Many business owners assume that becoming insolvent means liquidating. When this happens, a liquidator is appointed to sell off assets and repay debt, and the company must stop trading while this all takes place.

The good news is there are alternatives, and you can solve insolvency without liquidating. Here’s a rundown of your different options to resolve your situation and stay in business.

Pay your creditors

If you have fallen behind but the business is turning around, you may be able to arrange to repay the providers you owe money to. You could take out a loan or you may be able to negotiate a payment plan with the tax office (be aware you may be charged interest on your tax debt).

With the tax office, it’s essential you reach out and set up a payment plan before you start receiving penalty notices as a result of not paying your bills.

If you decide to take out a loan to repay your creditors, make sure you can make the repayments before you commit. You may be able to secure the loan against some assets, which will minimise the risk for both you and the lender.

Find a way to consolidate your debt

Speaking of loans, if you have several different accounts and credit cards that are overdue, a loan from the bank or another lender may make everything more manageable and lighten the load thanks to a lower interest rate. This might be a good time to review your current credit situation with a finance broker.

Raise capital

If an injection of funds will put things on the right track, you may be able to ‘lend’ to the business from your personal funds or find an investor who is willing to contribute financially in return for part-ownership or other compensation.

With this being said, you need to have confidence that you’re not just digging a deeper hole for yourself. Work with your accountant and financial planners to do some forecasting so you have an idea of what’s actually possible.

Did you know Apple was on the brink of bankruptcy at one stage? It was Microsoft that saved the day, by investing quite a few million.

Review your income and expenses 

It is very easy to say ‘just earn more money’ but a lot less simple to do so. However, with a combination of strategy, great people, good market knowledge and a product or service people want, you can reinvent your business model and get back on top.

You may need to do some deep diving into your finances to figure out what has gone wrong. There could be expenses you can eliminate, and you might have to let some people go but recovery is never impossible. Sometimes growing the business is not profitably and scaling back will help increase profits.

Marvel was in a terrible position in the late 1990s before it started making movies off the back of its popular comic book titles. Its partnership with Disney means it’s one of the most successful brands in the world.

Find a buyer

Many brands avoid going from insolvency to liquidation by selling to a larger company. This may be an option, especially if you have IP or products that are in demand.

If you decide to sell to cover the cost of your debts, you don’t necessarily have to do so at a ‘bargain basement’ price. Work with a legal and accounting team so you sell for fair value and do so in accordance with the law.

The benefit of selling your business is being able to repay your debts while your staff keep their jobs. The purchaser will take the responsibility of restoring client relationships and getting cash flow back in shape.

Make sure you discuss your Capital Gains implications with your accountant prior to any sale.

Solving insolvency without liquidating

The best thing to do if you’re facing overwhelming business debt is to get the advice of a professional. A specialist insolvency lawyer can help you explore every option, make the right decisions and come up with a plan so you can side-step liquidation.

Need help to make a call around insolvency and liquidation? Reach out to Legal Affairs Lounge today.

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.

Take a look at some of the options and steps involved with the insolvency process if you are a business.

How do you know if you are insolvent?

The signs you are insolvent are:

• If the number of overdue bills keeps building rather than dropping
• If the total of your business debts is higher than the value of the assets, you own
• If your sales figures and profits have been on a downward trend
• If you don’t have the cash flow to cover your regular expenses
• Your financial team is continually receiving phone calls and letters of demand from creditors

In some circumstances, multiple creditors may take action against a company that doesn’t repay its debts. This can result in what’s known as compulsory liquidation — and an order is issued by the court as a result of the creditors’ actions.

Otherwise, the company’s directors can start the insolvency process themselves, if they feel they need help to take stock of the situation and bring things under control.

Being insolvent doesn’t necessarily mean the end of the business. The first and most important step is to engage a team of legal professionals who are experienced in insolvency and can guide business directors through the process. Once someone is on board to help with the relevant steps and paperwork, here are the potential steps to move through:

Voluntary Administration

When a company goes into voluntary administration, the directors hand control to external administrators who start investigating financial details and working out how to deal with creditors. These experts are sometimes referred to as insolvency practitioners or receivers.

The company can continue trading during this time but there has to be a formal admission to the Australian Securities and Investments Commission, which will make a note that the company is in administration.

Once the administrators have completed their investigation, there will be a clearer picture of whether it is possible to pay creditors and move forward, or if liquidation is the best next step.

Receivership

If debts can be restructured, payment plans can be arranged and assets sold in order to pay off the creditors, or if the company can be acquired by another entity, it may be possible to get back on track and continue trading.

