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Preserving your business in solvent trading – Print21 magazine article

Friday, 04 December 2009
By Print21

There is no doubt that many printing companies have been doing it tough recently but how do you know if and when your business becomes insolvent – and what does it mean for the company directors? Wal Abramowicz outlines the risks and penalties.

In the current economic climate many businesses may be facing financial difficulties although without necessarily being insolvent. However, if a company is unable to pay all its debts when they fall due, it is considered to be insolvent.

If you consider that your company is having financial difficulties or is likely to become insolvent there are several options available. Some of these options may include refinancing, restructuring or changing your company’s activities, or appointing a voluntary administrator or liquidator. You should not allow your company to continue to incur further debt.

Under the Corporations Act, directors and officers of companies have a duty to ensure that they are properly informed in relation to their company’s financial position and to prevent the company trading if it is insolvent.

A director will breach the Corporations Act if the company does not keep adequate financial records. Therefore, in any action against the company, the company will be considered to have been insolvent throughout a period where it can be shown that there was a failure to keep adequate financial records.

Breaching the Corporations Act provisions for insolvent trading may result in fines against directors including penalties of up to $200,000. In addition, creditors can commence compensation proceedings for amounts lost by them. A compensation order can be made against a director in addition to fines. If the action leads to the personal bankruptcy of a director, it will disqualify that director from continuing as a director or managing a company.

A director may also be subject to criminal charges with fines and imprisonment if it is found that, as a director, the company was allowed to incur debts when it was insolvent or there was an element of dishonesty.

What you can do
Steps that can taken if your company is insolvent include:

Voluntary Administration: If a company’s business declines, the board can decide that the company is insolvent or likely to become insolvent and it can then appoint an administrator and place the company into voluntary administration. This process can assist to determine the company’s future direction in an effort to save the business.
A Deed of Company Arrangement can be entered into and is a legally binding document between the company, its creditors and the administrator. The company’s affairs will be carried out according to the terms of the Deed of Company Arrangement. The main advantage is that the company can continue to trade with a view to returning the business to profitable trading.

Liquidation: If a company cannot pay its debts, an independent party known as a liquidator may be appointed to take control of the company’s financial affairs. A liquidator will attend to the dismantling of the company and will then distribute the company’s assets in a way which is fair and to the benefit of its creditors.

Receivership: A company will usually go into receivership when a creditor who holds security over some or all of the company’s assets appoints a receiver. The receiver’s role is to collect and sell enough of the company’s assets to repay the debt.

In conclusion, if your company is experiencing financial difficulties, then it is important to seek proper accounting and legal advice to increase the likelihood of the company’s survival.

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