appointments can be initiated within an hour. This is subject to Rodgers Reidy being satisfied that it should consent to the appointment.

The role of a director brings about responsibilities and possible personal claims by parties who have dealt with the company. A claim for insolvent trading is against the directors of a company personally, which puts personal assets at risk. If you have given a personal guarantee to unpaid suppliers your assets are at risk. Assistance should be obtained as soon as possible to ensure that your circumstances will not result in personal losses.

In the event of bankruptcy of an individual, all assets fall under the control of the trustee with the exception of certain minor personal assets and a motor vehicle with limited equity.

Unless you have committed a criminal offence in the operation of the business you will not go to jail. A severe case of insolvent trading may be a criminal offence, accordingly you should seek assistance as soon as there is any reason to suspect that the company may be unable to pay its debts.

If your company cannot pay its debts (including ATO tax, PAYG and superannuation debts) as and when they fall due you should meet with Rodgers Reidy to discuss your options. Failure to take immediate action could result in your personal liability for some of these debts. It is important to understand that there are often many options available, including those that allow the company to continue to operate and, with the agreement of creditors avoid liquidation.

In Australia, a statutory demand is a formal written notice served by a creditor to a debtor company. It is governed by the Corporations Act 2001 and is a legal demand for payment of a debt owed by the company.

The statutory demand is a crucial step in the debt recovery process, and it is often used as a precursor to initiating winding-up proceedings against the debtor company.

Key points about statutory demands in Australia:

  1. Legal Requirement: The demand must meet specific legal requirements outlined in the Corporations Act. It must be in writing, specify the amount of the debt, and provide details about the debt, such as its nature and when it is due for payment.
  2. Minimum Debt Amount: The debt being claimed in the statutory demand must be at least the statutory minimum, which is currently $2,000.
  3. Strict Timeframe: The debtor company has 21 days from the date of service to either pay the debt, come to a satisfactory arrangement with the creditor, or apply to set aside the demand.
  4. Consequences of Non-Compliance: If the debtor company fails to comply with the demand within the 21-day period, it is deemed to be insolvent, and the creditor may take further legal action, such as applying to wind up the company.
  5. Setting Aside a Demand: The debtor company can apply to the court to set aside the statutory demand if there are valid reasons, such as a dispute over the debt, an offsetting claim, or if there is a genuine and substantial dispute about the existence or amount of the debt.

It’s important for both creditors and debtors to understand their rights and obligations when dealing with statutory demands, as failure to respond appropriately can have serious consequences for the debtor company. Legal advice is often sought by both parties to navigate this process effectively.

A bankruptcy trustee is a professional who is appointed to manage the affairs of a bankrupt estate. They are registered under the Bankruptcy Act 1966 and are required by law to realise the assets of the bankrupt estate, investigate the past financial affairs of the bankrupt, and distribute the funds recovered to creditors in accordance with the priorities set out in the Bankruptcy Act.

On the other hand, a registered liquidator is a professional who is registered under the Corporations Act 2001 to manage the process of winding up insolvent or failed companies. They are usually experienced accountants who can also be appointed to wind up the affairs of a solvent company. The role of a liquidator involves investigating the company’s affairs, protecting and realizing its assets, recovering any legal claims, and distributing the funds received to creditors and shareholders.

ASIC is the Australian Securities and Investments Commission, which is responsible for regulating bankruptcy trustees and liquidators in Australia. A registered liquidator is a natural person who is registered as a liquidator under the Corporations Act 2001. They are allocated a Registered Liquidator Number and their name and number appear on ASIC’s Register of Liquidators. Registered liquidators act in a fiduciary capacity, and often have total management control of the affairs, money and other property of a body corporate.

A bankruptcy trustee is a professional who is appointed to manage the affairs of a bankrupt estate. They are registered under the Bankruptcy Act 1966 and are required by law to realise the assets of the bankrupt estate, investigate the past financial affairs of the bankrupt, and distribute the funds recovered to creditors in accordance with the priorities set out in the Bankruptcy Act.

