ByLawyers News and Updates

Insolvency – FED

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Insolvency practitioners and lawyers acting for small business clients are advised that the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 and Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 commenced on 1 January 2021.

These instruments amend the Corporations Act 2001 and Corporations Regulations 2001 to introduce two new insolvency processes: small business restructuring and the simplified liquidation process.

Small business restructuring

Under Part 5.3B of the Corporations Act 2001 an eligible company may have a small business restructuring practitioner appointed. This enables small companies that are financially stressed to restructure debt to continue to trade. The process is supervised by a small business restructuring practitioner, who must be a registered liquidator. Directors play a large role and retain control of the business under supervision. This reduces the costs of external administration and may see the company survive the financial stress experienced.

Simplified liquidation process

Eligible companies may access a simplified and faster liquidation process under Part 5.5 of the Corporations Act 2001, which reduces the costs and time of the process to ensure creditors are paid. In this process liquidators are able to adopt a simplified liquidation process with reduced compliance requirements.

The two new processes are aimed at supporting small businesses in financial stress.

The By Lawyers Insolvency – Company Liquidation commentary has been updated accordingly.

Insolvency – FED

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The temporary changes to insolvency laws under schedule 12 of the Coronavirus Economic Response Package Omnibus Act 2020 have been extended to end on 31 December 2020.

The temporary measure were originally set to end on 25 September 2020.

A recap of the changes are as follows:

Bankruptcy

The time for a debtor to comply with a bankruptcy was extended from 21 days to six months. The threshold for initiating bankruptcy proceedings increased from $5,000 to $20,000.

The same six month time extension applies to the time within which a debtor is protected from enforcement action by a creditor, following their presentation of a declaration of intention to present a debtor’s petition, under s 54A Bankruptcy Act.

Liquidation

The time for a debtor company to comply with a statutory demand was extended from 21 days to six months. The threshold to issue a statutory demand increased from $2,000 to $20,000.

Safe harbour

The temporary s 588GAAA ‘Safe harbour—temporary relief in response to the coronavirus’, of the Corporations Act 2001 provides that the existing civil penalties for directors failing to prevent insolvent trading under ss 588G(2) do not apply in relation to a debt incurred by a company if the debt is incurred in the ordinary course of the company’s business and until 31 December 2020.

The By Lawyers Dealing with COVID-19 legal issues commentary has been updated to reflect the revised end date of 31 December 2020 for the Commonwealth government’s insolvency measures.

Temporary changes to insolvency laws – FED

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The Federal Government has made temporary changes to insolvency laws under the Coronavirus Economic Response Package Omnibus Act 2020, aimed at relieving current economic pressures on individuals and companies.

The Act commenced on 25 March 2020.

These temporary changes to insolvency laws are as follows:

Bankruptcy

The time for a debtor to comply with a bankruptcy notice has been extended from 21 days to six months. The threshold for initiating bankruptcy proceedings increases from $5,000 to $20,000. These changes will apply for six months from commencement of the Act.

The same six month time extension applies to the time within which a debtor is protected from enforcement action by a creditor, following their presentation of a declaration of intention to present a debtor’s petition, under s 54A Bankruptcy Act.

Liquidation

The time for a debtor company to comply with a statutory demand has been extended from 21 days to six months. The threshold to issue a statutory demand has been increased from $2,000 to $20,000. These changes will apply until 25 September 2020.

Safe harbour

A new, temporary, s 588GAAA ‘Safe harbour—temporary relief in response to the coronavirus’, of the Corporations Act 2001 provides that the existing civil penalties for directors failing to prevent insolvent trading under ss 588G(2) do not apply in relation to a debt incurred by a company if the debt is incurred in the ordinary course of the company’s business and until 25 September 2020.

Practitioners should keep these changes in mind for the next six months and be aware of the end date, which is 25 September 2020.

Alerts have been added to the By Lawyers Insolvency – Bankruptcy of Individuals, Insolvency – Company Liquidation and Companies commentaries notifying subscribers of these changes.

 

Keep up-to-date with our latest COVID-19 News & Updates

Insolvency – Company liquidation – FED

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A full review of the By Lawyers Insolvency – Company Liquidation guide has been conducted by our highly experienced author, Michael Murray.

The review ensures that all content is in line with current law and practice.

