Personal insolvency is expected to rise by 23% year-on year in 2024. On the corporate side, the ATO has ramped up Federal Court actions to claw back $30 billion in unpaid business taxes, and started 476 wind-up proceedings in the first 7 months of 2023 (compared with 14 over the same period in 2022).
Company directors who trade while insolvent, fail to pay a DPN by the due date, or who have breached the Corporations Act in other ways, may be held personally liable. This can mean having your personal assets seized, fines, or even criminal penalties.
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Our primary objective is to keep your business operating – liquidation is always the last resort. After assessing your risk of insolvency, we’ll devise a strategy that may include:
If you and any fellow directors decide on this route, your legal team will provide vital advice to protect your interests during the administration and associated investigation process. We regularly assist directors to:
If liquidation cannot be avoided, it is crucial to have an experienced insolvency law team review your situation before contacting liquidators to commence the insolvency process. As officers of the court, liquidators are vested with powers to:
If there are outstanding issues or past irregularities that have not been addressed through specialist legal counsel, you can be held personally liable, and even face prosecution in the courts.
Our insolvency lawyers work with you prior to commencing the formal liquidation process, ensuring your affairs are in order and any liabilities or exposures are minimised as much as possible.
When done properly, restructuring business operations to resume under a new framework allows you to retain the positive elements of an insolvent company, such as customer goodwill, your workforce, even your trading name. However, to avoid your a fledgling restructure attempt turning into illegal phoenix activity, you must take steps to ensure:
Our insolvency solicitors will advise on the viability of any potential restructure, then work with the various stakeholders to build back better.
In the 2017-2018 period, ASIC banned 45 company directors, some of whom were suspected of being involved in illegal phoenixing. Penalties for associated crimes can include large fines and up to 15 years’ imprisonment for company directors.
Our insolvency law and restructuring experts work with various stakeholders – creditors, liquidators, company directors or other individuals – to manage pre-insolvency and potential liquidation. While we only act for one party in a specific matter, we can advise stakeholders from all sides of a pre-insolvency, active liquidation, or post-insolvency matter.
Matters we assist with include:
Discover how we guided a construction company struggling in the post-COVID economy to salvage its business and protect its employees when faced with severe financial difficulties and tax issues.
Facing disputes with the Australian Tax Office (ATO) over significant tax debts and other financial challenges, the company directors sought our advice on implementing a restructure. Our plan aimed to manage the day-to-day operational expenses of a large workforce, maintenance of stock and equipment, and fulfilling lease obligations, as well as avoiding the negative impacts of potential Director Penalty Notices (DPNs) at all costs.
The recovery strategy included several key steps designed to stabilise the company’s financial and operational health:
Within the context of this strategic restructuring, it is essential to delve into the concept of Director Penalty Notices and their potential implications:
Directors can avoid personal liability under a DPN by ensuring that the company meets its tax reporting and payment obligations on time. In the context of financial distress or restructuring, it is critical for directors to stay informed of their tax obligations and consider the timing of asset sales and liquidation to manage potential liabilities effectively.
In this case, the construction company directors were acutely aware of their responsibilities and the looming threat of DPNs. Their strategic actions, particularly the timely decision to restructure and address debts, were informed by a desire to mitigate the risk of personal liability through DPNs. By engaging in a lawful and transparent sale of assets at market value, and appointing a liquidator post-sale, the directors demonstrated diligence in fulfilling their obligations and protecting the interests of employees and creditors.
With our help, the strategic restructuring facilitated the business’s recovery, protecting employee wellbeing while also shielding directors from liabilities including DPNs.
This case study underscores the importance of understanding and navigating the legal and financial obligations associated with company directorship, particularly in times of financial distress. By taking informed and proactive steps, the directors were able to steer the company through a challenging period, ensuring compliance with legal obligations, and ultimately facilitating a positive outcome for all stakeholders involved.
Exploring all possible options and ensuring the best outcomes for our clients is of the utmost importance during times of financial stress. When debt is closing in, the chance to consider multiple possible resolutions can provide peace of mind and a renewed opportunity for financial stability.
We handle insolvency cases, from personal to major corporations. Our insolvency team are experienced in supporting businesses through difficult legal and financial times. We take every step possible to avoid the cessation of business, the termination of major contracts, and encourage the continuation of employment.
