Small and medium-sized enterprises (SMBs) are being hit hard by COVID and its economic consequences in Australia – and everywhere, for that matter. Directors of SMBs are questioning whether insolvency is looming, and therefore the possibility of appointing a Voluntary Administrator to implement a formal restructuring of the business.
What is Voluntary Administration?
Voluntary Administration is a process where a registered insolvency professional temporarily takes control of a business which is in financial difficulty or insolvent. This professional, the ‘Voluntary Administrator’, takes away control from the directors for a period of time in order to assess the finances and determine the future of the business.
How do you know if you need to go into voluntary administration?
Before appointing a Voluntary Administrator, it is important for directors to be aware of the shortfalls of Voluntary Administration and other options that may be available to them. The key advantage of Voluntary Administration for directors is to give them time and energy to work on a restructure.
During that period there is a moratorium on creditor action against the company. This means:
- the company cannot be wound up.
- securities cannot be enforced (with some exceptions).
- an owner or lessor cannot recover property used by the company (with some exceptions).
- legal proceedings cannot be commenced against the company (with some exceptions).
- a company director’s guarantee cannot be enforced.
However, the time period available to a Voluntary Administrator is not very long: there is only six weeks to approve the restructure.
The most important consideration for directors, in deciding whether or not to appoint a Voluntary Administrator, should be whether that appointment has a decent chance of restructuring the business and eliminating accumulated debts. Most times, however, the typical outcome of a Voluntary Administration results in a liquidation rather than a DOCA.
Help for SMBS
For SMBs in this position, don’t be alarmed. There are provisions in the law, including those recently introduced through the Coronavirus Economic Response Package Act 2020, which give you the time and breathing space to evaluate your options without breaking the law.
When directors decide to appoint a Voluntary Administrator, they are often motivated by one thing – fear. Directors are personally liable under the Corporations Act 2001 for insolvent trading, or tax debts if they misstep. They are concerned about the risk of insolvency and reach out to their accountant for advice (or a lawyer) who will usually emphasise that insolvent trading is illegal. If a company director hasn’t been through an insolvency process before, they are staring at a messy and risky process. The fear of this may lead to the premature appointment of a Voluntary Administrator to avoid any possible liability for insolvent trading.
There is help on the horizon with several new (and relatively new) legal provisions that protect their position during times of business difficulty:
1. Relaxed time periods and increased minimums for ‘statutory demands’.
The most common way for an unpaid creditor to prove insolvency (and therefore start the winding up of a company) is to issue a statutory demand for payment of debt (‘statutory demand’). If the debtor fails to pay a demanded amount within a certain period of time, they can be deemed insolvent and winding up proceedings can be initiated. The new Coronavirus Economic Response Package Act 2020 increases the amount that must be owed before issuing a statutory demand from $2,000 to $20,000 and extends the period for the debtor to respond from 21 days to six months.
2. The COVID-19 Safe Harbour.
The Coronavirus Economic Response Package Act also provides a new temporary ‘safe harbour’. Directors will not be personally liable for insolvent trading where they meet the following conditions:
- the debt is incurred in the ordinary course of business.
- the debt is incurred in the six-month period from when the law comes into effect.
- the debt is incurred before the appointment of the voluntary administrator or liquidator.
3. Standard Safe Harbour.
This safe harbour was introduced in 2017, but not all directors understand its implications well. It provides that the duty of a director not to trade while insolvent does not apply if:
- at a particular time after the director suspects insolvency, the director develops a course of action that is reasonably likely to lead to a better outcome for the company.
- the company debt is incurred in connection with the course of action.
The net effect of these three provisions is that directors have time to seek advice and properly evaluate their options before appointing a Voluntary Administrator, or a liquidator. In addition, directors will not be breaching their duty, even if they are insolvent, if they take out debts in the ordinary course of business, or they are developing a ‘course of action’ for responding to their situation.
Have you noticed our #FridayExpertTips... here's one that relates to #Taxation
"Small businesses can change the legal structure of their business and minimise tax liabilities when active assets are transferred by one entity to another. However, business restructuring can be quite complex, it is highly recommended to speak to your Tax Advisor first!”