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.

There are a number of debt recovery options available to businesses in Australia. The most appropriate option will depend on the amount of debt owed, the debtor’s financial circumstances and your own business’ needs and preferences.

Take a look at some of the initial steps you can take, as shared by Legal Affairs Lounge’ team of debt recovery lawyers on the Legal Affairs :

Negotiate with the debtor

First things first, reach out and have a discussion. There may be a solution you can find between the two of you.

If you are considering negotiating with a debtor yourself, there are a few things to keep in mind. It is important to be firm but fair and to have a clear understanding of your legal rights as well as the debtor’s financial circumstances.

It’s better to be assertive, not aggressive. It is against the law to use intimidation tactics or threaten someone because they owe you money.

Send a letter of demand

You should first try to negotiate a payment plan or settlement. You could perhaps have your accountant or bookkeeper reach out on your behalf, or phone the account manager yourself to try to recover the funds.

If this doesn’t get results, you may send a letter of demand. The following tips will help you to write an effective letter:

– Make sure you are clear about the amount of money that is owed. Include any interest and legal costs that may be due.

– Give the debtor a reasonable timeframe to pay the debt. This will depend on the amount of money owed and the debtor’s financial circumstances.

It makes sense to work with a Legal Affairs debt recovery lawyer when creating a letter of demand. If the client has the money but is holding onto it, a letter like this can prompt rapid payment.

Apply for a court order

For an amount less than $25,000 your next step is a visit to the Queensland Civil and Administration Tribunal (QCAT). This was established to help businesses recover money owed without losing it to legal support costs.

If the amount is more than $25,000, you will need to work with a lawyer to handle the matter via the Magistrates, District or Supreme court.

Use a debt collection agency

Struggling to recover debt on your own? Working with a debt collection agency may be the best option for you. Your debt collector will follow some of the steps above but because they are familiar with the process they can be much more efficient and persistent.

If you are considering taking action to recover a debt, you should get advice from a debt recovery lawyer first.

If the debtor is insolvent

Many people believe that a company is absolved of its debts if it becomes insolvent or the Directors file for bankruptcy. This is not the case. In fact, part of the process a company must undergo to restructure or become insolvent involves negotiating with creditors. The business may need to sell some of its assets in order to resolve its debts and while you may not get every cent you are owed, at least you can recover some of the money.

It makes sense to work with a debt recovery lawyer if one of your clients is in financial difficulty and going through a restructuring period because it will help you resolve the issue with less stress.

Avoid bad debts

As much as possible, ask your creditors to pay for your services or products upfront. This will save you from having to chase unpaid funds.

In addition to this, make sure you have a clear contract in place or have your clients agree to terms and conditions in writing so bills are not disputed and you have a clear path to a legal claim.

Need help to recover business debts? Reach out to the Legal Affairs debt recovery lawyers at Legal Affairs Lounge today.

If you’ve had money difficulties but want to hold on to your business and feel like there is hope for a positive outcome, one solution can be to press ‘pause’ and get help to restructure your debt.

Here’s an explainer of simplified debt restructuring for Australian small businesses.

How does restructuring help to save businesses from insolvency ?

In the past, Australian businesses facing insolvency have had no choice but to be placed in the hands of a liquidator. Updates made to the law in 2021 mean that if your business has less than $1 million in debt, you have more options and the ability to stay in control while you figure out your next steps.

Referred to as ‘simplified debt restructuring’, this process requires your business to appoint a Small Business Restructuring Practitioner (SBRP) to help restructure your unsecured debts (outside of what you owe your employees) so you can avoid insolvency. If your company is in trouble, this practitioner will work with you and your creditors to come up with a plan that will take care of and relieve debts.

To be eligible for debt restructuring, your business must:

• Have less than $1 million in liabilities (not including employee entitlements)
• Be either insolvent or likely to become insolvent at some future time
• Be up to date with the payment of employee entitlements
• Be up to date with all tax lodgements (not necessarily tax debt)
• Not be under other restructuring or administration including a Deed of Company Arrangement or liquidation.

It’s also important that none of the business directors have gone through a similar process in the last seven years (your SBRP will check to ensure you meet all the requirements during your initial discussions).

If you are eligible for debt restructuring and your creditors agree to the proposal put forward, your business can continue to trade and avoid insolvency.

Your restructuring plan

Your SBRP will have 20 days to come up with a way to pay back the money you owe or absolve you of your debts. You’ll need to share all your financial information so this person can identify the best way to move forward.

Your plan may specify ‘cents in the dollar’ that you will repay or detail how you will return money to your creditors. It’s worth noting that additional debts incurred after you have enlisted the help of a restructuring expert will not be included in your plan.

Working closely with your SBRP, you’ll create a restructuring proposal statement, which includes a schedule setting out the company’s creditors, and the amount they are owed by your company.

Throughout the process, you’ll stay in control of your company and be able to trade. Once you have a debt restructuring plan, a proposal will be put to your creditors, who have 15 business days to accept or reject your suggestions.

Why restructure your debts?

It’s never a great feeling to reach out for support but if your company is in financial trouble, you can undergo the debt restructuring process and have temporary relief from the fear that your creditors can enforce their claims against you.

If more than 50 per cent of voters agree to the terms you put forward, your company can continue to trade and you can pay off your debts according to the plan.

How does a small business restructuring practitioner help?

The rules and process for restructuring debt are complex, which is why it’s mandated that you reach out for the support of a registered specialist.

Your SBRP will firstly confirm you are eligible for debt restructuring. Then they will get to know your business, prepare your plan and circulate it to your creditors, confirming at the same time that they believe you will be able to meet your obligations.

Once a plan is made, shared and agreed on, your small business restructuring practitioner manages the disbursement of payments to your creditors, based on the terms set out in the plan.

While simplified debt restructuring has saved many small businesses since 2021, there is fine print to be aware of. You can read more at treasury.gov.au or reach out to Legal Affairs Lounge for more information.

Disclaimer: The content 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.