by Simeon Miglioranza

Is your business struggling in these hard financial times? Are you facing bankruptcy or insolvency? Do you require dispute resolution, business advice or support for leasing, business sales, assignments or franchise negotiation? Whether you are a sole trader, partnership, small to medium sized business or a large private or public company, we can help during challenging times.


Do not lose hope

Despite all our hard work and efforts, and thousands of hours we put into our businesses, sometimes we unexpectedly become stuck. You may have fallen behind in paying debts to creditors, have limited cash to pay your staff or do not have the necessary funds to purchase much needed materials and assets to keep your business operating smoothly. You may be time limited, and do not have the expertise or the latest up to date business advice to implement effective changes that could see your business thrive. Alternatively, you may be treading on thin ice risking it all, which could lead to disaster.

Managing our businesses when they are losing money and potentially facing liquidation and bankruptcy is a hard pill to swallow, especially in the current economic climate. An even harsher reality is that losing your business and becoming bankrupt could mean loss of business reputation, fall-out with friends and family, loss of experienced staff, disputes with creditors, customers and ex-staff, a bad credit rating, defaults on your mortgage, being sued or investigated and penalised by the Australian Securities Investment Commission (“ASIC”). There are many risks around business fall-out, and it is important to know what your options are to avoid or minimise any damage.

ASIC administers and regulates companies via the Corporations Act 2001 (Cth) (“the Corporations Act”). The legislation is in place to ensure businesses meet regulatory obligations conducting honest and fair business trading practices so that businesses are not trading insolvent.

Trading insolvent

A company or business is trading insolvent when it is unable to pay debts to creditors. It is important that your business remains solvent and that you have the necessary funds to pay your outlays such as creditors, dividends to shareholders, suppliers, insurance, wages and superannuation, as well as to ensure your tax contributions are up to date.


Consequences of trading insolvent

The consequences of trading insolvent are found in Section 588 of the Corporations Act. A business trading insolvent could be pursued by creditors, can be sued, and for large companies, attract pecuniary penalties up to $200,000. If dishonesty is a reason for failure to remain solvent, a director could face criminal charges. For a small business or sole trader, action might be taken against you in court for smaller claims. Regardless of the size of the business, there are serious consequences to trading insolvent.


What to look for to ensure you are not trading insolvent

ASIC have provided some guidelines for indicators that a business may be trading insolvent.
Depending on the type of business you operate (sole trader, small or medium to large business) there are several identifiable indicators to watch out for to ensure you are not trading insolvent:

  • ongoing losses;
  • overdue taxes;
  • increasing debt (liabilities greater than assets);
  • absence of a business plan;
  • incomplete financial records or disorganised accounting procedures;
  • problems selling stock;
  • default on loans or interest payments;
  • overdraft limit reached or defaults on loan or interest payments;
  • dishonoured and post-dated checks; or
  • an expectation that the ‘next’ big job, sale or contract will save the business.


What are your obligations as Director under the ASIC Regulatory guidelines?

As a Director of a Company, you have a duty to prevent trading insolvent. Some helpful tips for small business and sole traders are below:

  • oversee the preparation of profit and cash flow budgets and regular management accounts, and monitoring actual results against budget expectations;
  • review the company’s ability to collect debts owed to it and to realise other current assets, including stock, on a regular basis;
  • monitor when creditors are due to be paid and the company’s ability to comply with normal terms of trade;
  • review the current level of bank lending facilities and the ability to access additional funding if required;
  • investigate financial difficulties;
  • ensure your employees have the requisite skills; and
  • assess the business performance.

You should act in a timely manner if your business is likely to become insolvent in the future and take action to address any temporary lack of liquidity.


What to do next

Do not get caught out and risk going into liquidation and having your business wound up.

If you have determined that your business is facing financial hardships, you are not meeting demands by suppliers, or you are incurring debts to creditors which you are not sure you can pay or you need advice and support then our friendly team of expert Solicitors at Bottoms English Lawyers are here to help you.

We can also help with commercial disputes, starting up a business, drafting employment contracts or negotiating and drafting leases.