Signs of Insolvency Along with Required Actions of the Directors

Discuss About The Director Shareholder Liabilities Insolvency?

Solvency is referred as the abilities of an organization or its members for paying out all their debts that are due as well as unpaid till the date mentioned under section 95 A(1) of the Corporations Act 2001. Here, the value of assets is always higher than that of liabilities, which indicates that dues can be easily payable by the solvent organization. However, in section 95A(2) of the Corporations Act, a person unable to pay the dues or debts on time is termed as an insolvent and the situation is known as insolvency. Here, the situation is completely vice-versa, where liabilities exceed the assets in an organization (Australian Institute of Company Directors, 2012). Additionally, liquidation of a company means winding up, the last step taken into consideration in case the debt amount is left unpaid. Here, the assets are sold at a discounted rate to recover the due amount leading to company disclosure (ASIC, 2017; Australian Institute of Company Directors, 2012). The paper explores diverse concepts related to insolvency and its impact in Australia. Management, Australian Securities & Investment Commission (ASIC)’s role in insolvency issues are analyzed within real life situations, which finally helps in the accomplishment of the paper objective.

Warning signs related to the insolvency risks are situations in business, which indicates the inability to pay off debts. Few of the signs are inability to pay the due taxes, where the organization starts ignoring the tax payments because they are bound to pay wages of the employees, supplier along with creditor demands. Usage of superannuation contribution of the employees for trading, experiencing continuing losses along with reduced cash flow as well as receiving legal notices on behalf of the creditors are few signs that push the business towards insolvency. For instance, if an organization does not pay the creditors on due date of 25-30 days, suppliers will further push them to pay or demand Cash on delivery for the next orders. Therefore, credit supply will be over, which will badly affect the already unbalanced cash flow (BTSA, 2017) Some additional signs include inadequate amount of sales along with lack in sales forecast and increased in the account receivable with the passage of time, thereby relying on obtaining finance or loans at high interest rates. Besides, financial records stay incomplete while the organization is found to be incapable of selling any further stock as stock turnover is quite low. All these signs align with the causes of insolvency of an organization (BTSA, 2017a).

The Potential Liabilities of Company Directors When a Company Becomes Insolvent

Directors need to understand the application of five rules to handle the insolvent situation in an organization starting with avoiding the resistance to acknowledge as well as to display pro-activeness by acting quickly and as early as possible. Additionally, the directors should look for adopting vigorous standards, where monitoring will be improved by considering the assets, liabilities, cash flows and bank facilities of the organization. The board of directors must further seek financial along with legal advice for developing alternative plan, when the existing plan is about to fail. At such instances, they can inject fresh funds to overcome the situations of financial difficulties. Moreover, directors should ensure that the banks are informed and engaged in the complex situations, where possibilities of short term loans may be provided to their organization for restructure and for turning-around the situation. The turnaround as well as restructuring strategies will take time and therefore directors need to keep patience and ensure engagement of stakeholders for its successful implementation (Corrs, 2017).

A director will be personally liable for breaching the rules and regulations of the organizations, based on the need to take potential action for recovering the debts. It is the legal duty as well as obligations of a director to act for company’s benefit pertaining to the organizational objective. Directors are in turn responsible for administering the organization in support of the shareholders. According to the Corporations Act 2001 and common law, a director needs to uphold certain duties, which additionally considers limited liability of the corporate entity. Any breach of these duties can lead to legal consequences, which will in turn include civil along with criminal penalties, sanctions as well as director’s disqualification for their post (Moroney, 2017, ASIC, 2016).

Some of the potential liabilities of a director starts with delivering security or acting like a guarantor over asset’s of the shareholders in the company. Additionally, directors need to ensure that no trading take place, when the company has already become insolvent and determines the debts incurred. Moreover, a director is liable due to the losses caused by the breach of their duties.    Besides phoenix activity also takes place in illegal terms, where transfer of assets to a new organization undertakes intentionally for saving tax and avoiding payment to creditors along with employee entitlements. Furthermore, a director is personally liable under ATO’s Director Penalty Regime for withholding the amount of Superannuation Guarantee Charge (SGC) or Pay As You Go (PAYG), in case the company is unable to repay the amount. Hence, organizations ensure enough assets to pay off these debts (Moroney, 2017, ASIC, 2016).

The Different Avenues Available to the Director Or Company if it Presumes to be Insolvent

There are three different avenues available for a director, if the company is presumed to be insolvent, which include voluntary administration, liquidation along with receivership. Voluntary administration is a process, where future direction of the company is resolved at a quicker pace. Here, voluntary administrator, an independent as well as suitably qualified individual work and control the entire company to save its business by making a way out. Here, the voluntary administrator further takes the responsibility to pay off the creditors in a better way. A director can also act as a voluntary administrator after obtaining a written consent from registered liquidator. The second option is liquidation, where a liquidator is appointed to control the insolvent company and work accordingly for the creditor’s benefit on fair basis. A director needs to call a meeting with the other member if they initiate the liquidation process. Here votes are considered for permanently winding up the company by the liquidator or taking the help of court for completing the process. The last option is receivership, where a secured creditor appoints a receiver to collect as well as sell assets of an organization to repay the owed debt (ASIC, 2014; ASIC, 2017a). This can be inferred from the topical issue of Value-stream Investment Management Ltd v Richmond Management Pty Ltd [2012] FCA 898 (Federal Court of Australia, 2012). Hence, a secure creditor needs to hold some security on few assets of the company to complete the process. A director can also be a secured creditor but requires seeking advice prior to the appointment of any receiver (ASIC, 2014; ASIC, 2017a).

