options-for-insolvent-businesses-when-jobkeeper-ends

The Federal Government’s JobKeeper scheme is currently going to end in March 2021. There are over three quarters of a million businesses using this scheme, each receiving $750 per week for each employee for a total of over 3.5 million employees.

The scheme has worked as planned to help businesses retain employees and meet employment costs. But, what happens when JobKeeper ends and businesses can no longer keep paying their costs and expenses?

In this article we look at the options that are available to your company if it is unable to pay its debts at the end of the JobKeeper scheme.

Liquidate Your Company

The aim of liquidation is to wind up the affairs of a company. Sometimes liquidation can be the best thing for your company, however, in other circumstances it may only be the last resort. Where liquidation is appropriate is where it is simply impracticable for a business to continue trading in its current form and in those circumstances, liquidation can be the only solution.

The process of liquidation begins with the appointment of a liquidator who will realise any available assets of a company, investigate and pursue any viable recovery actions and report to your company’s creditors. At the end of this process any surplus funds will be distributed to the company’s creditors.

Voluntary Administration To Avoid Liquidation 

Many businesses enter into voluntary administration to avoid liquidation. Depending on your business’ circumstances, you may choose to place it in voluntary administration as part of a process of settling creditors’ claims and reducing a company’s overall debt level. In a voluntary administration, an insolvency practitioner is appointed to investigate the company’s affairs and report to creditors on their findings. An offer, which can be made by the directors, will then be put forward to the creditors to settle their claims. The offer is made by way of a formal proposal called a Deed of Company Arrangement (DOCA).

The voluntary administrator will hold a meeting with creditors where they vote to either:

  • End the voluntary administration and allow the directors to resume control of the business; or
  • Enter into a DOCA which is the directors’ proposal to settle creditors’ claims; or
  • Place the company in liquidation.

Your company can continue trading and will avoid liquidation if it goes into voluntary administration and a proposal for a DOCA is agreed to. A voluntary administration however, is often costly, can cause damage to a business’ reputation and is therefore sometimes not the best option for small businesses.

Lending Funds Or Recapitalising Your Business

If your business is facing financial difficulty, you have the option of providing a loan to the business or borrowing funds to support the business’ activities. This however, is a short term solution and is often not the solution for the underlying problems faced by your company. If you are looking at this option you should:

  • Obtain professional advice prior to lending or obtaining a loan, so that you are not just putting good money into a business which will ultimately fail;
  • Ensure that you have business turnaround plans, which we are well placed to provide advice on; and
  • Ensure that you take security over your company at the time the loan is made and register your security on the Personal Property Securities Register.

Business Sale Arrangement

You may be able to sell your company’s business either to an unrelated entity or perhaps to another related company.

If you are selling your company’s business to a related entity it is important that expert advice is obtained before proceeding to restructure your business. This is so any transaction complies with the relevant laws of Australia. A business sale to a related entity, if done incorrectly, will be illegal and the ASIC has been actively taking action against directors who have breached their duties in this regard. If a transaction is deemed illegal, the consequences to directors are serious, including criminal penalties and civil recovery actions.

Negotiate Settlements With Creditors

Often, our advice to clients is to negotiate settlements with their creditors. If you have a sound business but its cashflow is affected by the COVID-19 pandemic, we can help you negotiate payment arrangements or debts settlements with your creditors.

For more information on how we can help you negotiate settlement arrangements, click here.

Contact Us For Assistance

It is never too early to seek professional advice if you believe that your business will struggle after JobKeeper ends. So, don’t delay things any further and get in touch with us on 1300 906 966 or send us an email at mail@cactusconsulting.com.au to arrange a free confidential initial discussion.

Posted on 02-02-21 in Business insolvency, Business Solutions, Voluntary Administration and Deed of Company Arrangement.