ASIC is the Australian Securities and Investments Commission, which is responsible for regulating bankruptcy trustees in Australia. A bankruptcy trustee is appointed as a receiver over property, assets, or even a partnership of individuals to realise the respective assets and distribute proceeds in accordance with relevant facts such as documented arrangements or Court Orders.

A registered liquidator is a professional who is registered under the Corporations Act 2001 to manage the process of winding up insolvent or failed companies. They are usually experienced accountants who can also be appointed to wind up the affairs of a solvent company. The role of a liquidator involves investigating the company’s affairs, protecting and realising its assets, recovering any legal claims, and distributing the funds received to creditors and shareholders.

ASIC is the Australian Securities and Investments Commission, which is responsible for regulating bankruptcy trustees in Australia. A registered liquidator is a natural person who is registered as a liquidator under the Corporations Act 2001. They are allocated a Registered Liquidator Number and their name and number appear on ASIC’s Register of Liquidators. Registered liquidators act in a fiduciary capacity, and often have total management control of the affairs, money and other property of a body corporate.

An Insolvency Practitioner is a qualified accountant who is registered by a regulator – AFSA and/or ASIC – and is authorised to administer insolvency procedures. Because of their specialist knowledge, they are uniquely qualified to advise businesses and individuals on a wide range of insolvency-related issues and can support them through financial difficulties. See also Registered Trustee and Registered Liquidator.

Glossary.

Words and phrases you may hear, and what they mean.

AFSA – Australian Financial Security Authority The Australian federal agency that regulates personal insolvency.
AIIP – Australian Institute of Insolvency Practitioners An association of Insolvency practitioners that limits its members to only Insolvency practitioners.
ARITA – Australian Restructuring Insolvency & Turnaround Association The Australian association for insolvency and restructuring professionals.
ASIC – Australian Securities and Investments Commission The Australian government agency responsible for regulating corporate insolvency.
Asset Any property owned by a person or company, including tangible and intangible items having value.
A Bankrupt A person who has been placed in bankruptcy.
Bankruptcy A proceeding which is initiated by the individual or a creditor when the individual cannot repay outstanding debts or financial obligations.
Bankruptcy Act 1966 The legislation regulating personal insolvencies in Australia.
Circulating asset Assets (e.g. trading stock, debtors) that a company is usually able to use, dispose of, and deal with in the ordinary course of business without the need to obtain the secured creditor’s consent.
Circulating security interest A security interest held by a secured creditor in circulating assets of a company. Previously known as a ‘floating charge’.sg
Committee of inspection A small group of creditors, or their representatives, appointed by the creditors of a company in external administration to assist and advise the external administrator. The committee of inspection monitors the conduct of the external administration, may approve certain steps in the administration and may give directions to the external administrator. The external administrator must have regard to, but is not always required to comply with, such directions.
Compromise Agreement to accept a lower amount in full and final satisfaction of a debt.
Contingent asset An asset that might arise if a certain event occurs (e.g. current legal action taken by a company may result in an asset if the company wins the case).
Contingent liability A liability that might arise if a certain event occurs (e.g. a current legal action against a company may result in a liability if the company loses the case).
Contributory A shareholder might be liable to contribute toward a company’s debt in a liquidation if their shares are not fully paid.
Controller A person appointed by a secured creditor to deal with assets subject to a security interest. This includes a receiver and a receiver and manager.
Controllership When a person appointed by a secured creditor to deal with assets subject to a security interest is dealing with a company’s assets that are subject to that person’s control (i.e. an appointment of a controller).
Corporate insolvency Insolvency that relates to a company – as opposed to an individual. Corporate insolvency procedures include:

·       liquidation

·       receivership

·       voluntary administration

·       small business restructure
Corporations Act 2001 Australian legislation regulating companies in Australia, including corporate insolvencies.
Court liquidation A type of liquidation that is initiated by a court order.
Creditor An entity owed money by another entity (the debtor).
Creditor-defeating disposition The disposition of property:

·       for less than the market value of the property or the best price reasonably obtainable, and’

