The SURGE in Insolvency in Australia

It is no secret that insolvencies in Australia have skyrocketed, and we are in ‘the grip of an insolvency armageddon’, with the number of failing businesses almost doubling in a year.

In particular, the construction industry has faced significant challenges recently with the industry still feeling the impacts of COVID-19, where border restrictions and material shortages having negatively impacted constructions costs and eaten away at profits. While a lot of companies were kept afloat due to the concessions and support mechanisms introduced by the Australian Government during COVID, with that lifeline being rolled out, there has been a sharp increase of insolvencies in Australia.

In March this year, 243 construction businesses went into external administration. In the last 6 months, there have been several high-profile and large construction companies going under. This includes Probuild, Condev Constructions, Clough Group, Porter Davis and Mahercorp, to name a few. This naturally has a flow on effect to their suppliers and subcontractors.

According to ASIC, 1072 construction companies externed external administration during first half of the 2022-2023 financial year. This has accounted for 28% of all company collapses in Australia over during that time, proving that the construction industry has been hit harder than any other industry.

Experts warn the trend will continue throughout 2023 with rising inflation and interest rates, shortages of material and labour, rising labour costs and the rise in ATO debt collection activity.

What is insolvency?

‘Insolvency’ is when a company (or individual) is unable to pay their debts as and when they fall due.

Understanding insolvency is important for both individuals and companies as it can have significant legal and financial implications. If you suspect that you or your company are insolvent, seeking appropriate financial and legal advice at an early stage will provide you with the best opportunity to successfully navigate out of insolvency.

How do I know if my company is insolvent?

The following factors are indicative that a company may be insolvent or in financial distress:

-???????the company is experiencing ongoing losses;

-???????poor cash flow with a larger value of debt than liquid assets;

-???????overdue Commonwealth and State taxes;

-???????inability to borrow funds or obtain finance;

-???????unpaid creditors outside regular trading terms;

-???????dishonoured cheques;

-???????solicitors’ letters, legal proceedings, judgments, or warrants issued against the company; and

-???????inability to produce timely and accurate financial information to display the company’s trading performance and financial position and make reliable forecasts.

What happens if a company is insolvent?

While there is a stigma towards insolvency, companies often fail due to market conditions and through no fault of the people managing those corporations.

However, it is important to understand your obligations if you suspect your company is insolvent. A company should not trade or continue conducting business as usual, as this could result in civil penalties and criminal charges under the Corporations Act 2001 (Cth). Further, a director can beome personally liable for a company’s debts if they allow a company to trade while insolvent, so directors should be always aware of a company’s financial position.

The most common options available to an insolvent company includes voluntary administration or winding up (liquidation).

Voluntarily Administration

Voluntary administration is a process designed to assist financially distressed companies and, in certain situations, can enable a business to restart and continue.

It is a formal, short-term arrangement that can provide a company with an opportunity to restructure and avoid liquidation, by appointing an administrator to take control of the company’s affairs and investigate its financial position.

The administrator will determine the viability of the company and develop a plan for the future, which may include the sale or closure of the company’s business, or part of the business and assets. At that time, recommendations will be made to either wind up the company, continue trading (usually in some limited capacity) or for the company to be returned to the control of its directors.

The process of voluntary administration is outlined below:

1.????An independent registered liquidator takes full control of the company and is appointed as administrator.

2.????The administrator must hold the first meeting of creditors within eight business days of being appointed, unless the court allows an extension of time.

3.????The voluntary administrator must investigate the company’s affairs and report to creditors on the alternative options available to the company.

4.????The voluntary administrator must hold a second meeting to decide the company’s future within 25 business days of being appointed.

During this process, creditors are temporarily preventing from taking legal action against the company to recover their debts and provides the company with the necessary breathing space to try and work through some of its financial constraints and recover.

The administrator may also recommend a binding agreement with the creditors, called a Deed of Company Arrangement (DOCA), which sets out the details of how a company’s affairs should be dealt with. This usually involves creditors accepting partial payment of their debts with the remainder to be forgiven at the expiry of the DOCA.

If an administrator is appointed as quickly as possible, it often maximises the chances of the business surviving.

Liquidation

If a company is unable to be saved, liquidation is the next process. This involves the closure or ‘winding up’ of the insolvent company, where a liquidator is appointed.

The liquidator’s role is to:

1.????protect, collect and sell the company’s assets;

2.????investigate and report to creditors about the company’s affairs;

3.????inquire into the failure of the company and possible offences by people involved with the company; and

4.????distribute money from the collection and sale of assets after paying the costs of the liquidation, including the liquidator’s fees.

The liquidator has an obligation to ensure that creditors are treated fairly as part of the liquidation and their primary duty is to maximise the return for creditors.

There are two types of insolvent liquidation:

-???????creditors’ voluntary liquidation; and

-???????court liquidation.

In a creditor’s voluntary liquidation, the company’s creditors resolve to liquidate the company and appoint a liquidator, or the creditors may vote for liquidation following a voluntary administration.

In a court liquidation, a liquidator is appointed by the court to wind up a company following an application (usually by a creditor). After a company goes into liquidation, unsecured creditors are unable to commence or continue legal action against the company unless it is permitted by the court.

Once the liquidation is complete, the company will be deregistered and cease to exist as a legal entity.

What to do if your company is experiencing financial difficulty?

If your company is unable to pay its debts as and when they fall due or you think?your company may be insolvent, you should seek professional legal advice as soon as possible. This is imperative to give your company the best chance of surviving and to limit personal exposure of company directors. ?

How can we help with insolvency?

At Madison Marcus , our specialised bankruptcy and insolvency team understand the importance of timely and accurate advice when you need it most. Our team can assist you formulate the best insolvency strategy and orchestrate the best result for your current situation and the future well-being of your company.

Take control and safeguard your business today- Contact Madison Marcus on 131 LAW [131 529].

Written by: Cristian Fuenzalida