Updates and enhancements include:

  • New commentary on the statutory demand process, including applications to set aside statutory demands; and
  • Updates to a number of precedents to improve the Insolvency – Company Liquidation matter plan.

Keep up to date with By Lawyers

These updates to our Insolvency – Company Liquidation guide are part of By Lawyers commitment to the continual enhancement of our publications. By Lawyers subscribers can be confident that their guides and precedents are always kept up to date so they can enjoy practice more.

Insolvency – Bankruptcy of individuals – FED

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Author review

A full review of the By Lawyers Insolvency – Bankruptcy of Individuals guide has been conducted. The review ensures that all content is in line with current law and practice.

This review was conducted by our highly experienced author, Michael Murray.

Updates and enhancements include:

  • New commentary on recent law changes to debt agreements;
  • New commentary on the Federal Court and Federal Circuit Court processes for creditor’s petitions, applications to set aside bankruptcy notices and examinations; and
  • New commentary and matter plan additions because of new online processes for voluntary bankruptcy.

Keep up to date with By Lawyers

This review of our Insolvency – Bankruptcy of Individuals guide is part of By Lawyers commitment to regular updating and enhancement of our publications. By Lawyers always keeps you up to date so you can enjoy practice more.

Insolvency To Do lists – FED

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The By Lawyers Bankruptcy and Liquidation guides have been updated with the inclusion of four Insolvency To do lists.

These new precedents provide practical guidance for practitioners as they progress through a matter.

The To Do lists provide helpful prompts for each important step to be taken in a matter when acting for either the creditor or the debtor in both personal and corporate insolvency matters, including:

  • Liquidation;
  • Winding up;
  • Deeds of company arrangement;
  • Debt agreements;
  • Personal insolvency agreements; and
  • Bankruptcy proceedings.

The new To Do lists can be found in folder A. Getting the Matter Underway in the By Lawyers Bankruptcy and Insolvency guides and will assist practitioners in safely and efficiently managing their matters.

Insolvency – personal bankruptcy and corporate insolvency

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This publication has been updated as the result of an extensive author review, including new content discussing the recent changes introduced by the Insolvency Law Reform Act 2016.
For corporate insolvency up to date case law examples have been included.
Enhanced content on how bankruptcy proceedings are regulated in Australia and the role of creditors.

Bankruptcy and Liquidation

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Bankruptcy and Liquidation

NOVEMBER 
  • Further Information – added more links
  • Costs Agreements – reference to interstate costs laws added and updated interest clause
OCTOBER
  • New article – Trading whilst insolvent
  • Costs Agreements
    • Disputes section improved, fields for client and firm details added, trust account details added, solicitor’s lien added, execution clauses for individuals and corporations added and general formatting
    • VIC/NSW – Included reference to time limit for bringing costs assessment, total estimate of legal costs section with provision for variables, and authority to receive money into trust.
    • WA – Added clause on scale fees.
AUGUST
  • Costs Agreements added for Tasmania and Northern Territory.
APRIL
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
FEBRUARY
  • Making life a little easier for practitioners – look out for Blank Deed, Agreement and Execution Clauses folder in the matter plan at the end of each Getting the Matter Underway.

Practical warning signs of insolvency for small business

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

First published on the website, www.obp.com.au

Introduction

This article, which is designed to be used as a resource by business owners, directors, accountants and financial advisors, sets out some of the warning signs of insolvency that can be observed by ordinary business people on a day to day basis, as well as outlining the serious consequences for business owners who fail to recognise and act on those warning signs.

The current economic climate is causing many businesses to experience cash flow pressures, whether it be from reduced revenue or debtors failing to pay within trade terms. In these times, monitoring cash flow is of paramount importance to the survival of a business. Failure to ensure adequate working capital may ultimately result in liquidation or bankruptcy.

The warning signs of insolvency, as set out in this newsletter, need to be recognised and addressed in a timely manner. By obtaining professional and competent advice from solicitors, accountants and advisors, more positive outcomes can be generated for all stakeholders than might otherwise be available should business owners and directors remain in denial of the issues facing their businesses. It is important that early action is taken in order to prevent the negative consequences of business failure impacting on directors and their families.

Defining insolvency

Section 95A of the Corporations Act 2001 states that;

  • ‘A person is solvent if, and only if, the person is able to pay all the persons’ debts, as and when they become due and payable.’ AND
  • ‘A person who is not solvent, is insolvent.’