·       which prevents, hinders or significantly delays the property from becoming available to benefit creditors in the winding up.
Creditors’ trust A separate legal arrangement to deal with creditor claims. Creditor claims are often transferred to a creditors’ trust as part of a deed of company arrangement.
Creditors’ voluntary liquidation A type of liquidation that is initiated by the board of a company and ratified by its shareholders.
Debenture A document acknowledging that a company undertakes to repay a sum of money lent to the company by the holder of the document.
Debenture trustee The debenture trustee undertakes a range of functions on behalf of debenture holders, including acting as a liaison between the issuer company and the debenture holders.
Debt An amount of money that is owed to an individual or company for goods supplied or services provided.
Debt agreement A flexible alternative to bankruptcy, a debt agreement is a legally binding agreement between a debtor and their creditors to repay the debt – usually for a lesser amount – by instalments. Debt agreements are usually used by individuals who have unmanageable consumer debt (credit cards)
Debt agreement administrator A person licenced to administer a debt agreement. A registered trustee can also administer debt agreements.
Debtor An entity owing money to another entity (the creditor).
Declaration of indemnities A declaration that must be provided to creditors by the appointed Insolvency Practitioner which informs creditors about any indemnities given to the Insolvency Practitioner to cover fees or other debts incurred by them in acting as the external administrator. The declaration provides information to allow creditors to decide whether they wish to replace the Insolvency Practitioner over concerns about independence.
Declaration of relevant relationships A declaration that an Insolvency Practitioner must provide creditors in an external administration which informs creditors about certain relationships. The declaration provides information to allow creditors to decide whether they wish to replace the Insolvency Practitioner over concerns about independence.
Deed Administrator The insolvency practitioner appointed to carry out a deed of company arrangement.
Deed of company arrangement A legally binding arrangement between a company and its creditors following a voluntary administration. The deed sets out how the company’s affairs and assets will be managed and what assets or funds are available to satisfy creditor claims. It aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up of the company, or both.
Director A natural person appointed as a director of a company who is then responsible for directing and managing the affairs of a company. This also includes a shadow director.
Director Penalty Notice (DPN) A DPN is a notice issued by the Australian Taxation Office to a director who has outstanding PAYG, GST or superannuation. The notice requires the director (within 21 days) to repay the amount specified in the notice, or appoint a liquidator, administrator or a restructuring practitioner. If the director does not comply with the notice, they become personally liable for the amount specified in the notice.
Dividend A share of the profit of a solvent company paid to shareholders. Also used to describe a sum paid to creditors out of the assets of an insolvent company.
Eligible employee creditor A creditor (including the Australian Taxation Office for superannuation guarantee charge) who, in a winding up of a company, would normally be paid their employment related entitlements ahead of ( “in priority”) other unsecured debts. These creditors have a special right to vote on a deed of company arrangement proposal that seeks to modify the priority payment order.
Eligible unsecured creditor A creditor entitled to have a say in a pooling determination made by a liquidator. The term generally covers the external unsecured creditors of a group of companies, but excludes debts owing between companies in the pooled group. A pooling determination relates to a decision to treat the affairs of a group of companies as if it were a single external administration.
Excluded employee 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 only entitled to limited priority for repayment of their outstanding entitlements.
External administration Companies under external administration include companies in voluntary administration, provisional liquidation, liquidation or subject to deed of company arrangement. It does not include companies under receivership or controllership.
External administrator A defined term for a registered liquidator formally appointed to control the affairs of a company and its property. Includes a provisional liquidator, liquidator, voluntary administrator and an administrator of a deed of company arrangement. It does not include receivers or controllers.
FEG The Fair Entitlements Guarantee – an Australian Government payment scheme administered by the Department of Workplace Relations, Employee Entitlements Branch to assist employees who have lost their jobs as a result of their employer’s liquidation or bankruptcy and are owed employee entitlements. The FEG operates in relation to claims for assistance for certain unpaid entitlements for all employer liquidations and bankruptcies that occur on or after 5 December 2012.
Indemnity An agreement between the external administrator and a third party to cover some or all of the fees and other debts incurred by the external administrator.
Insolvency practitioner A qualified accountant who is registered by a regulator – AFSA and/or ASIC – and is authorised to administer insolvency procedures. Because of their specialist knowledge they are uniquely qualified to advise businesses and individuals on a wide range of insolvency-related issues and can support them through financial difficulties. See also Registered Trustee and Registered Liquidator.
Insolvent When a person or company is unable to pay their debts as and when they fall due.
Insolvent trading Occurs when a company that is insolvent incurs debt with the knowledge that they will not be able to repay that debt. Company directors can be held personally liable for debts incurred whilst a company is insolvent.
Intangible asset An asset with no identifiable physical form (e.g. a contractual right, copyrights, patents and goodwill).
Liability A legal obligation to pay an individual or company.
Liquidation A process which results in a company being shut down. All the company’s assets are sold, and the money raised is used to repay its debts. The term ‘winding-up’ is also used. The four types of liquidation are:

