4 key questions to ask yourself when facing insolvency

The failure of a business is heart-breaking for owners who have poured everything into making their entrepreneurial dreams come true. Unfortunately, both corporate insolvencies and personal bankruptcies are on the rise in Australia.

ASIC figures show 5.5 per cent more businesses shut down in the March 2018 quarter than in the same three-month period last year. Meanwhile, more than 32,000 Australians announced bankruptcy in 2017 – a 6.1 per cent year-on-year increase, according to illion. This may cause concern among small organisations, with the latest National Australia Bank SME Business Survey revealing confidence is on the decline.

SME owners won't want to dwell on insolvency, but having a comprehensive plan in place is crucial. Here are some things to keep in mind if your business enters a difficult trading period.

1. When should I seek help?

The threat of fines, criminal charges or asset losses are a major concern for SMEs. In fact, 85 per cent of directors in the country have said personal liability risks have caused them to take an overly cautious approach to decision-making in the past, the Australian Institute of Company Directors found.

But it's often better to be safe than sorry. Seeking help from experienced insolvency professionals at the earliest opportunity is the best course of action if your business is struggling. They can help you assess your situation, identify ways of preventing insolvency and provide support should the worst happen. If you are currently concerned about your business's future, please contact WMC Accounting to find out how we can assist.

2. Which legislation covers my type of insolvency?

The Corporations Act and the Bankruptcy Act are the two main pieces of legislation governing insolvencies in Australia. One or both may apply to you, depending on your business structure.

SMEs that are set up as companies fall under the insolvency rules of the Corporations Act. Meanwhile, the Bankruptcy Act handles insolvencies of people and unincorporated bodies, such as sole traders and partnerships. Understanding which laws apply to your business is important because it will affect what you could stand to lose.

Insolvent trading can result in civil penalties of up to $200,000 for the directors of companies, as well as criminal charges and further fines. However, a sole trader or partner may have personal assets held as security in their business, which could be lost when declaring bankruptcy.

3. What early measures can I take to avoid insolvency?

Insolvency should always be seen as a last resort. Declaring bankruptcy means your name permanently appears on the National Personal Insolvency Index, and credit reporting agencies will typically record your bankruptcy for five years. ASIC can also disqualify directors from managing corporations for up to 20 years under certain circumstances.

You should therefore exhaust every avenue before going down this route, including:

• Alternative finance options.
• Cash flow management advice.
• Business restructuring.
• Better budgeting.

Many SME owners will require professional business advisory services to find solutions to these complex business issues.

4. What can I do when other avenues don't succeed?

You may still have options even when you're unable to turn your business around. As a sole trader or partnership, you can seek a:

• Declaration of intention: This freezes your debts for 21 days to give you time to come up with a debt-management plan.
• Debt agreement: You can negotiate with creditors a structured way to pay off any money owed to avoid bankruptcy. Your debt, assets and income must be under a certain limit.
• Personal insolvency agreement: Similar to debt agreements, but without the restrictions on debt, assets and income.

For companies, voluntary administration is usually the first step, which means an independent administrator is appointed to find ways of avoiding liquidation. Secured creditors can also choose to send a company into receivership, enabling them to seize assets and sell them to cover any losses.

However, we like to avoid businesses getting to this stage, so please contact a member of the team at WMC Accounting to book an appointment today.