The COVID-19 pandemic may have moved some businesses into a position that may not be recoverable. Owners may not have the energy to fight back, so voluntary administration or liquidation is a real consideration.
Seek clarity on precisely what your predicament is, what options exist to move out of financial distress and how to maximise the protection of your personal assets.
If you find yourself wondering about voluntary administration and liquidation, the question revolves around insolvency and the ongoing ability of the business to pay its debts.
What is insolvent trading?
A company is insolvent if it cannot pay its debts as and when they are due and payable.
Trading while insolvent is characterised by an endemic shortage of working capital which needs to be distinguished from a temporary liquidity challenge. Given the impacts of the COVID-19 pandemic, there is a strong likelihood that many businesses are suffering from adverse liquidity. Solvency will depend on that liquidity challenge not running into a shortage of working capital.
In January 2021, the Australian Government introduced further insolvency reforms for small business.
3 reasons why avoiding insolvent trading is important to business owners
1. Cash flow issues in business is a very visible sign that solvency is questionable;
2. If you trade a business while it is insolvent, you could be breaking the law, it is a criminal offence; and
3. Being found guilty of insolvent trading will almost certainly impact your personal asset position.
Hold or fold?
That inflection point between temporary liquidity challenge to endemic working capital shortage has commercial realities influencing it.
Here’s a checklist to gain clarity on the best course to take
- How is cash flow, and can it be improved?
- Can financial support (i.e. cash) be secured from directors, associated parties or other sources?
- Can underutilised assets be realised quickly to raise cash?
- Are there any Government support packages available?
- Can creditors/landlords/Tax Office assist with accepting altered terms of repayment of debts?
- Can debtors assist with the early payment of accounts receivable?
- Can the bank or lender assist with extensions to debt?
Climb Business will act for you. An administrator or liquidator does not act for you; they act for the company creditors.
Helping in Times of Financial Distress
When you find your business is in financial distress, it’s important to seek expert corporate insolvency advice and to choose your advisor very carefully.
Concerns for the economic consequences of the COVID-19 pandemic has been a source of unexpected stress and adversity for many people. Business owners will focus on the negatives in terms of the profitability and sustainability of their business. Even worse, they contemplate the possibility of insolvent trading and the voluntary administration or winding up of their business and the potentially negative impact on their assets.
If you are considering voluntary administration or liquidation, an administrator or liquidator will not provide that clarity and range of advice for you personally. They act for the creditors of the company, not for you. Taking their advice based on slick advertising, glossy websites, and low fee promises may land you in a worse position and maybe even be on the wrong side of the law.
An Independent Insolvency Assessment
An assessment requires careful and honest consideration by an expert. The critical factor is the cash flow test. However, the health of the balance sheet, the potential available external sources of funding available, realisable assets, and the working environment context the business operates in all play a role.
Doubts about solvency and whether you have a viable business?
- Restructure under the Safe Harbour provisions or the Small Business Restructuring process, which are outside a formal insolvency appointment; or
- Voluntary administration with a deed of company arrangement to compromise debts and have the opportunity to restructure under this formal insolvency appointment;
Both options involve an administrator or liquidator; however, they do not have your personal interest at heart. Climb Business can manage that process with your interests front and centre. We will work with you to develop and implement a turnaround plan which will be critical to making your business a success again.
Voluntary administration is to be avoided where possible as the administrator is in control of your business and it is very, very expensive and time consuming.
Believe that the business is insolvency, but there could be a viable business?
- As above for voluntary administration;
- A liquidation and sale of a business may be appropriate to maximise the return to creditors noting there is unlikely to be a full payment of creditors.
Insolvent and no viable business to save?
- Where there is no prospect for the ongoing viability of the business and it appears insolvent, the business should be placed in liquidation;
- You will need our advice to minimise personal liability from claims of insolvent trading or other claims from directors duties to maximise the protection of your assets.
In each case, please seek independent advice. Climb Business can help maximise the opportunity to turnaround your business and to minimise the impact on your personal assets.
Get help today
Get independent advice from us for the best opportunity to restructure and turn around your business.
Start with a no-obligation chat with a financial councillor about where your business sits right now and how we can plan to turn around your business.
We act for you and minimise the impact on your personal assets. Administrators will act for your creditors, not for you.