Insolvency situations can sometimes occur due to circumstances outside your control such as: – a key employee has fallen seriously ill; – the business has expanded at an unprecedented and unsustainable rate; or – or a major debtor has failed to pay an account.
Even small occurrences can have major implications for a business. Our experienced team of insolvency lawyers and professionals are located in Brisbane, and work with our clients first hand to support them in both domestic and international claims.
Our insolvency lawyers have a wealth of experience in managing multiple stakeholders, frequently with contrasting views and objectives. We break through these difficulties to deliver effective strategies and results. We provide both informal services including advice, reviews, and account investigations, as well as formal consultations and services.
We regularly act for and advise creditors as to the recovery of secured and unsecured debts. We have also helped many of our clients to boost their recoveries in the future, including by drafting appropriate terms of trade and effective security clauses (such as retention of title (ROT), charging or caveat clauses) and to register security interests on the PPSR.
We also advise creditors and assist them in protecting their interests during the Voluntary Administration process, Deeds of Company Arrangement and the Liquidation process.
We regularly provide advice to company directors and individuals to effectively restructure their businesses, via informal arrangements and negotiations with creditors or formal processes (Voluntary Administration and Deeds of Company Arrangement, Liquidation, Part X Bankruptcy proposals) or to prepare for the possible appointment of an external administrator or trustee in bankruptcy.
Our knowledge and expertise provide our clients with a solid platform and strategy to navigate and get through times of financial difficulty.
We provide advice to insolvency practitioners on a daily basis in respect of a broad range of issues arising during Administrations, Deeds of Company Arrangement, Liquidations, Receiverships and Bankruptcy.
We pride ourselves on a trusted and long lasting relationship with our clients to provide excellent service and partnered outcomes for mutual benefit.
For more information about our pre-insolvency advice and services, contact us.
In difficult times, it’s quite common for struggling companies to request to enter into a payment arrangement with their creditors in order to sustain cash flow.
In accordance with the Corporations Act 2001, a liquidator has the ability to recover certain payments – known as unfair preferences – made by the company to creditors in the 6 months before the start of the liquidation commonly referred to as the ‘relation back day’.
The aim of taking preference action is to ensure that the assets of an insolvent person or company are distributed equally among the creditors.
If your business receives a preference claim from a liquidator, don’t assume that you can’t fight back.
Whether you are submitting or defending against a preference claim, we can help you to achieve the best results.
When investigating the affairs of the company, a liquidator needs to identify potential preference claims. The following are examples of strong indicators that liquidators look out for when trying to identify preferential payments:
In order for a Liquidator to successfully prove a preference claim, they need to establish that:
The Corporations Act provides creditors with defences to unfair preference claims.
In order to properly defend a preference claim, a creditor needs to establish that:
And that’s where our expertise comes in handy as understanding the evidence and presenting it in a clear, logical way for the court is vitally important to ensure the success of your defence or claim.
Whether you have received a preference claim or want to submit one, we can help.
When a company becomes insolvent, the liquidator is entitled to all the assets that belonged to the company at the commencement of the winding up. The liquidator then manages and distributes this property equally amongst the company’s creditors.
It isn’t uncommon for a company to make certain transactions or otherwise attempt to dispose of property in the wake of impending insolvency proceedings, which leaves little for the liquidator to distribute.
To combat this happening, the liquidator has wide ranging powers that allow them to regain sold/disgorged property for the benefit of the company’s creditors.
Transactions can be voided if they are considered:
Uncommercial transactions are the most common forms of voidable transactions.
According to Subsection 588FB(1) of the Corporations Act 2001, a transaction can be regarded as uncommercial if it is deemed that a reasonable person in the company’s circumstances (insolvency) would not have entered into the transaction, with regards to:
A transaction is considered uncommercial if it has no financial benefit or is detrimental to a company’s financial standing. The two most common uncommercial transactions made by companies include:
To be deemed ‘uncommercial’, the transaction must have resulted in a bargain of such magnitude that is cannot be explained by normal commercial practice.
If you have been party to an uncommercial transaction, we can help. Contact us to find out more.
