Financial aspects

Business solvency

Is your business solvent?

A company is insolvent if it is unable to pay its debts as and when they fall due.  If your business is suffering financial hardship, it is crucial that you give some time to the question of insolvency.  Ignorance of your financial position is no excuse.

You can be insolvent even though you have sufficient assets to ultimately meet your debts.  If those assets are not readily available to meet payment of your debts, you may lack the liquidity sufficient to keep you solvent.

It may also be the case that the fact of either a major creditor currently not demanding the repayment of a debt or a lender advancing monies to you may be the only reason why you are not insolvent.  It is therefore crucial to monitor your financial position on an ongoing basis to ensure that circumstances do not change without your knowledge which might trigger the repayment of such a debt and thereby render you insolvent.

Business solvency

Do you know the effects of trading whilst insolvent?

Directors may be personally liable for the debts of a company that trades whilst insolvent.  If you are operating a partnership or you are a sole trader, and you are unable to pay the debts of your business, you are personally liable, of course, for those debts and may be made bankrupt as a result.

Almost invariably, the principals of a business will provide their own personal assets as security for the borrowings and credit of the business. Insolvency of the business is often a trigger for the calling in of that security.

If your business fails to pay group tax, then the ATO can seek to recover those payments from the directors of the company.  This is so whether or not there is a right to recover against directors on the basis that they have been trading whilst insolvent.  This is a statutory right that can be invoked by the ATO in any circumstance in which it fails to recover the full amount of tax payable by a company.

Trading during insolvency

Do you know what to do if trading whilst insolvent?

The directors of a company can protect themselves against personal liability arising from insolvency by going into voluntarily administration. However, if those directors have personally secured the debts of the company or some of them, it is possible, indeed likely, that the lender will seek to recover from the directors on the basis of that security if the assets of the company are insufficient to pay the company’s creditors.

The directors of an insolvent companies should seek specialist legal advice with respect to the effects of a voluntary administration. One of the effects might be that a secured creditor can appoint a liquidator to the company should the directors appoint a voluntarily administrator.

If you are an individual, the bankruptcy legislation provides you with some options rather than going bankrupt. You can, for example, enter into a scheme of arrangement with your creditors.

In a partnership situation, it is vital to also be aware of the financial circumstances of your partner(s). If they are insolvent, they are not likely to be of any assistance in paying the debts of the partnership as and when they fall due. If the business cannot pay those debts, they may well fall to you to pay.

You should immediately seek advice if you believe that your company, your partners or you personally are insolvent.

What to do when trading insolvent

Financial documents

Do you have financial documents in place, such as guarantees, mortgages, charges, debentures and the like?

Most businesses have financial arrangements in place to support their borrowings. It is important that these arrangements are well documented and that any statutory requirements with respect to the same (for example the registration of a charge involving a company ) are complied with.

Financial document

Are you aware of the effects and requirements of your financial documents?

Most businesses have financial arrangements in place to support their borrowings. It is important that these arrangements are well documented and that any statutory requirements with respect to the same (for example the registration of a charge involving a company on the Personal Property Securities (PPS) Register) are complied with.

It is crucial that you comply with the terms of your financial documentation. If you do not, the relevant financial institution will, upon becoming aware of your breach, almost certainly take action to recover its credit from you. This could be devastating for your business.

A breach of a key financial arrangement, such as a factoring agreement, mortgage, charge or debenture, will almost inevitably lead to the “calling in” of that financial arrangement and any related securities such as guarantees and indemnities.

Of course, the risks in this regard are not only contractual. Certain activities may constitute criminal activity if your actions are deemed fraudulent. You may not consider your actions to be so.  Obviously, you own your business.  However, when you enter into a major financing arrangement, you are effectively giving up many of the rights of an owner, or at least making those rights subject to the greater rights of the lender.  Your right to use the income and assets of the business is no longer solely your own.  You cannot act contrary to your finance arrangements.  As indicated, to do so may constitute not only a breach of contract, but also a criminal act.

Financial documents effects

Taxation

In the early stages of a business, investors are often related to the principals of the business operation.  Indeed, often mum and dad will put their house on the line to secure finance for a son’s or daughter’s new business venture. The terms of these loans are very often not reduced to writing either at all or adequately.  As a result, this can leave mum and dad extremely vulnerable.  It is also a recipe for disaster when it comes to administering the estates of mum and dad after they have died, particularly in so far as other siblings are concerned.

