Insolvency risks will add up without good planning

Up to 2000 businesses would have ordinarily failed since March but that is not happening at the moment because of two things that every business owner should watch out for.

As part of the general business cycle, there are always a certain number of companies that get wound up, every week, and looking at the statistics at the moment, there have only been a handful of external administrations. Many are suggesting that there are upwards of 2000 businesses that would have ordinarily failed since March but that is not happening at the moment because of two things.

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Firstly, the current minimum threshold for creditors issuing a statutory demand on a company went from $2000 to $20,000 and secondly the statutory demand period went from 21 days to 6 months.

These measures pose risks if they continue.

The longer this continues, without a viable and realistic recovery plan, people are potentially eroding their own personal wealth.

For example, the tax office still has the ability to make directors personally liable for company debts under a Directors Penalty Notice and these tax debts will continue to accumulate if people aren’t making payments.

If directors are not making the company’s statutory lodgements it may result in directors automatically becoming personally liable for amounts owed.

People need to be well informed about these areas of responsibility. They may be sitting back in this quasi-moratorium we have at the moment waiting for things to change but in actual fact debts such as employee entitlements on stood down staff continue to accrue.

BDO Australia's Andrew Fielding, July 2020

People need to be well informed about these areas of responsibility. They may be a little bit naive and sitting back in this quasi-moratorium we have at the moment waiting for things to change but in actual fact debts such as employee entitlements on stood down staff continue to accrue.

On top of that, one of the things that hasn’t changed, although it is now being discussed, is the preferential payment system. Preferential payments are payments made to a creditor who has been deemed to have been preferred in the six months (longer if a related party) prior to a company being placed in liquidation.

This means, if a liquidator is appointed they can recover those preferential payments from that creditor with the intent being to take that money back and distribute it equally among the other creditors. Which essentially means anybody receiving payments at the moment could be sued later on (if that company fails) and have to return those funds because it’s been deemed a preferential payment.

Ordinarily, one of the defences for the recipient of that payment is that they were not aware of the company’s insolvency and the money was received in good faith. However, I think under the current circumstances it would be very hard for anybody to argue they weren’t suspicious of the financial viability of one of their creditors.

Whilst there are temporary protections in place for directors for insolvent trading at the moment, these directors still have their fiduciary duties to uphold, which may still leave them susceptible to being sued if they haven’t carried out their director’s duties appropriately.

At some point there will be a number of companies that will fail, there is no doubt about that, and every liquidator will be looking at what payments were made prior to the company being placed into external administration, and did the company’s officers fulfil their duties appropriately.

If I was a director of a company continuing to trade I would be meeting with all my customers, particularly the larger customers, and asking them to prove to me that they are not insolvent if I’m going to continue to trade, and extend credit to them.

It all comes down to good planning and effective communication with your stakeholders.

Andrew Fielding is the national leader for business restructuring at BDO in Australia.