A statutory demand is a demand in the appropriate form served by a creditor on a debtor requiring the debtor to satisfy or secure the debt within 21 days.
A statutory demand must be made in the correct form pursuant to section 459C of the Corporations Act.
A statutory demand must:
A statutory demand must be accompanied by an affidavit in support of the debt or a judgment of the Court.
It is important to note that the debt is required to be paid within 21 days of being served with the statutory demand; otherwise the creditor gains the presumption that the company is insolvent and can apply for a winding up order.
Accordingly, the debt should be paid immediately in accordance with the statutory demand.
There is also the option to resist the statutory demand. This involves filing an application with a supporting affidavit to the court within the 21 day period.
The creditor can apply to the court for a winding up order on the presumption that the company is insolvent. However, this presumption applies only where the winding up order is made within 3 months.
A voluntary administration generally occurs when company directors resolve to appoint a voluntary administrator to the company. In some circumstances, a voluntary administrator can also be appointed by secured creditors or a liquidator.
The first creditors’ meeting is called by the administrator within 8 business days of appointment.
At this meeting, two issues are decided.
Firstly, whether the creditors wish to appoint a different administrator.
Secondly, whether they wish to form a committee of creditors and if so, who will make up the committee.
The administrator will take control of the company, conduct investigations and report to the creditors and the Australian Securities and Investment Commission.
After the investigations take place, the second meeting of creditors will be held.
The administrator will provide a report with options for the company’s future.
These options may include:
Once the company enters voluntary administration, a moratorium comes into effect.
This moratorium prevents the company from being sued by creditors without the written consent of the administrator or the leave of the court (with some exceptions).
During this period, guarantees given by a director of the company are unenforceable.
A deed of company arrangement (DOCA) is an agreement between the company and its creditors to satisfy the company’s debts.
The terms of the DOCA are as agreed – generally, the DOCA allows the company to continue operating and may maximise the return for creditors.
Creditors are able to vote on a DOCA at the second meeting of creditors, which is generally held 15 to 25 days after the appointment of the administrator.
The company must execute the DOCA within 15 days of the creditors’ voting for the proposal to enter a DOCA. Failure to comply within the time period would automatically put the company into liquidation.
All unsecured creditors are bound by the DOCA, even in the event that they did not vote for it. Secured creditors are not bound if they did not vote for the DOCA, unless the court orders that they be bound.
The deed administrator appointed under the DOCA is responsible for monitoring the company.
Entering voluntary administration can provide a solution for companies to:
An unsecured creditor’s rights include:
A secured creditor’s rights include:
Bankruptcy is a process where a trustee is appointed to administer an insolvent person’s estate. A person is insolvent if they are unable to pay their debts as and when they fall due.
Generally bankruptcy lasts three years from the date that the bankrupt files their Statement of Affairs, unless the trustee objects. A Statement of Affairs is a document completed by the bankrupt which discloses the bankrupt’s personal and financial information including their assets and debts.
At the end of the bankruptcy the bankrupt is ‘discharged’.
Bankruptcy can provide a solution to debt problems for both the debtor and the creditors. The debtor is released from their debts at the end of the bankruptcy and can start afresh. Creditors have the benefit of an independent person (the trustee) administering the debtor’s estate and receiving some payment for the unpaid debts.
A person may make themselves bankrupt by filing a debtor’s petition and Statement of Affairs with the Official Receiver. The Official Receiver will then issue an estate number to the bankrupt.
A creditor may apply to the Federal Circuit Court to make a person bankrupt.
Generally, the creditor must have obtained a judgment on their debt and have served a bankruptcy notice on the debtor. The debtor then must pay the debt before the expiry of the bankruptcy notice.
If the debtor fails to pay the debt before the expiry of the bankruptcy notice the creditor may file a creditor’s petition with the Court seeking a sequestration order, which will bankrupt the debtor.
It is important to note that the Statement of Affairs must be completed by the bankrupt before the three years will begin to ‘run’ so it is essential that the bankrupt files this as quickly as possible.
There are a number of restrictions and obligations placed on a bankrupt person including:
A bankrupt’s assets will be realized by the trustee. Any asset that is able to be realized and divided among creditors is referred to as divisible assets.