The same definition is set out in subsection 5(2) and 5(3) of the Bankruptcy Act 1966.

The solvency test imposed by law is a cash flow test, rather than a balance sheet test. Assessing solvency is not as simple as the above definition implies. At the simplest level, solvency is assessed by comparing the available current assets to the extent of liabilities that are due and payable. This is the first step when considering a ‘cash-flow test’ of solvency. Only those assets that can be readily converted into cash, such as debtors or stock, are taken into account as an available resource. Similarly, only amounts that are currently due and payable are to be considered.

However, it is necessary to look at the entirety of a company’s circumstances, rather than focusing on any one factor. Many other factors need to be taken into account, such as the ability of the business to realise assets, utilise credit resources or refinance existing debt.

Warning signs of insolvency

Being aware of the warning signs of insolvency allows directors and business owners to address those issues which may be impacting on the viability of their businesses, and to seek appropriate advice in a timely manner. In our experience, the earlier that action is taken, the better the outcome. As the solvency of a business deteriorates, three distinct phases of warning signs can be readily identified;

  • Early Warning Signs which, if recognised and acted upon, allow for the best chances of a business being able to resolve those issues threatening its ongoing viability.
  • Substantive Warning Signs indicate that a business has serious cash flow issues which need to be addressed immediately.
  • Critical Warnings Signs indicate that the winding up of the business is imminent and formal insolvency solutions need to be considered.

Set out below are the warning signs referred to above.

Early warning signs

These signs are commonly displayed by businesses as they begin experiencing financial difficulties. These early warning signs include:

  • An occasional inability to meet suppliers’ debts within trade terms resulting in increased dialogue with suppliers.
  • Using cash reserves, such as funds set aside for GST, PAYG or superannuation, to cover temporary cash shortages.
  • Reduction in discretionary spending such as stationery, maintenance or staff amenities in order to maintain profitability.
  • Increased use of personal credit cards to pay business expenses.
  • Deteriorating relationship with the bank as it starts to monitor a business more closely.
  • Inability to obtain mainstream finance as the banks have identified an increased risk of insolvency.
  • Increased level of worry about a business’ financial circumstances.
  • Accumulated trading losses eroding a business’ working capital.
  • Non-collection of debtors leading to temporary cash flow shortages.

It is worth noting that there may be no cause for alarm if it is considered that the problems are temporary in nature, and if steps are being taken to address issues if needed.

Substantive warning signs

As the financial circumstances of a business further deteriorate, the indicia of insolvency become more obvious, and begin to have an increasingly detrimental impact on the business. These substantive warning signs are:

  • An inability to obtain finance from alternate/bridging financiers.
  • Suppliers placing customers on stop supply or COD terms and/or seek to reduce the credit limit on trade accounts.
  • An inability to avoid making payments outside of trade terms, having dishonoured payments, issuing post-dated cheques or making round dollar payments in response to specific demands for payment from a supplier.
  • Requirement to negotiate formal payment plans in order to secure ongoing supply or to prevent legal enforcement commencing.
  • The inability to pay superannuation on time.
  • Reduction in staff numbers to save costs as the business cannot fund itself.
  • Choosing to ignore communications with creditors generally.
  • Staff members or internal financial controllers expressing concerns about a business.
  • Inability to prepare timely and accurate financial information, and a lack of records generally.
  • Increased level of worry about a business resulting in family or marital issues.
  • Denial of, or avoidance of dealing with, the financial difficulties of the business.

If a number of these signs are identified, then it is likely that immediate action is warranted to ensure the survival of the business.

Critical warning signs

When the financial position of a business becomes sufficiently impaired, creditors will look to enforce the amounts due by that business. Critical signs of insolvency indicate that creditors will no longer wait for the circumstances of a business to improve and will generally initiate formal recovery action in order to obtain payment. These critical warning signs include:

  • Legal demands for payment from creditor’s solicitors.
  • Commencement of court action to recover amounts owed by a business.
  • Writ’s for possession of property or garnishee notices being issued against a business.
  • Creditor’s Statutory Demands or Bankruptcy Notices being issued against a business.
  • Director Penalty Notices being issued by the Australian Taxation Office (‘ATO’) or the Office of State Revenue (‘OSR’).
  • Repossession of business assets by secured creditors.
  • Winding Up proceedings or Creditor’s Petitions being filed against the business.