Company liquidation is the process that takes place when the organization is unable to pay off the dues to the creditors and saving it through voluntary administration becomes useless. The two process of liquidation has been differentiated below:

Voluntary liquidation is considered essential, when company’s business becomes completely insolvent and trading needs to be stopped. Here, the process is initiated by the directors along with company members to wind up by passing a required resolution as well as by getting a liquidator appointed. Additionally, the liquidator can be selected by the director and members in voluntary liquidation. The remaining assets of the company are sold and the fund recovered to pay off to the creditors by the liquidator as per the Corporations Act (CRS Insolvency Services, 2014; Australian Government, 2014).

Involuntary liquidations start when a creditor, who owes money from the organization initiates an involuntary liquidation for its winding up and recovering the amount with the help of court. A statutory demand may be issued on behalf of the creditors by the district or local court in the first judgment session. Court may hence appoint an official liquidator for the process or a provisional one (CRS Insolvency Services, 2014; Australian Government, 2014).This can be regarded contingent based on the topical issue of Andrew Fielding as Liquidator of Lyngray Developments Pty Ltd v Dushas & Anor [2012] QDC 96 (District Court of Queensland, 2012). Hereby, the creditor who initiated the process has all the rights to choose a liquidator during involuntary liquidation process to recover the funds (CRS Insolvency Services, 2014).

Difference between Voluntary and Involuntary Interventions Aligned with Organization’s Potential Insolvency

Instead of winding up, a company may look for alternative procedures such as voluntary administration as well as DOCA (Deed of Company Agreement) during insolvency, which may rescue them from the degrading situation and lead to positive outcome. Voluntary administration is conducted by an independent administrator, who is appointed to review the company affairs and rescue it from getting wound up (Taylor, 2017; Australian Government, 2014). This can be explained through the topical concern of Robinson, in the purview of Darrell Lea Chocolate Shops Pty Ltd (Administrators Appointed) [2012] FCA 833 (Federal Court of Australia, 2012a). Moreover, directors can appoint the administrators on behalf of the stakeholders along with creditor prior to their suspect of inability to pay off, who are directly supervised by the ASIC as well as the Court. During administration, the company is provided with a moratorium period before creditors enforce any action on the secured individuals along with the landlord. The procedure may take a maximum of one month, where business trading affairs will be investigated. At the end, a meeting will be convened with the creditors, where voluntary administrator will outline the existing affairs along viability of the company to continue operations. The options can be considered eligible in this situation including return in the authority to the directors, placing the company into liquidation or proposing DOCA to the creditors. DOCA is payment agreement by a third party or director on behalf of the company, where the key objective is to formally allow a restructuring process for the financial suffering company. DOCA in turn helps in binding all the unsecured creditors except personal agreements to pay-off a debt. If the company fails to restructure, they have to sign the DOCA as per the creditor’s orders. Hence, if company ignores to sign the DOCA, it will automatically fall into liquidation and the administrator will become a liquidator (Taylor, 2017; Australian Government, 2014).

Australian companies’ insolvency statistics are measured by ASIC. In the present section, data from four quarters including September and December 2016 along with March and June 2017 is analyzed, whereby the quarterly total appointments were 2,299, 1817, 1717 and 2198 respectively. The EXAD or external administration remained below 4% in every quarter from July 2016 to June 2017 and the total appointments were recorded to be 8031, where average total was 2008 (ASIC, 2016a; ASIC, 2016b; ASIC, 2017b; ASIC, 2017c). Some of the statistical data related to these four quarters has been provided in the appendix section.

ASIC is the regulator of corporate, financial as well as market services in Australia, which ensures transparency and fairness in the financial market, thereby maintaining economic reputation and well being of the nation. ASIC does its maximum of the work as per the prescribed norms in the Corporations Act 2001. Strategic priorities promote trust along with confidence amongst investors as well as financial consumers. Some of the key roles include improving and facilitating the financial system’s performance, enforcing law, promoting information and confidence engagement of the consumers along with investors, thereby administering the corporate law in an effective manner and lastly building information considering the other statutory bodies and companies easily accessible to public. ASIC in general is a government body controlling the financial system in Australia, starting from a company’s registration to its winding up along with liquidation (ASIC, 2017d).

Conclusion

The study clearly indicates the concepts of insolvency and several processes related to its functioning. It was hence evident that insolvency is effective due to the misuse of the financial system by the directors instead of the employees. Trading was hence suggested to be stopped as soon as company understands their insolvent position in the marketing. It was hence found that companies have alternatives rather than winding up their business, where they can appoint a voluntary administrator to recover from the situation. Here, the directors can save the company from liquidation and from getting completely wound up. Conclusively, it was found to be important for the directors to disclose everything to their investors, banks as well as shareholders, so that fairness could be displayed and collaborative effort could be provided to rescue the business along with its stakeholders.

References

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