Corporate Insolvency Lawyers

Insolvency is when a company cannot pay its debts as and when they fall due. When this occurs it may end up in one of the following types of formal administration:

• Liquidation
• Voluntary Administration
• Deed of Company Arrangement
• Receivership

Corporate insolvency can arise as a result of a one-off event that causes cashflow problems, or can arise from ongoing cashflow issues.

Often matters are brought to a head by the ATO taking action to recovery amounts owing to it.

How you are affected depends on your power in the organisation. As a director you will be required to assist the external administrator. If you have been involved in 2 or more companies which have gone into insolvency within the last 7 years and paid less than 50 cents to the creditor, ASIC can disqualify you from managing corporations for up to 5 years.

Voluntary administration is the period during which an administrator investigates a company’s affairs and reports to creditors on whether the company should be placed into liquidation or a deed of company arrangement (DOCA) should be accepted.

A deed of company arrangement is an agreement between a company and its creditors about how the debts owing by the company are to be dealt with, as an alternative to a liquidation of the company.

A liquidation or winding up of a company involves a liquidator selling a company’s assets and using those assets to pay creditors of the company in accordance with the requirements of the Corporations Act 2001.

Under section 588G and 588M of the Corporations Act 2001, a liquidator or creditor can sue directors personally for allowing a company to incur debts while a company was insolvent.

It is therefore important for directors to ensure that they obtain early advice if they believe a company may be at risk of becoming insolvent to reduce the risk of personal liability.

Insolvent trading claims may be defended in a number of ways, including:

1. That a director did not have reasonable grounds to suspect the company’s insolvency, and a reasonable person in a like position would not have been aware of grounds to suspect the company’s insolvency (section 588G(2)); or
2. At the time the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time (section 588H(2)); or
3. Because of illness or for some other good reason, the director did not take part at that time in the management of the company (section 588H(4)); or
4. The debts incurred were subject to the safe harbour provisions.

Additionally, under section 1317S and 1318 of the Corporations Act 2001, a court has the power to relieve a director from liability if:

1. the person has acted honestly; and
2. having regard to all the circumstances of the case the person ought fairly to be excused for the contravention

Under section 588GA of the Corporations Act 2001, a director can take advantage of provisions designed to protect directors from an insolvent trading claim if certain steps are taken by directors.

The safe harbour provisions are complex and professional specific advice should be sought.

However, broadly speaking, safe harbour involves:

1. The director developing a plan (referred to in the legislation as a “one or more courses of action”);
2. That plan is reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator, or liquidator, of the company; and
3. The debts in question are incurred in connection with the plan; and
4. The debts are incurred within the timeframes specified in section 588GA.

However, safe harbour is not available if at the time the debt is incurred:

1. A company is not substantially complying with its obligation to pay employees their entitlements when due; or
2. The company is not substantially complying with its obligation to give returns, notices, statements, applications or other documents as required by taxation laws; or
3. The company has failed to pay employee entitlements or given returns, notices, statements, applications or other documents as required by taxation laws, on more than 2 occasions in the 12 month period prior to the date the debt is incurred.

Additionally, if a director fails to substantially comply with certain statutory obligations to report on the affairs of the company following the appointment of a receiver, administrator or liquidator, the director will not be able to rely on the safe harbour provisions unless a court orders otherwise.

Under section 588FA of the Corporations Act 2001, an unsecured creditor who receives payment of the debt in the 6 month period leading up to a company’s liquidation may be liable to repay to the company the amount received by that creditor.

If a creditor receives a demand from a liquidator in relation to an alleged unfair preference, a number of defences may be available:

1. The creditor may be able to establish that a running account existed which may reduce the amount of the preference;
2. The creditor may be able to establish that they were a secured creditor;
3. The creditor may be able to establish the “good faith defence”. This requires the creditor to prove that at the time of receiving the payments it did not have reasonable grounds to suspect the company’s insolvency, and a reasonable person in its position would not have had such grounds for suspecting the company’s insolvency.

A director can be directly liable to pay the ATO Pay As You Go Withholding (PAYG) and Superannuation Guarantee Charge (SGC) obligations that are not paid by a company under the director penalty notice process.

There are two types of DPN: a lockdown director penalty notice and a non-lockdown director penalty notice.

Non-lockdown Director Penalty Notice
A non-lockdown Director Penalty Notice can be issued by the ATO where a Business Activity Statement (BAS), instalment activity statement or superannuation guarantee statement is lodged with the ATO within 3 months of the due date for lodgement, but the amount owing under the lodgement is not paid by the due date for payment.

If a non-lockdown Director Penalty Notice is issued by the ATO following such a lodgement, the director has 21 days to either:

1. pay the debt;
2. place the company in administration; or
3. place the company in liquidation.

If the director fails to take such action, the director will be personally liable for these debts.

Lockdown Director Penalty
A lockdown director penalty is a penalty that occurs automatically if a company fails to lodge a BAS within 3 months of the due date for lodgement.

If a company fails to lodge the BAS, instalment activity statement or superannuation guarantee statement with the ATO within 3 months of the due date for lodgement, the director is automatically liable for the debts incurred and the director cannot avoid liability by placing the company into administration or liquidation on receipt of the Director Penalty Notice.

Shine Lawyers’ business recovery insolvency law team helps SMEs get back on a sound financial footing. Our business recovery and restructuring solutions are tailored to you and your business’ unique circumstances.

Where you are located isn't necessarily a barrier when it comes to obtaining the services of a lawyer. We're experts when it comes to Insolvency related claims and we can help you get the compensation you deserve.

It doesn't matter if you are located close or far away from a Shine Lawyers office - we will always provide the same, expert advice and manage your claim with the same level of quality and commitment.

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