Is Your Client Insolvent? Liquidate Now (probably not)? Or Wait (probably)?

At a time like this you might be thinking Liquidators are run off their feet? That’s not the case! We are getting plenty of calls, but the number of liquidations is way down on recent months. Surprised? Well don’t be because, at the moment, we are rarely advising directors to put companies into liquidation. There are a bundle of moving parts so let’s run through the considerations.

The impetus (or lack thereof) – most Insolvency Laws have been suspended!

Most directors are understandably reluctant to put a company into liquidation, even an insolvent company with no hope for the future. There are usually a few things that do drive a director to take the necessary steps, but all of those usual imperatives have been removed. Consider this:

Insolvent Trading Laws – SUSPENDED!

From 25 March 2020, Insolvent Trading laws have been suspended. This has been achieved by expanding Safe Harbour provisions for six months from that date. A director may rely on the new temporary Safe Harbour provisions for a debt incurred as long as the debt is incurred in the ordinary course of the company’s business.

Ability for a Creditor to wind-up a debtor – DELAYED!

The Government has temporarily increasing the current minimum threshold for creditors issuing a statutory demand on a company from $2,000 to $20,000. Not responding to that demand within the specified time creates a presumption that the company is insolvent. But, the timeframe for a company to respond to a statutory demand has been extended from 21 days to six months. So after the Court wait times, an aggrieved creditor won’t get a recalcitrant debtor to Court in under eight months.

Ability for a Landlord to evict a non-paying tenant – DELAYED!

The new Leasing Code issued by the National Cabinet lays down the principle that Landlords must not terminate leases for non-payment of rent during the COVID-19 pandemic period.

ATO pressure, including DPNs – GONE!

The ATO usually applies pressure to a Director by way of service of Demands on the Company and ultimately by issuing a DPN on a Director (if there are PAYG Superannuation or recent GST debts). But those Notices seem to have just … well… ceased. In addition, you’d be aware that the ATO is usually quite accommodating with a Payment Arrangement if a taxpayer is unable to make a tax payment. Well the ATO is now being very accommodating. Clearly the ATO has been told to back off on its debt collection practices.

So for at least six months: no insolvent trading, no wind-up pressure from creditors, no ATO pressure, no landlord pressure.

Government Incentives

As an accountant, you’ll know more about the incentives being offered than I do. So we won’t lecture you on that. Suffice to say that a lot of directors are, understandably, waiting to see what money will be thrown at them.

So don’t liquidate at all? Nope – there are some situations where liquidation is the right option

Whist the old imperatives for a director to liquidate a company are gone, or suspended, there are remain a few situations where liquidation is still the right option.

• It may prevent a director from becoming personally liable for the company’s tax debts. The Law says that the ATO can, under specific circumstances, make a director personally liable for a company’s tax debts by issues a Director Penalty Notice. The Law is still there! It has not been removed by the COVID-19 crisis.
• Already hopelessly insolvent – It ends the stress and worry of trying to save an unsavable business. After you appoint a liquidator, the liquidator deals with all creditors, assets, landlords and the ATO. The liquidation stops creditors hassling you and gives you the opportunity to move on with life.
• The Government may pay your employees. In some cases, there will be no assets or funds available to pay any creditors, including employee entitlements. The Government’s Fair Entitlements Guarantee scheme (FEG) provides for employees to be paid their entitlements if there are no funds in a liquidation. The provisions are there as a safety net for employees and, be aware, there are penalties if a director deliberately structures a company’s affairs to access the FEG scheme. But generally, the FEG scheme is there as a safety net for employees to ensure they are paid their entitlements.
• Yes, you can start a new business in the future. There is nothing illegal about having to put your company into liquidation. There are about 10,000 liquidations a year and that number will likely increase as a result of COVID-19. There is no automatic banning of a director of a company that enters liquidation to prevent them from continuing as a director of other companies or becoming a director of another company in the future. So, if a Director does need to put a company into liquidation, there is nothing to prevent them starting a new company in 3, 6 or 9 months from now.
• It avoids the personal liability that comes attached to the new “government and bank backed loans”. Businesses will be offered a variety of special purpose loans from their bank, which are Government backed. But be careful. Our advice is to be wary of accepting new loans to pay past creditors, current trading losses or to cover future trading losses. At the moment, a director would NOT be personally liable for past debts but if they take on a new loan, they will likely be personally liable for that new loan. So think carefully before accepting a new loan if a term is that the director must provide a Personal Guarantee.

So that’s the lie-of-the-land. At present the imperatives to start a liquidation are suspended and a liquidation is appropriate in only limited circumstances. If you or your clients would like to discuss the specific circumstances of a company, please call us.