Previously, there have only really been two legal options for directors to prevent business failure – administration or liquidation. As a result, there has been a rise in phoenix activity as the only realistic option for a business to continue. A large portion of this is considered illegal which has led to ATO and ASIC monitoring businesses and conducting raids and prosecuting directors and advisors. This has lead to industries, particularly construction and transport, suffering.
Things had to change, so in September 2017, new laws contained in the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, introduced amendments to the insolvent trading provisions in the Corporations Act 2001. These law changes introduced new ways to prevent business failure and possibly avoid an insolvency appointment.
Below is an overview of the three options available for directors to prevent business failure. The key to better outcomes is getting in early. Don’t delay implementing improvements or seeking professional help to keep your business afloat.
Safe Harbour Protection: Business turnaround and restructuring
Business turnaround (operational and strategic improvements) and restructuring (capital adjustments) have always been options to prevent business failure. However, directors ran the risk of exposing themselves to insolvent trading if their efforts were unsuccessful. They could find themselves on the receiving end of a liquidator’s insolvent trading claim. For many directors, it’s not worth risking the family home to try to prevent business failure.
New Safe Harbour Protection laws protect company directors. Safe Harbour Protection was introduced to remove the stress and personal financial exposure for directors, so they can focus on achieving the best outcomes for their business. What’s more, their advisors are also protected, giving directors strong support to succeed.
There are various criteria that a company needs to meet to be eligible for Safe Harbour Protection. Primarily these include:
- keeping tax lodgments up-to-date
- paying employee entitlements including superannuation
- carrying out a genuine turnaround
- Maintain proper financial records
The Safe Harbour period allows the director time to try to turn the company around without trading insolvent. If it becomes clear the company turnaround will be unsuccessful. The period of Safe Harbour will end and the Director must take the appropriate course of action.
Voluntary Administration to Deed of Company Arrangement (DOCA)
Voluntary Administration hands over control of a company to an Administrator while the company has breathing space to improve cashflow and prepare a Deed of Company Agreement (DOCA). A DOCA is a proposal of how to keep the business going and avoid liquidation. The company’s creditors vote on whether to accept the DOCA proposal at a meeting held approximately 5 weeks after the Administrator’s appointment.
DOCA proposals generally provide for a business to continue trading and creditors to receive a better outcome than heading immediately into liquidation. It's also the only option a director can voluntarily pursue if a winding up application has been filed in court by a creditor. Administration can provide a great outcome. In order to do so, companies need to have:
- sufficient funds available to cover the administration costs
- a viable business capable of generating future profits to provide a return to creditors
- supportive customers and suppliers
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Sale of the business, followed by liquidation or administration
Sometimes a viable business just can’t survive in the existing company, or other options aren’t suitable. Finding a buyer for a distressed business can be difficult within a short time-frame. Though there are a few options here:
- Competitors, suppliers, customers or employees may be interested
- You could advertise on a specific marketplace like Resolve
- A sale to a related entity may be appropriate
While the price you want for your business might not be what someone is willing to offer, a sale can result in a lot of benefits. The new owners can maintain the lease and retain employees. This will also minimise the director's potential personal liability.
Conversely, particularly in a sale to a related party, the sale price must be at least for fair value, the purchase price paid on commercial terms and the sale proceeds not misappropriated.
If following the sale, the sale proceeds received aren’t sufficient to pay all the company’s debts in full, it may be insolvent. In this case, appointing an administrator or liquidator is an appropriate way to properly deal with the sale proceeds and wind down the company’s affairs.
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For more information on business turnaround and restructuring options for business debt, check out our information page here.
