Corporate insolvency issues and solutions can be very complicated. Professional assistance is absolutely essential to ensure that your assets are protected.
Corporate insolvency issues and solutions can be very complicated. Professional assistance is absolutely essential to ensure that your assets are protected. There are also likely to be tax issues. If you’ve received a director penalty notice or garnishee notice from the tax office, even your personal assets may be on the line.
Understanding corporate insolvency- The big issues
Under Australian corporate and taxation law:
- A company is technically insolvent if unable to meet its financial obligations
- A company may not trade while insolvent
- Directors may be held personally liable for tax owed by their companies
- Creditors may apply to have a company wound up for failure to pay outstanding monies
There are some obvious questions here:
Q: How does a company, which is subject to a lot of mandatory accounting practices, become insolvent in the first place?
A: The insolvency scenario involves any situation whereby the company is “unable to meet its financial obligations”. That means financial obligations of any kind.
Q: Is it possible that company directors may not even be aware of their company’s insolvency?
A: It’s possible, but it’s no defence. Directors are obliged to exercise “due diligence” in the performance of their duties and that includes financial management.
The fact is that insolvency is the corporate equivalent of a bullet. It can either be fatal, or the company, although wounded, may recover if the situation is well managed.
The first and most critical step in the process of dealing with corporate insolvency is to get expert guidance from insolvency practitioners.
There are several typical scenarios in corporate insolvency:
- Accounts- Mismanaged and/or inadequate accounts are disasters waiting to happen. They can have gaping holes in them, and that’s where the problems start.
- Fraud- Corporate solvency problems can be caused by fraudulent practices.
- Bad debts- Failure to recover monies owed is an all too common scenario in company insolvencies.
- Tax liabilities- Tax owing may be allowed to accumulate, for whatever reason. Sadly, for companies, if the amount of tax owed is sufficient, the company can be deemed to be technically insolvent, particularly if there are other major debts owing.
You can see where some expert help might come in handy. The professional approach is very straightforward:
- Check the accounts- To fix the problems, you need to know exactly what’s gone wrong. You will also need to be in contact with any debt collection agency that creditors have employed or with the creditors themselves.
- Check the books- That’s where fraud invariably shows up.
- Check debt recovery options- This really should have been done before, but it’s critical to improving the company balance sheets, too.
- Assess and manage any tax issues- This can be staggeringly complex process. It often involves a full independent assessment and really must be done by professionals, because tax assessment and tax appeals are statutory processes.
The benefits of the professional scrutiny will be obvious:
- Accounts are cleaned up and restored to a credible state- This also means that they’re acceptable in terms of compliance with corporate and tax law.
- The books are thoroughly examined- Basic small business accounting and small business bookkeeping are good antidotes to operational problems. You’ll wind up with healthy books.
- Debts are properly managed- This is correct business practice, and you’ll see how it’s done.
- Tax issues are brought under control- The ATO has discretionary powers to assist with reasonable requests for allowances for time to pay outstanding taxes. This alone can eliminate the threat of insolvency.