As a business grows, the owners of the business often look outside their family group for the next line of funding for the growth of their business.  This is most frequently either a bank or an equity investor.  If your existing investor arrangements are not properly recorded, this can cause a difficulty for the bank or equity investor.  They will want to know the exact terms upon which any capital of the business operation may become repayable. 

Of course, it is possible that secondary financiers will be paying out the primary financiers as part of the re-financing deal.  The secondary financiers will, in these circumstances, want to be assured that the money being used to pay out primary investors is bona fide and not a means of depleting the resources of the company or business operation unreasonably.

The bottom line is that all arrangements with financiers must be accurately and appropriately recorded.  If the money has been advanced by way of loan, a loan agreement should be put in place and any security provided in support of the loan must be properly created.  If this security includes a  charge over company assets, it may require registration on the Personal Property Securities (PPS) Register.

If finance is advanced as shareholders’ funds, that is in return for equity in the business, this must be recorded in the appropriate places, such as in the minutes of a directors’ meeting and on a share certificate.  Consideration should also be given in this case to entering into a shareholders’ agreement.

If the financial arrangements are of a more complicated nature, such as convertible notes, proper regard to the statutory requirements with respect to such financial arrangements is also essential.

 

Taxation

Investment

Is your business ready to accept investment for growth?

Most people like to see their businesses grow.  Regrettably, few know what is required to successfully achieve growth.  Often, one of the important elements that is required is the ability to successfully negotiate an investment in your business.  In order to be in a position of strength in such negotiations, your business must be ‘investor ready’.

Becoming investor ready requires an evaluation of the totality of your business, including issues such as:

  • structure
  • current financial arrangements
  • protection of intellectual property
  • systems and procedures
  • the underlying strength of the current balance sheet
  • future profit projections
  • market share
  • growth potential
  • the strength of ‘the product’
  • the ongoing commitment of key people
  • the strength of the business’s contracts
  • the business’s risk profile
  • the integrity of the owners of the business, etc etc.

If you want growth, you will require further capital.  Whether that be from a bank, an investor or some other source, you must be investor ready.  Being investor ready requires a detailed analysis and, most likely, a significant restructuring of your business operation.  It may not be easy, but the rewards can be substantial.

 

Investment for growth

Our Business and Commercial Lawyers

Michael Perkins Principal Lawyer

Michael Perkins

Lawyer, author, educator

Michael Perkins, Co-Founder and Principal Lawyer Dip Law SAB, TEP, MICW has over 30 years’ experience of in resolving complexities for clients managing their family and business interests. While many professionals manage and deliver transactions for clients, Michael provides additional support with resolving broader complexity and conflict in the lives of his clients, where possible without resorting to litigation or other dispute resolution processes. He helps clients deal with the practical, strategic and operational needs of their businesses, conservation of their assets, activating community and philanthropic interests and planning for succession to their estate over time. Michael applies a multidisciplinary approach in dealing with the challenges of achieving growth, asset protection, estate governance and succession. Methodologies finessed with experience are applied, paving a way forward for globalising businesses as well as families making plans to manage their wealth for the benefit of subsequent generations.
Jeremy Duffy Autonomy First

Jeremy Duffy

Principal Lawyer

Jeremy Duffy is a contracted Principal Solicitor based in South Australia. Jeremy has over 38 years of experience including as a partner in two Adelaide law firms. His background includes numerous litigation matters in both State and Federal jurisdictions and non-litigious advisory and transactional work in trusts, estate planning, property law and commercial transactions. Jeremy’s clients over the years have included corporates, banks, property developers and managers, financial advisors, representative bodies and private clients. Leveraging his extensive and varied skill set, he adeptly handles a broad spectrum of legal matters for a diverse clientele. Jeremy has a strong interest in developing technology to help deliver legal services more efficiently.

Amber Geake Autonomy First Lawyes

Amber Geake

Associate Lawyer

Amber Geake, Associate Lawyer at Autonomy First Lawyers, has been working in the legal sector since 2016 and was admitted to the Supreme Court of New South Wales in 2020. A passionate advocate, Amber’s focus is on all matters dealing with estates, including succession planning, estate administration and estate litigation. She has substantial experience in contested estate litigation (family provision, contested probate, testamentary capacity and validity, protected persons and general equity matters) in the Supreme Court of New South Wales. Her background also includes assisting clients within the Guardianship Division of the NSW Civil and Administrative Tribunal. Amber is currently undertaking her Master of Applied Law (Wills and Estates) at the College of Law.

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