·       court liquidation

·       creditors’ voluntary liquidation

·       provisional liquidation

·       members’ voluntary liquidation.
Liquidator The insolvency practitioner appointed to administer the liquidation of a company.
Managing Controller A managing controller is a receiver and manager, or any other controller who has functions or powers of management of the company.
Member (of a company) A shareholder.
Members’ voluntary liquidation A type of liquidation for solvent companies, that is initiated by the company. All the company’s creditors are required to be paid in full.
Non-circulating assets Assets that the company may not dispose of without the consent of the secured creditor such as physical plant and equipment.
Non-circulating security interest A security interest held by a secured creditor in non-circulating assets of a company.
Officer (of a company) A director, secretary or external administrator (in most cases) of the company.
Official Receiver The Official Receiver (‘OR’) oversees the administration of personal insolvency procedures in Australia. The OR is also responsible for issuing various notices under the Bankruptcy Act.
Official Trustee The Official Trustee is the government Trustee that administers personal insolvency appointments.
Personal insolvency Insolvency that relates to an individual – as opposed to a company. Personal insolvency procedures include:

·       bankruptcy

·       debt agreement

·       personal insolvency agreement.
Personal insolvency agreement A legally binding agreement between a debtor and their creditors to repay the debt – usually for a lesser amount.
Personal property Assets other than land and buildings. Includes cars, boats, business inventory, intellectual property (e.g. copyright and patents), bank accounts and debtors.
Personal Property Securities Act – PPSA PPSA is the legislation that governs security interests in personal property.
Personal Property Securities Register – PPSR A national online register that records information about security interests. It is administered by AFSA.
Phoenixing When a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts.
Poll (of creditors) A voting procedure where the chair of the meeting must consider both the number of creditors voting the same way and the value of their debts in deciding if a resolution is approved or not.
Pooling The practice of treating the affairs of a group of companies as if it were a single external administration.
Prescribed provisions Provisions that the Corporations Act 2001 (Corporations Act) takes to be included in a deed of company arrangement, unless the deed specifically excludes them.
Priority The order set down by the Corporations Act for the payment of debts and claims of an insolvent company by an external administrator.
Priority creditor An unsecured creditor entitled to be paid ahead of other creditors (e.g. employees).
Proof of debt A prescribed form creditors complete setting out details of their claim against the company, including how the debt arose and the amount claimed.
Provisional liquidation A type of liquidation where a liquidator is appointed as a caretaker to safeguard a company’s assets while the court considers a winding-up application.
Provisional liquidator A registered liquidator appointed by the court to preserve a company’s assets until the court decides a winding-up application or some other litigation regarding the company.
Proxy In an external administration a creditor or a shareholder can appoint someone else to represent them at a meeting. Usually a proxy attends and votes on behalf of the creditor or member who appointed them.
Proxy form A form that creditors or shareholders must complete to appoint a proxy for a creditors’ or shareholders’ meeting.
Public examination An external administrator, ASIC or a person authorised by ASIC can apply to court to question an externally administered company’s directors or any other person who may be able to give information about the affairs of the company. A Bankruptcy Trustee also has powers to conduct public examinations either in the Court or before the Official Receiver at AFSA.
Realise Convert assets into cash, usually by selling them.
Receiver A registered liquidator appointed by a secured creditor to realise enough of the assets subject to their security interest to repay the secured debt. Less commonly, a court may appoint a receiver to protect the assets or to carry out specific tasks. When ASIC refers to receivers, we mean receivers, receivers and managers and managing controllers (e.g. a person who has control of company property to enforce a debt owed by the company or a person appointed by the court).