Divisible assets include:
Examples of divisible assets may include real estate including the family home and contents of bank accounts.
The bankrupt’s assets which cannot be realized may include:
Sentimental property must have sentimental value and be an award for sporting, cultural, military or academic achievement. This does not include monetary awards. The creditors must also resolve that the property is sentimental. Engagement and wedding rings are not considered sentimental property.
A bankrupt is still able to earn an income up to a certain amount.
The Actual Income Threshold Amount (AITA) for income assessments is indexed biannually based on the base pension rate (on 20 March and 20 September) and adjusted if a bankrupt has dependants depending on the number of dependants on a sliding scale.
The current threshold for a bankrupt with no dependants is $68,768.70 (after tax).
Any income in excess of this amount must be paid into the estate.
The trustee will:
The assets and property of the bankrupt immediately ‘vest’ in the trustee once bankruptcy occurs. This means that the trustee automatically gains rights and control over the assets and property and does not have to take any special action.
Secured and unsecured creditors of the bankrupt are affected in different ways. If a creditor is ‘secured’ it means that they have a charge over a debtor’s asset; a common example of a secured creditor is a bank with a mortgage over the family home. A creditor is ‘unsecured’ if they do not hold a right to or charge over any of the debtor’s assets; a common example of an unsecured creditor is a bank who has issued a credit card to a customer.
Unsecured creditors exchange their right to bring a claim for a right to prove their debt in the bankrupt estate in return for a dividend.
This means that the unsecured creditor gives up their right to bring a claim for the full amount of the debt owed by the bankrupt for the right to be paid a dividend by the trustee once all assets of the bankrupt have been realized.
Secured creditor’s rights generally remain the same. They can enforce their rights by having their secured asset sold or realized. They are then able to prove in the estate for the shortfall or difference between the amount recovered from the security and the original amount of their debt.
Creditors are able to vote to change the trustee.
Void transactions include undervalued transaction or transfers which were intended to defeat the debtor’s creditors and transfers where the consideration was paid to a third party within five years of the commencement of the bankruptcy.
There are some exemptions including maintenance agreements or orders made in the Family Court or payment of tax pursuant to Commonwealth or State law. The trustee is able to void these transactions and recover the asset. It will then be available for distribution among the creditors.
Preferential payments are when a creditor of the bankrupt received an advantage over other creditors when compared to what they would have received in the bankruptcy.
The payment has to have occurred when the bankrupt was insolvent and within a certain timeframe of the bankruptcy. The trustee is able to void these preferential payments and recover the payment in order to make a more fair and equitable distribution among the creditors.
Yes. A personal insolvency agreement (also known as a Part X agreement) allows a debtor to come to an agreement with their creditors in relation to their debts without being made bankrupt. In this process, a trustee is appointed by the debtor signing an authority under section 188, a Statement of Affairs is prepared by the debtor and a draft personal insolvency agreement must be provided to the trustee. A meeting of creditors is then held to decide whether the creditors will accept the proposal. Debtors should be aware that signing a section 188 authority is an act of bankruptcy and creditors may choose not to accept the proposal and bankrupt the debtor instead.
A section 73 proposal can be used to annul a bankruptcy.
The bankrupt proposes an alternative arrangement for paying the debts to creditors.
An annulment has the effect of voiding the bankruptcy from the beginning. It is as if it never occurred.
A Part IX debt agreement is an agreement between the debtor and their creditor’s which provides for a sustainable plan for the debtor to pay off their debts.
Liquidation refers to the process by which a company is brought to an end or ‘wound up’.
It involves redistributing the assets and property of the company, usually to its creditors.
It usually occurs when the company has become insolvent, meaning it can no longer pay its debts as they fall due.
An independent person known as a ‘liquidator’ will be appointed to oversee this process to ensure that the interest of the creditors, directors and members are treated fairly.
Liquidation can be either voluntary or compulsory.
Liquidation ends when the company is dissolved by court order on the application of the liquidator or the company is struck off the register of companies by ASIC.
Voluntary liquidation occurs when the company, through a resolution of its directors and sometimes its members, chooses to enter into liquidation.
This may be because it has become insolvent and the members of the company wish to bring the company to an end. In a voluntary liquidation, a liquidator is usually chosen by the company; however, the creditors have the right to change the liquidator.
