Frequently Asked Questions
Don’t let the unknown play on your mind. Let us help you bring clarity on your options to the circumstances of your business.
What does insolvency mean?
Insolvency occurs when a company is unable to pay its debts as and when they fall due. Under the Corporations Act 2001 (Cth), this is the test for insolvency in Australia. Insolvency can lead to legal actions such as liquidation or voluntary administration.
How do I know if my business is insolvent?
Indicators of insolvency include (among other things):
- Ongoing losses.
- Overdue taxes and superannuation.
- Creditors demanding payments.
- Legal action taken by creditors.
- Inability to obtain finance.
- Dishonoured payments or cheques.
- Inability to produce timely and accurate financial information.
Directors have a duty under the Corporations Act 2001 to prevent their company from trading while insolvent.
When should I consider a restructure?
Consider a restructure when:
- The business is experiencing financial distress but has potential for viability.
- There is an opportunity to improve efficiency and profitability.
- You need to address unsustainable debt levels.
- Market conditions change and necessitate a different business model or strategy.
- You identify operational inefficiencies or need to modernize processes and systems.
- Creditors may be becoming agitated or legal action has been commenced.
What typically happens in a restructure?
A business restructure can involve several steps, including:
- Assessing the company’s financial position.
- Negotiating with creditors to extend payment terms or reduce debt.
- Changing the company’s business model, operations, or management.
- Possibly entering into a formal arrangement, such as a Deed of Company Arrangement (DOCA), which is a binding agreement between a company and its creditors outlining how the company’s affairs will be dealt with
What options are available for my ATO debt?
The Australian Taxation Office (ATO) offers several options for managing tax debt, including:
- Payment plans: Arrange to pay your debt in installments over time.
- Deferrals: Request more time to pay.
- Compromise: In some cases, the ATO may accept a lump sum payment that is less than the total debt owed.
- Remission of penalties and interest: Request for reduction or cancellation of penalties and interest charge
What happens in a liquidation?
In a liquidation:
- A liquidator is appointed to wind up the company’s affairs.
- The company ceases trading.
- The liquidator collects and sells the company’s assets.
- The liquidator investigates the affairs of the company to identify and pursue any claims available to them or the Company for the benefit of creditors.
- The proceeds are distributed to creditors in a specific order of priority, and any surplus is returned to shareholders.
- The company is deregistered and ceases to exist.
Should I be concerned about liquidation?
Yes, which is where Fortify Partners come in. We want to help your business through its financial difficulties before any potential liquidation event is required.
Key areas to understand for liquidation concerns:
- Liquidation usually means the end of the business.
- Directors may face personal liabilities if found to have traded while insolvent for example.
- Employees may lose their jobs, although they are typically entitled to certain protections and payments under the Fair Entitlements Guarantee (FEG) scheme.
- Creditors may not be paid in full, depending on the company’s assets.
- The liquidation may crystalise ATO debts and result in a Director Penalty Notice being issued to hold the director personally liable for Company tax liabilities.
- The liquidation will trigger personal guarantees, enabling those creditors to pursue the director personally for any shortfall.
What is a director penalty notice (DPN)?
A Director Penalty Notice (DPN) is issued by the ATO and makes directors personally liable for their company’s unpaid PAYG withholding and superannuation guarantee charge liabilities.
There are two types of DPNs:
- Non-lockdown DPN: Directors can avoid personal liability by paying the debt or appointing an administrator or liquidator within 21 days.
- Lockdown DPN: Directors are automatically personally liable and cannot avoid liability by appointing an administrator or liquidator.