Receiver and manager A receiver who has, under the terms of their appointment, the power to manage the company’s affairs.
Receivership A process which entitles a secured creditor to appoint an insolvency practitioner as a receiver to a company. The receiver’s role is to take control of the secured assets to repay the secured debt. The loan agreement gives the creditor a right to appoint a receiver under certain conditions.
Registered Liquidator An insolvency practitioner who is registered as a liquidator with ASIC. Only a Registered Liquidator can administer corporate insolvency procedures.
Registered Trustee An insolvency practitioner who is registered as a trustee with AFSA. Only Registered Trustees can administer personal insolvency procedures.
Report on Company Activities and Property (ROCAP) A prescribed form required to be completed by the directors and secretary of a company in liquidation, voluntary administration or receivership, giving details of the company’s assets and liabilities.
Restructuring The process of reorganising the ownership, financing and/or operations of a company with the goal of making it more profitable. See also turnaround.
Safe harbour Provisions in the Corporations Act giving directors an exemption from insolvent trading liability where they are developing a course(s) of action that is ‘reasonably likely’ to lead to a ‘better outcome’ for the company than administration or liquidation. There is a list of factors to be considered by directors in attempting to use the safe harbour provisions and directors should seek appropriate advice from a suitably qualified professional.
Secured creditor A creditor who holds a security interest in some or all of a company’s property
Security An asset pledged to guarantee the repayment of a debt. Security is intended to cover the debt amount if the debtor can’t pay it back.
Security interest A registration of a secured creditors interest in assets of an individual or company. Registrations must be recorded on the PPSR (with the exception of land and buildings).
Solvent When an individual or company is able to pay their debts as and when they fall due.
Tangible asset An asset with a physical form (e.g. stock or real estate).
Trade creditor An individual or company that has supplied goods and/or services to the debtor and remains unpaid.
Trustee A person or firm that holds and administers property or assets for the benefit of a third party.
Trustee in bankruptcy (or simply ‘trustee’) An insolvency practitioner who is licenced to administer personal insolvency procedures.
Turnaround The process of reviving a struggling company.
Uncommercial transaction A transaction that was unreasonable for a company to have entered into. It may be set aside by the company’s liquidator provided it occurred within two years prior to the winding up, and when the company was insolvent or if the company became insolvent by entering into the transaction.
Unfair preference A payment made or other benefit given to a creditor by an insolvent company that causes the creditor to be in a more favourable position than other unsecured creditors in a liquidation. The company’s liquidator can seek to recover an unfair preference provided it occurred within six months prior to the liquidation, and when the company was insolvent or if the company became insolvent by making the payment or giving the benefit.
Unsecured creditor A creditor that does not have security for a loan.
Voluntary administration An insolvency procedure where a financially troubled company appoints a registered liquidator as the Voluntary Administrator for the purpose of attempting to rescue – if possible – a company that’s in financial difficulty. The role of the voluntary administrator is to take control of the company, investigate the company’s affairs, report to creditors and recommend to creditors whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors.
Voluntary Administrator The insolvency practitioner appointed to carry out the voluntary administration of a company.
Voluntary Administrator A registered liquidator appointed to carry out the voluntary administration of a company.
Wind up (or ‘winding up’) See liquidation.
Winding-up order A court order for the winding up of a company (liquidation). The first step in a court liquidation, usually made after an application by a creditor.

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