Voluntary liquidation can occur in one of two ways, being either through a creditors’ voluntary winding up or a voluntary administration.
A voluntary winding up occurs where the directors and members decide to place the company in liquidation and a liquidator oversees the process of redistributing the assets and property of the company in order to bring it to an end.
A voluntary administration occurs where the directors resolve to appoint a voluntary administrator to the company.
The voluntary administrator will take control of the company and conduct investigations into the company’s affairs.
They will then provide options for the company’s future which may include:
A deed of company arrangement is an agreement between the company and its creditors to satisfy the company’s debts.
Voluntary administration allows the company time to consider its future and options for moving forward whereas voluntary liquidation is purely aimed at bringing the company to an end.
Compulsory liquidation or court appointed liquidation occurs when the court orders that the company be wound up.
In this instance, one or more of the company’s creditors applies to the court for the company to be wound up. This is because the company has become insolvent.
In this instance, the court usually appoints the liquidator nominated by the creditor/s.
Pursuant to section 95A of the Corporations Act 2001 “A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.”
When a person is not solvent, they are insolvent.
Insolvency occurs when a company can’t pay all of its debts as and when they fall due.
A company will be considered insolvent even if they have an asset surplus (an ‘asset rich, cash poor’ scenario), if they are unable to quickly liquidate those assets.
A company will be deemed to be insolvent when it fails to comply with certain requirements set down in legislation, the most common of these being the failure to comply with a statutory demand from a creditor.
A statutory demand is a demand in the appropriate form (Form 509H) served by a creditor on a debtor company requiring the company to satisfy the debt within 21 days.
Insolvent trading occurs when a director allows the company to incur debts when the company is insolvent.
Directors have a duty to prevent insolvent trading and therefore can be held personally liable in certain circumstances for debts that were incurred from the date of insolvency to the date of liquidation of the company.
A liquidation can end by:
An administrator might be appointed in circumstances where the liquidator believes that creditors may be given a greater return.
This means that the company may be able to continue trading where the liquidator believes the company has prospects of carrying on its business successfully.
The liquidator’s powers include:
Creditors are able to apply to the court for an order in relation to a court appointed liquidation in the event that the company is insolvent.
In all types of voluntary liquidation, creditors are able to appoint alternative liquidators or administrators.
The creditors are able to vote to appoint an alternative at the first creditor’s meeting which is held within 8 business days of the appointment of the voluntary administrator.
If a creditor is seeking to appoint an alternative liquidator, they should secure the alternative liquidator’s consent prior to the meeting.
The resolution will be passed if a majority of creditor present at the meeting vote in favour of the resolution.
Where the company’s assets are realized and they are insufficient to pay creditors, creditors will be paid a dividend or percentage of the amount due and owing.
Debts of the company are generally paid in order of priority as follows:
Each ‘class’ of creditors must be paid in full before the next class can receive a payment or dividend.
A secured creditor’s rights include appointing a receiver to realize some or all of the secured assets (even after liquidation commences):
A secured creditor will generally need to submit a proof of debt form to the liquidator for the amount of the debt which exceeds the value of their secured assets. This will allow them to receive dividends in a similar way to unsecured creditors.
An unsecured creditor’s rights include:
An unsecured creditor must submit a proof of debt form to the liquidator proving their debt in order to be paid a dividend.
The proof of debt form should be accompanied by supporting documentation such as invoices.
The proof of debt will either be admitted by the liquidator or it will be rejected and the unsecured creditor notified within a period of 7 days.
If you cannot reach a resolution with the liquidator in relation to your proof of debt, you may be able to appeal to the court.
You should seek legal advice as soon as possible as an unsecured creditor will only have 14 days to appeal to the court.
In the event that the company becomes insolvent, the director should immediately arrange for the company to enter voluntary liquidation or voluntary administration.
Voluntary administration may allow for the company to get back on its feet.
Directors should be aware that there are a number of ways that directors can be held personally liable for company debts including where there was insolvent trading, unreasonable director related transactions and personal guarantees.
Members have a right to receive any surplus after the company’s assets have been realised and creditors and the expenses of liquidation have been paid.
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