These actions by creditors usually sound the death knell for a business, due to the severity of the impact they have on the operations of the business.

Consequences of insolvency

Sole traders are personally liable for the debts of their businesses and may be made bankrupt as a result of their failure to satisfy outstanding liabilities. Directors of insolvent companies risk personal liability through a range of exposures such as director penalty notices from the ATO or OSR, or through claims by a liquidator for trading whilst insolvent. Other issues may arise such as the calling up of debit loan accounts, or the triggering of liabilities under personal guarantees provided to third parties. Directors may also be held liable for breaches of their duties, particularly in respect of their conduct at a time when the company was insolvent. Both civil and criminal sanctions can be imposed against directors for breaches of duties.

O’Brien Palmer has previously issued articles which are available on the O’Brien Palmer website in which the consequences of insolvency for directors are explored, particularly in relation to;

The consequences of the foregoing can be quite serious, and as such it is recommended that where warning signs of insolvency have been identified, then directors should seek immediate professional and experienced advice.

Conclusion – the need for timely action

The warning signs set out above are not exhaustive, and not all of them will necessarily be present in an insolvent business. A business may also exhibit multiple warning signs and not necessarily be insolvent. However, a business that transitions from showing preliminary warning signs, to numerous substantive warning signs, is more than likely insolvent, or will be in the very near future. A business that exhibits any critical warning signs is most likely already insolvent, and has in all probability been so for some time.

Business owners and directors should be concerned when a business begins to show early signs of insolvency. However, as noted earlier, there may be no cause for alarm if the issues are considered to be under control. Pre-emptive action usually results in a broader array of options remaining available to the business than in circumstances where the finances of the business have been neglected.

Directors and business owners should remain cognisant of the warning signs of insolvency, and seek appropriate advice as soon as any of the warning signs are identified. A solvency checklist is available here on the O’Brien Palmer website as an additional resource available to be used when undertaking such assessments.

Saviours or Scavengers – A review of debt advisory in 2015

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

First published on the website, www.obp.com.au

In recent years, an industry has developed around the perceived needs of company directors and individuals to receive commercial advice prior to the appointment of an administrator, liquidator or bankruptcy trustee. Such advice is sought in the expectation that it will increase the likelihood of achieving positive personal outcomes. Commonly referred to as debt advisory, pre-insolvency advisory or business advisory, the development of this industry has encroached upon an area previously the domain of solicitors, accountants and financial advisors.

Insolvency professionals are now unable to provide advice in this area if they want to subsequently act in a formal capacity. This is as a result of the duties imposed upon them pursuant to the provisions of the Corporations Act 2001, the Bankruptcy Act 1966 and the Code of Professional Practice developed by the Australian Restructuring Insolvency & Turnaround Association (‘ARITA’); in particular the independence requirements and the duty to act in the best interests of creditors.

Debt advisors, acting as advocates for their clients, provide advice on restructuring company and personal assets with the aim of protecting them from the insolvency process. Proponents of the industry say that it maximises asset value for creditors, motivates ethical behaviour by directors and bankrupts and assists in maintaining the integrity of the insolvency industry.

Critics are more inclined to believe that the industry legitimises fraudulent phoenix activity, reduces the assets which might otherwise be available for creditors, results in vulnerable people being taken advantage of and generally undermines the objectives of the insolvency profession.

(For a review of what differentiates fraudulent from legitimate phoenix activity, creditors are referred to our previous newsletter entitled “Pre-Packs – Do they have a place in Australian insolvency practice?” available on our website.)

Corporate debt advisory

Regardless of your point of view and taking into account the number of people operating in this area, the industry appears to be thriving. Unlike solicitors, accountants and financial advisors, debt advisors are unregulated and often do not have professional qualifications.

At O’Brien Palmer, we have had mixed experiences working with corporate debt advisors.

A number of operators have been highly professional in their approach and have delivered positive outcomes for their clients. There are many debt advisors who practice in a manner which maximises asset value for the benefit of creditors, potentially retains asset value for their clients, simplifies the insolvency process and reduces costs.

