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MAKING SENSE OF INSOLVENCY RISK

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by Paul Gidley25.08.17

Early detection can reverse SME exposure to collapse

Any Australian business that only managed to stay afloat by using their debts due to the Australian Tax Office (ATO) as a type of unofficial/unauthorised overdraft facility, need to better understand ‘insolvency risk’ or face their inevitable collapse.

With the number of official liquidations expected to be on the rise, all businesses and especially SMEs needs to better understand what insolvency really means – a.k.a. the inability to pay debt when they’re due – and how they should deal with it.

Think of insolvency as an umbrella term – which depending on how insolvent you might be – may lead to one of several potential paths, including administration or liquidation.

Given how many companies trade with varying degrees of insolvency, it’s important that SMEs fully appreciate what each of these terms really mean. For starters, the most common misnomer is around bankruptcy, which unlike all other insolvency procedures – which apply to companies – applies exclusively to individuals unable to A) pay debts, and B) cannot reach suitable repayment arrangements with their creditors.

By comparison, liquidation is when a company has failed and it’s literally left with no option but to close and sell everything of value. For example, companies are typically left with no option when they can’t pay their tax debts, and the ATO applies to wind them up by putting them into liquidation.

However, before deregistering the company, it’s also important to understand that liquidation requires the liquidator to take control of a company’s business and records, and wind-up all affairs for the company in an orderly and fair manner for the benefit of all creditors.

The single biggest tell-tale signs that SMEs are going from bad to worse are cash flow shortage, stalling payments, borrowing more and asking for extended trading terms. However, it’s important to remember, not all SMEs trading with varying degrees of insolvency are automatically destined for corporate collapse.

The trick for any SME exposed to insolvency risk is to seek advice early enough to determine if they have an underlying business that can still be restructured. It’s equally important to note that by taking advice, SMEs may limit the civil and criminal claims that could arise if they continue trading while insolvent.

Directors who regularly communicate with staff/creditors, and seek real-time advice from accountants are more likely to find solutions to keep the business running.

Assuming they haven’t left it too late, directors and shareholders also have a voluntary appointment option, rather than wait to be wound-up by a court-appointed liquidator. The beauty of a debtor-driven voluntary appointment is it lets companies in financial distress seek the advice needed to potentially become profitable again, while also potentially restoring shareholder value.

The bottom-line is that cash-strapped SMEs that attempt to address insolvency risk early enough, are far more likely to survive a rising interest rate environment, and/or renewed interest by the ATO in recovering smaller debts.

Should you or your clients have any further enquiry or would like a consultation with any of our experienced insolvency experts please contact us at www.shawgidley.com.au