Australian businesses are currently battling a raft of challenges, from multiple interest rate rises to post-pandemic labour shortages, high power prices, rising inflation and ongoing supply chain shortages.
Our November Business Risk Index highlighted the subdued state of business activity in Australia. While we usually see a run-up in trade receivables as Christmas approaches, this key indicator of business activity has been flat since July and declining since September.
With company insolvencies rising, it’s important to understand the difference between liquidation, voluntary administration, and bankruptcy. This information is critical for your business when assessing a creditor’s ability to pay any outstanding debt.
Liquidation
In the case of liquidation, an independent registered liquidator is appointed to take control of an insolvent company, wind it up, and settle to the fullest extent possible.
The most common form of this is creditor’s voluntary liquidation – a voluntary resolution by company shareholders to commence this process due to debt levels. In some instances, a court can make a liquidation order and appoint a liquidator.
Liquidation usually involves the collection and sale of all relevant assets, the cessation of trading operations, the termination of the employment of all employees, and the consolidation of any cash.
If you believe you are owed money by a company entering liquidation, you must give the registered liquidator a valid ‘proof of debt’ form and any other requested material.
Through the inspection of the company’s practices, assets, and credit history, they will begin settling its debts – first to priority creditors (including employees) then on to any government fees, business expenses and bank payments, then finally to unsecured creditors who have no ‘security interest’ (such as a mortgage) in the company’s assets.
Voluntary Administration
If a potentially insolvent company shows signs that it may be able to cover its debts through maintaining operations, it may enter into voluntary administration. This decision is made by the company directors, as opposed to involuntary administration, which may be enforced by creditors if the company refuses to wilfully comply.
An independent and qualified administrator will be nominated to assess the company financially, and operationally, to determine if a plan can be made to pay all, or a mutually agreed-to amount, of the company debt owed while continuing to operate. If they determine that no such plan can be made, that business may need to commence liquidation proceedings.
Should the voluntary administrator assess that the creditor can create a plan to pay a significant percentage of its outstanding credit whilst staying operational, then the chances of settling that debt increase, which benefits the company and its creditors.
Bankruptcy
Bankruptcy refers to insolvent individuals. When an individual client declares bankruptcy they are considered to have insufficient cash or saleable assets to adequately pay any existing debts, determined under the Bankruptcy Act (1966).
Once an individual is declared bankrupt, they’re automatically disqualified from managing any corporation. Additionally, they must also cease to be director, alternate director or secretary of any company until the terms of their bankruptcy agreement have been met, as determined under the Corporations Act (2001).
How can I protect my business?
Be proactive in debtor management. Conducting appropriate due diligence on the credit score and credit risk of trading partners and clients will give your business the necessary planning time by identifying potential insolvency red flags early.
A credit reporting tool, such as CreditorWatch’s DebtorLogic, gives valuable insights into debtor payment trends and credit history, through data-driven analysis of a customer’s entire portfolio, indicating their ability to pay outstanding credit.
Setting out appropriate credit policies and payment terms to mitigate rising insolvency may also form a part of your debtor management strategy.
If you are a secured investor, with proven security interests, and have registered on the PPSR prior to a creditor entering insolvency, then you have the right to payment as a priority creditor.
While the rising insolvency of partners may be causing some alarm throughout the community, there are tools and processes that can be implemented to protect your business from bad company debt, bad creditors, and exposure to risk.
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