If your company is struggling financially it’s understandable that you may feel the pressure as a director to find solutions to the financial woes.
This pressure can lead to rash financial decisions that are not in the best interests of you or your company.
Directors should seek professional insolvency advice to avoid making the most common mistakes we see.
The following is a summary of the six main things that you should NOT do prior to liquidation:
- Transfer assets to related entities for less than fair value.
- Lend money to your company if it can’t be repaid.
- Pay certain creditors in priority to others.
- Continue trading whilst insolvent.
- Pay creditors who you have guaranteed.
- Obtain advice from unregulated and unqualified advisors.
1. Transfer assets to related entities for less than fair value
This is perhaps the most common mistake we come across as liquidators. It is also the simplest to identify.
There is no issue with selling assets or a business to a related entity as long as fair value is paid. The best way to evidence this is to obtain a valuation prior to selling the assets/business and use this as a guide for what the sale price should be.
It may then be appropriate for the sale proceeds to be held by the company for a liquidator to deal with when appointed.
2. Lend money to your company if it can’t be repaid
Ever heard of the saying “throwing good money after bad”?
Unfortunately, that’s what many directors do when their company is struggling. Rather than protecting their personal assets, they often sell or re-mortgage their family home and pour the funds into the company.
While there is an onus on you as director to try and turn the company around, blindly pouring in money of your own makes no sense.
Instead, seek specialist help to identify the causes of your company’s financial distress and implement a plan to overcome these issues.
3. Prioritise certain creditors over others
Don’t be tempted to pay debts owed to related entities before other unrelated trade creditors.
These payments will be deemed ‘unfair preference payments’ by liquidators, as one creditor has received an unfair preference over other creditors.
If the ATO is paid PAYG payments ahead of other creditors and these amounts are later recovered by a liquidator, the ATO can have you, as director, joined to any legal proceedings brought by the liquidators to recover the PAYG payment as an unfair preference payment.
4. Continue trading whilst insolvent
Insolvency refers to the point in time when a company cannot pay its debts when they fall due and payable.
Trading while insolvent is both a civil and criminal offence. If you have assets you wish to protect, trading while insolvent puts those at risk, given that a liquidator (or creditors) can pursue you personally for the debts incurred by the company after it became insolvent.
It’s therefore important to stay on top of your company’s financial performance and ensure you take action the moment you think your company could be insolvent.
5. Pay creditors you have guaranteed
Pursuant to Section 588FH of the Corporations Act 2001 (Cth), paying creditors that you (or a related entity) have guaranteed in priority to other creditors while the company is insolvent gives rise to a claim against you (or the related entity) by the liquidators for the amount of the debt paid.
Don’t fall into the trap of paying off your guaranteed debts before other creditors!
6. Obtain advice from unregulated and unqualified advisors
Many unregulated advisors offer services to directors of failing or failed companies to protect their assets and avoid paying creditors.
In almost all cases, directors are advised to take illegal actions to frustrate liquidators and creditors, such as illegal phoenix action. Unfortunately, if you follow this advice, you will be the one left holding the can when criminal action is taken by the ASIC.
If you are a director facing liquidation, take reliable insolvency advice and understand your options. Get in touch on 1300 906 966 or chat with us via the live chat window on our site.