We at Mackay Goodwin are aware of the additional strain placed upon our clients at the time of an insolvency event. We strive to ensure that the external administration runs as smoothly as possible, and can be finalised in the shortest possible time period.
We understand that Directors are often swamped with additional demands from creditors and other stakeholders, compounded by the financial stress of a failing business. It may also be the case that a lack of understanding of the liquidation process can result in failure to provide the Liquidator with the required documentation on which to base their investigations.
It is important that Directors understand there may be legal and financial ramifications of such an omission. The Corporations Act 2001 (“the Act”) stipulates the mandatory provision of a range of Company documents to the Liquidator following an insolvency event. Failure to do so constitutes a breach of Directors duties under the Act, and will be reported to the Australian Securities and Investment Commission.
By acting promptly and efficiently in the first days of the appointment, it is possible to alleviate much of the additional workload associated with the appointment of a Liquidator. If the practitioner is provided with key documents from the outset, they are less likely to require regular contact and make additional requests. Moreover, acting in a timely manner means that the Liquidator’s investigations can be finalised at an earlier date resulting in earlier payment of any dividends to Creditors.
Here are some simple tips that may assist in reducing the burden on Directors in the early stages of the liquidation:
- Bank Statements
The Liquidator will require copies of bank statements for any bank account held in the name of the Company for the two year period preceding our appointment. On the date of our appointment Company bank accounts will be frozen, limiting the ability of the Director to access bank statements through online banking. Seeking statements directly from the banking institution can result in significant time delays. Accordingly, it is beneficial for the Director to access the bank account and provide statements to the liquidator before the account is frozen.
- Management Accounts
Under Section 286 of the Corporations Act 2001, it is the duty of Directors to maintain management accounts that accurately reflect the dealings of the Company. Failure to do so can result in a presumption of the insolvency of the Company, and in some cases can constitute a criminal offence.
It is common practice for small businesses to maintain accounts using online subscription-based software such as Xero and MYOB. Directors should ensure that the account remains active, and that the appropriate log-in details are provided to the insolvency analyst as a priority at the beginning of the Liquidation. It is also beneficial to save a backup file.
Failure to pay the subscription fee can result in the de-activation of the account, resulting in further delays. At this point it is necessary to incur additional costs in order to re-activate the account. A backup of the Company records should be made in the days prior to our appointment, and the records provided to the insolvency practitioner.
- Report as to Affairs
You will be issued with a Report as to Affairs document, along with official appointment documents on the day of our appointment. We understand that the document is onerous to complete, but it is vital that you do so. The Report as to Affairs provides the insolvency practitioner with an initial overview of the Company’s operations, and greatly assists with the investigations process. This can result in a more streamlined investigation, and reduce overall time spent on the liquidation.
It is also important to note that the Report as to Affairs documents must be completed under Section 475 of the Act, and that the Liquidator is required to report any Director who fails to do so to ASIC.
- Secured Assets
Company assets that remain under finance at the date of the Liquidator’s appointment (e.g. Motor Vehicles and Equipment) are likely to be subject to security interests held by the financial institution. This means that the financier has the primary right to recover the asset following an insolvency event as security for the outstanding debt.
The insolvency practitioner will assess the value of the asset, and any equity in the asset, and make a determination whether it can be commercially recovered to the benefit of creditors. To assist with this assessment, the current payout figure, sales contract and any other relevant security documentation must be provided to the insolvency practitioner. This is of particular benefit to Directors who wish to retain the asset by purchasing the vehicle from the Company, or by refinancing the asset in a personal capacity. Any attempt to seek finance, or maintain control of the asset will be hindered until such time as the insolvency practitioner has made their determination.