The same cannot be said for a number of other advisors. Some operators have spent time working in the insolvency industry and take advantage of the realities of modern insolvency administration, such as the limited scope of investigations conducted in circumstances where a liquidator is unfunded, the role played by creditors who rarely fund the activities of a liquidator or bankruptcy trustee, and the limited resources of the Australian Securities & Investments Commission (‘ASIC’). Although ASIC reviews all corporate insolvency appointments in order to identify individuals advising directors to act illegally, and although insolvency practitioners have powers and duties to deal with fraudulent phoenix activity within the current legal frame work, some debt advisors lead their customers to believe that getting caught is a numbers game, and that the odds are in their favour.

We have observed circumstances where directors have been;

  • advised to transfer assets for undervalue or otherwise engage in potentially fraudulent phoenix activity.
  • encouraged to destroy company books and records.
  • instructed to create security interests in an attempt to defeat creditors.
  • charged excessive fees for the services provided.
  • advised to generally engage in behaviour designed to frustrate an insolvency practitioner in the completion of his or her duties.

In the event that such actions are identified as a result of a practitioners’ investigation, then the practitioner may be required to report the conduct to ASIC, or to take appropriate steps to recover assets for the benefit of creditors.

Personal debt advisory

Personal debt advisors can help people manage their debt levels and to avoid formal insolvency solutions such as bankruptcy. By negotiating with individual creditors and with access to alternate sources of finance, personal debt advisors can help people manage their debt levels whilst aiming to avoid formal insolvency. Importantly, they are also helping individuals free up personal capital to assist with the funding of their businesses.

Where formal appointments can’t be avoided, debt advisors have assisted debtors to prepare themselves for the effects of the bankruptcy, and have assisted with the subsequent formulation of a proposal to be put to creditors in order to compromise their debts and to have their bankruptcy annulled.

That said, personal debt advisors are not immune from criticism. We recently became aware of a case where a personal debt advisor claimed fees in excess of $7,000 to open a file and form the view that the only option available to his client was to declare himself bankrupt. Others have paid high fees to advisors who have done nothing more than to process hardship applications with their banks, and then received no further assistance in rectifying their personal financial situation. Unless managed carefully, the engagement of personal debt advisors may merely delay the inevitable, and can make the situation worse.

Selecting a debt advisor

Separating the sales pitch from the substance can be difficult for individuals, especially when facing extreme financial stress. In corporate matters, it is common for highly competitive debt advisors with access to the court lists to make contact with directors before they themselves are aware that an application to wind up their company has been filed, and then use high pressure tactics to ensure directors engage their services.

This occurs not withstanding that the debt advisors are usually unqualified to give legal advice in connection with winding up proceedings and in circumstances where engaging a lawyer will come at an additional cost to the company or its director.

Choosing the right advisor is extremely difficult in such a new and unregulated industry, and the consequences of getting it wrong can be calamitous. If you are aware that a client is in contact with a debt advisor, then we recommend that you advise your client to proceed cautiously.

Specifically, in assessing the services offered by debt advisors, potential clients are encouraged, wherever possible, to;

  • seek advice from multiple sources, including accountants and solicitors who are required to act in the best interest of their clients.
  • be cautious of high pressure sales tactics and advisors who claim to be experts.
  • not be pressured into making an immediate engagement or committing on the spot.
  • be wary of promises which seem too good to be true, as they usually are.
  • enquire as to the background and qualifications of the advisor, and to ensure that the advice provided is impartial and not skewed by the benefits accruing to the advisor for work referred.
  • be realistic about the work to be completed by the advisor, as some advisors will structure a financial solution in order to maximise their fee.
  • negotiate payments which are directly related to positive outcomes.
  • avoid open ended engagements, and restrict engagements to specific tasks.
  • check all written agreements closely and carefully, and have them reviewed by a solicitor.

Conclusion

At O’Brien Palmer, we have worked successfully with some highly professional debt advisors. If you feel unable to advise your clients in relation to pre insolvency matters, then we can recommend a number of operators with whom we have had successful dealings, or we can provide you with some general advice on specific insolvency related topics.

We do not accept commissions for referrals, nor do we pay commissions for engagements, so you can be assured of the impartiality of our recommendation. We encourage individuals faced with financial pressure to work collaboratively with their accountants, solicitors and if appropriate, with reputable debt advisors.

We also encourage such individuals to contact us at O’Brien Palmer for an obligation free assessment of your circumstances and the options which remain available.

By O’Brien Palmer

Insolvency and Business Advisory

First published on the website, www.obp.com.au

2015

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