Corporate insolvency is a part of the life cycle of many businesses. Data from the Australian Securities and Investments Commission shows that in the June quarter of 2016, there were 2,283 companies that went into external administration.

That's an 8.3 per cent increase on the previous year, and a strong indication of the prevalence of outstanding debts. As lines of credit stack up for your company, you can reach a point where they become untenable, and the business becomes insolvent. Understanding exactly how these processes occur is important for any company director. 

When a business runs into serious debts, what are the points of no return?When a business runs into serious debts, what are the points of no return?

Time frames for measures taken against directors

One of the biggest bodies your business can owe money to is the Australian Taxation Office (ATO). As debts increase and remain unpaid, the ATO will initiate contact with you, the director, to organise repayment. This is a point where the services of an insolvency specialist accountant can be useful, negotiating with them on your behalf and structuring debt in a manner that suits your company.

However, the longer debts remain unpaid, the stronger the measures from the ATO will be. The time remaining to avoid the most serious of actions will depend on what the ATO does. If you receive any of the following, then action against you will begin immediately:

  • A director penalty notice
  • A claim of summons filed with the relevant court
  • A sequestration order

However, the following notices will normally give you a window in which you can act to establish a payment plan or repay the debt: 

  • A statutory demand (21-day window)
  • A creditors petition
  • A garnishee notice

Creditors can also take action of their own volition, without involving the ATO. If debts are not paid, creditors can file a statutory demand, which gives directors 21 days to repay debts or enter a longer-term plan. 

If you receive any of these, it is time to take serious action with regards to your company finances. Cactus Consulting's insolvency accountants can help you plot the most appropriate course of action. It is also important to remember this quote from the ATO: "we will not seek to bankrupt you if it is clear that you are able to pay your debt in a reasonable time". 

Clear contact and acting in good faith to repay debts will put you in good stead.

Clear contact and acting in good faith to repay debts will put you in good stead.

This begins with communication. Reaching out to creditors or the ATO in advance and demonstrating that your business is taking steps to restructure, make funds available to pay down debt or simply organise a payment plan will often be an excellent first step. 

Prevention is the best plan for Australian business, but it can't always happen. When stronger measures are taken by the ATO or creditors it is a serious issue, but you must remember it is not too late. Until wind-up action begins, your company has a chance to avoid becoming totally insolvent. Talk to the accounting professionals at Cactus Consulting to sort your business out and determine how to deal with these notices – or attempt to avoid them entirely. 

Posted on 17-10-17 in Corporate finance insights and updates.