In these circumstances, a receiver is appointed to oversee the management of assets, potentially restructure the company and help take care of financial obligations.

Liquidation

The insolvency professionals you work with may determine liquidation as the best course of action if there is no way to escape the financial difficulties the business is facing.

Liquidation is also referred to as “winding up”. As part of this, items of value (assets) are sold to help repay debts, the company is closed, and it stops trading.

How to recover from insolvency

Recovering from insolvency is possible and many Australian companies have been able to do so. A positive outcome often depends on taking action sooner rather than later.

To avoid the threat of insolvency, careful financial management and a monetary ‘safety net’ are essential. It makes sense to work with a good accountant so you can be aware of spiralling costs before they are out of control.

Would you like more information about the steps to insolvency, contact Legal Affairs Lounge today to discuss your options.

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.

Sometimes, despite all your best efforts and intentions, your financial situation can spiral out of control, leaving you facing bankruptcy.

If you have significant debt and are considering declaring bankruptcy, here are some quick facts you need to know:

1. Bankruptcy isn’t always the only option

Before you decide to declare bankruptcy, seek financial advice. There are free services available via the National Debt Helpline on 1800 007 007.

You may be able to avoid bankruptcy with a Part IX (9) debt agreement, which will allow you to pay a percentage of your debt over a period of time.

If you are a business owner, there could be the option to restructure your debts so they can be taken care of gradually. A Small Business Restructuring Practitioner (SBRP)  can help you with this process, which has become easier during COVID.

Bankruptcy is not an easy road so make sure you get some advice to rule out every alternative.

2. Bankruptcy has consequences

People declare bankruptcy when they owe a great deal of money and have no way of paying it back.

By declaring bankruptcy, you may think you’ll be able to walk away from your debts. However, there are quite a few steps involved and it’s not quite that simple. For example, once you have formally declared bankruptcy, a Trustee will be appointed to investigate your financial affairs. You can appoint your own or the Australian Financial Services Authority may appoint one for you at the request of the people who you owe money.

The Trustee will help you figure out if you have any assets that can be sold in order to give money to your creditors.

The main consequence of bankruptcy, other than the stress of going through the process, is that your credit rating is affected and it will be very difficult to borrow money for several years. In addition to this, you cannot act as Director of a business or own any assets over a certain value. Your ability to travel overseas may also be limited.

These consequences generally last for a period of three years and one day, although credit reporting agencies may keep records for five years and more. You may find you can’t borrow a significant amount without a guarantor to co-sign on a debt agreement.

3. Not all debts are absolved

Bankruptcy generally clears the following debts:

• Credit cards
• Store cards
• Unsecured business and personal loans
• Trade creditors
• Payday loans
• Utility bills

You cannot walk away from every debt when you are bankrupt. You will still be expected to pay for things including child support, HECS/HELP fees, court fines and your mortgage (your bank will probably arrange to sell your house so you can settle this debt).

4. You can still work and earn money while you’re bankrupt

There’s no time like the present to start fresh. Even though you won’t be able to borrow money while you’re bankrupt, you can still take the necessary steps to support your living requirements.

However, once you reach a certain amount of income (starting from around $54,000), a percentage of the money may be claimed to return to the people and businesses you still owe. This amount will vary depending on your circumstances, for example you will have a higher earning threshold if you are supporting one or more children.

5. A lawyer can help

Bankruptcy is a highly stressful situation for anyone and it doesn’t always happen because of bad habits or mismanagement. Sometimes you can be in debt without realising, or things can go wrong so suddenly that you don’t have time to get in control of your finances.

When you enlist the support of a bankruptcy lawyer, you’ll have the benefit of advice and assistance in all matters related to your personal debt. Pre and post-bankruptcy advice can help you with all or some of the following:

• Creating and signing debt agreements
• Guiding you through bankruptcy proceedings
• Making you aware of your rights and the risks involved with your decisions
• Sharing advice about bankruptcy notices and how to respond to one
• Presenting a petition for bankruptcy to the Australian Financial Services Authority (AFSA)
• Negotiating your debt settlement agreements
• Sharing advice about your rights and obligations
• Securing an early release from bankruptcy
• Defending you against bankruptcy proceedings

If you’re facing bankruptcy but feel unsure about the next best steps, reach out to an experienced bankruptcy lawyer on the Legal Affairs . Legal Affairs Lounge specialise in the following:

• Bankruptcy legal advice
• Rights and obligations
• Early release from bankruptcy
• Personal insolvency
• Bankruptcy litigation

Get in touch to find out more.