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15 Mar 2017

insolvency

Do we really have an insolvency crisis in Australia? Cue alarm bells!

According to Adam Creighton and David Crowe Australia’s foreign debt has hit “extreme’ levels.

And since 2013 the Melbourne Herald Sun has reported that  ‘An average of 44 small businesses per day are closing their doors.’

Further back in 2011 a report by Dun & Bradstreet claims that:

“The number of small businesses going bankrupt jumped by 48 per cent over the last 12 months, while small business start-ups fell by 95 per cent over the same period.”

The Australian Bureau of Statistics has comprehensive statistics on business failures by category with some reasons for their failure.

This is not much comfort.

The quote, unquote good news is that the failures are not generally occurring in the first year according to a report by  Kate Jones of the SMH reports that  business failures are a gross exaggeration and that only 1.5% of businesses fail within their first year of operation.

Her research shows that it is far more likely for business to fail in the next 3-5 years.

Why do so many businesses fail in the first 5 years of operation?

According to VEDA, a credit ratings agency, as reported in the SMH the key problems are:

  • Cashflow
  • Trying to secure new leads; and
  • Paying off debts.

Causes of company failure are varied, but a 2011-12 report into corporate insolvencies by the Australian Securities and Investments Commission found:

  • 44 per cent suffered poor strategic management
  • 40 per cent fell victim to inadequate cash flow or high cash use 
  • 33 per cent went under because of trading losses

SmartCompany.com.au conducted a survey of over 1,000 businesses and found:

‘Of those surveyed, 61% of SME operators said small businesses failed because of an inability to manage costs, 50% said inexperienced management, 50% said poorly designed business models or no business plan, 49% said insufficient capital, 37% said poor or insufficient marketing, and 35% said insufficient time managing the books.’

Cash flow

Cash flow is key in any business.  Poor management, debt and cash flow are all inter-related when it comes to running a business. Too often entrepreneurs borrow large amounts of money to buy, start or operate their businesses. The result of this is often that, while they have good revenue, most of it is paid to the bank to finance their borrowing, leaving them with insufficient cash flow to pay their other debts. Jamieson Louttit & Associates  have conducted research which shows that:

  1. 80% of all bad debts/ losses for SMEs (Small to Medium sized businesses) occur in the 8-12 weeks prior to its Customers/ Suppliers being placed into liquidation (or some other form of insolvency); and
  2. The daily Insolvency Notices Alert provides a list of businesses experiencing financial difficulties and subject to applications for winding up. The alert allows businesses to manage the risks of bad debts with its Customers and Suppliers.

It is necessary for your business operations to forecast cashflow accurately and to ‘match the finance terms to your needs’. With so many SMEs experiencing cash flow problems it is quite likely that some of your client’s cash flow problems will become your problems.

So, what are your options?

Don’t adopt an ostrich mentality. The most important thing is not to ignore the situation.

Getting advice early is important. MSI Taylor have a range of services including Bookkeeping, Accounting & Tax, Audit, Business Advisory, Business Finance and Business Intelligence to name a few.

What to do when facing insolvency?

If your bank will not renegotiate the loan, talk to your accountant about appointing a Voluntary Administrator.  The ASIC government website  gives a guide on this process.

In summary, the directors of the insolvent company can pass a resolution to appoint a qualified person to be appointed as administrator of the company with a view to putting a scheme of arrangement to the unsecured creditors, to pay the debts either by installments over an agreed period of time, or to offer a lump sum smaller than the total debt, in full satisfaction for the debt. If this is accepted by a majority of creditors having 75% of the debt owing, the scheme will bind all creditors. This will take the stress off the business owners and provide an orderly method to pay off the debt.

Receivership

If the bank or other financial institution has taken a charge over the assets of the company, which is the usual course of events, it may appoint a receiver if the loan is in default. During the period of receivership, the directors have no control over the business of the company. The receiver can sell the assets of the company to recover the debts of the party appointing him and then return the company to the control of the directors, insofar as any business is left to be conducted.  Often the appointment of a receiver spells the end of the business.

Liquidation

Winding up proceedings are usually commenced by the service of a Statutory Demand on the debtor company. This is a notice which can be served on the debtor company under S.459 of the Corporations Act and demands payment of the debt within 21 days. There is no requirement for the creditor (bank) to commence legal action first and get a judgement. Provided that the debt is over $2,000 and is not in dispute, the creditor can serve the 459 Notice.

DO NOT IGNORE THIS. GET IMMEDIATE LEGAL ADVICE.

If you dispute that the debt is due, either in whole or in the amount stated in the Notice, you may be able to commence action in the Supreme Court, to have the Notice set aside, but only if you do this within 21 days of having been served with the notice. This time cannot be extended. If a liquidator is appointed, he will take control of the company and sell the assets for the benefit of the creditors, who will be paid rateably. For more information on liquidation go to the ASIC website.

Summary

In order to operate a successful business, you need more than a good idea. The experts will tell you that you need good management, a good business plan and to keep your cash flow under control.

 

Charlie Wilson writes for Authorflair.com he has extensive experience in advising SMEs and financial institutions in the area of debt recovery. Disclaimer: The above is general advice only and not intended as legal advice. Always seek professional legal advice when faced with potential insolvency.


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