Cashflow Advice Adelaide – Insolvency and Safe harbour – Insolvency Indicators

Are you seeking cashflow advice Adelaide? Has the COVID19 crisis hit your business hard?

Gaining access to the ‘Safe Harbour’ from insolvent trading protects directors from being personally liable for debts incurred by their company whilst attempting a restructuring or turnaround initiative. An advisor’s clients must meet specific requirements if they intend to rely on the Insolvency & Safe Harbour defence and remain protected.

When seeking cashflow advice Adelaide, the insolvency safe harbour protection under section 588GA of the Corporations Act has never been more relevant. Small or family businesses must embrace risk if they are to survive and prosper. This means continually striving to innovate, disrupt and strategically grow. In February 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill was passed. In addition to adding phoenixing definitions, criminal offences and civil penalties to the Corporations Act 2001, the Amendment adds Safe Harbour as a defence (which, of course, we specialise in…).

This brief guide gives you the knowledge that you will need to best advise your clientele regarding Insolvency & Safe Harbour.

Cashflow Advice Adelaide

How do you know if you are facing financial distress or trading insolvent? Insolvency is defined as the inability to pay debts as and when they fall due. Section 588G of the Corporations Act requires a director of a company to prevent the company from incurring a debt if:

(a) the company is already insolvent at the time the debt is incurred; or

(b) by incurring that debt, or by incurring a range of debts including that debt, the company becomes insolvent, and, at the time of incurring the debt, there are reasonable grounds for suspecting that the company is already insolvent, or would become insolvent by incurring the debt: s588G(1).

Insolvency may sometimes only be identifiable in retrospect. As such, there are warning indicators that can be used to identify insolvency risk. It should be noted, however, that establishing insolvency is often an extremely complex exercise as future or prospective sources of funding may be taken into consideration.

Is it possible to see insolvency coming towards you? Yes, it is.

There are 17 leading indicators of insolvency, to which courts will take an adverse view. The checklist below provides a set of warning signs. Many of these items come from Justice Mandy who presided over the Water Wheel case, ASIC vs Plymin & Ors (2003), in Victoria’s Supreme Court.

17 leading indicators of insolvency

  1. Continuing losses
  2. A liquidity ratio (assets: liabilities) below 1
  3. Overdue taxes
  4. Inability to borrow additional money
  5. Poor relationship with the bank
  6. Inability to access alternative finance
  7. Inability to raise further equity capital
  8. Suppliers putting the company on Cash on Demand terms or demanding special payments before resuming supply
  9. Creditors left unpaid outside of their trading terms
  10. Issuing post-dated cheques
  11. Dishonoured cheques
  12. Dishonoured direct debits
  13. Special arrangements with selected creditors
  14. Letters from solicitors, or summonses, judgements or warrants issued against the company
  15. Payments to creditors that can’t be reconciled to specific invoices; for example, invoices paid in round figures instead of exact sums
  16. Inability to produce timely and accurate financial information
  17. Inability to display the company’s trading performance or make reliable forecasts.

Warning: This is not an exact science! Many of these conditions exist in solvent companies, especially if a company has access to external funds. Whether or not the company is insolvent is a question of fact to be ascertained from a consideration of company’s financial position taken as a whole by looking at commercial realities to see what resources are available to co to meet its liabilities as they fall due and whether resources other than cash are realisable by sale or borrowing upon security.

You may have identified one or more of these warning signs in your own company. Take this as an opportunity to review your company’s financial performance and risk exposure, the better to determine its financial health.

Directors are duty-bound to prevent debts if a company trades while insolvent

A critical duty of being a company director is to prevent a company from incurring debts while trading insolvent. Among the penalties for failing to uphold this duty is a personal liability. The director will have to pay the company, or the creditor, the balance of the debt.

Other penalties apply, too (detailed under Section 588G of the Corporations Act).

A breach, or failure to uphold the duty, is considered to have occurred if a company incurs a debt when the director:

  • is actively in office
  • is directing an insolvent company
  • has reasonable grounds to suspect the company’s insolvency.

The Safe Harbour provisions have no specific process – Cashflow advice Adelaide

Directors cannot rely on a specific or mandated process by which to claim the Safe Harbour. However, when looking for cashflow advice Adelaide directors can take an important first step and informally begin a restructuring of the company.

If directors adhere to correct governance principles, they will be likely to follow the right course of action anyway.

Such a course of action involves:

  • being formed about the financial position of the company
  • preventing misconduct by any party (officers or employees)
  • ensuring that appropriate records are kept
  • getting advice from a suitably qualified entity
  • planning to, or actually, restructuring the company.

The key test is whether or not an action may lead to a ‘better outcome’ for the company

The ‘better outcome’ sounds subjective, but it isn’t.

To access Insolvency & Safe Harbour provisions, ‘better’ refers to creditors and means as opposed to appointing an administrator or liquidator immediately.

Here’s one thing you can do for your clients

If you have a client that is (or is at risk of) trading insolvent, you can advise them to take appropriate steps before considering liquidation.

The first and most critical step is for directors to develop a written plan that is likely to put the company in a better position than if a liquidator were appointed.

You then need to seek advice from an ‘appropriately qualified entity’ to assess as to whether or not their plans are likely to lead to a better outcome for creditors. TurnAbout AU is an appropriately qualified entity under section 588GA of the Corporations Act and is specialists in this field.

Of course, there are hurdles to the Safe Harbour protections, such as lodging tax returns (meet reporting obligations under the Income Tax Assessment Act 1997) and paying employee entitlements (including superannuation). But by developing a plan, gaining advice from an entity that is appropriately qualified, and preventing further debts, your clients will be in the best position from which to access the Safe Harbour.

Here’s the good news…

If you or your clients require independent, appropriately qualified advice regarding Insolvency & Safe Harbour, they can call me direct on 1300 877 329 for a confidential conversation. Alternatively, make contact via email at eddie@turnabout.com.au.

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