Key Points

• Corporate insolvency appointments have more than doubled since this time last year.

• The increase of controller and court appointments show that creditors are tired of waiting. That impatience will increase because the ATO has recently announced the commencement of a systematic recovery process.

• Businesses that are not proactive, put their businesses at significant risk, and may create personal liability exposures to the company’s directors and officers by continuing to trade.

Insolvency appointments double

According to the Australian Securities & Investments Commission (ASIC) insolvency statistics, corporate insolvency appointments have more than doubled since this time last year (5,020 as at 23 January 2024, compared to 3,803 around the same time in 2023).

That is likely to continue, and to increase in number.

Why?

That is due to the difficult financial climate that has been created because of the global debt crisis, interest rates, COVID-19 legacy issues, and a changing landscape for business and their clients or consumers – all of which, significantly impact cashflow.

Most companies are experiencing significant fluctuations in aged debtor payments (some are paying later than expected, partially, or not at all). Those companies are facing increases in commercial disputes and insolvency related issues (such as debt recovery, contract, supply chain, building & construction, security, finance, and property disputes).

Those cashflow issues create a myriad of issues with respect to liabilities of the company (payroll, taxation, property, and suppliers) and potential personal liability issues for the directors and officers, particularly, whilst the company continues to trade.

Australian Taxation Office updates its position

On 25 January 2024, the Australian Taxation Office (ATO) updated its guidance content on enforcement on its website entitled “If you don’t pay”.[1] Importantly, that indicated that from 29 January 2024 debt cases may be actioned by an external debt collection agency – “recoveriescorp”.

It has been widely reported that:

1. The ATO leniency policy came to an end in around July 2023; and

   
   

2. The ATO intends to utilise the director penalty notice regime more often in 2024, as part of its strategy to recover approximately $30 billion in overdue small business tax.[2]

In short, these are signs of a systematic recovery process that has commenced on a large scale. The ramifications of those recovery steps will be felt by companies, their debtors, and creditors, concurrently, or in due course.  

It is a vicious cycle for businesses with direct and indirect ramifications. For example, getting paid, in part, or outside payment terms by debtors, creates a potential exposure to clawback claims by liquidators, such as on the basis that the payment was an unfair preference etc.

Types of insolvency appointments

According to ASIC’s Australian insolvency statistics, the types of appointments are as follows (in order of most utilised to least):

1. Creditors’ voluntary liquidation – is a process that is initiated by the company's directors when they are concerned the company cannot pay its debts;

2. Court appointments – is a process that is usually driven by a creditor of the company and results in a court order;

3. Administration/DOCAs – these are different processes used to structure a company’s affairs, repay its debts, and potentially to continue running the business. A Deed of Company Arrangement (DOCA) is a formal framework used to bind the company and its creditors about how the company’s affairs will be dealt with, and is usually agreed after the company enters voluntary administration.

4. Restructuring – The restructuring process allows eligible companies to retain control of the business, property, and affairs of the company while it develops a plan to restructure the company’s affairs with the assistance of a restructuring practitioner. Then, enter into a restructuring plan with creditors.

5. Controller appointments – generally, these are appointments to take over the operation of a business or over certain property because there has been a default on obligations to a financier.

Insolvency Reforms to support small business

To reduce the impact of COVID pandemic on small business and provide small businesses with more options to resolve financial issues, the insolvency reforms introduced two new processes:

1. Small Business Restructuring – a faster and more flexible process for **eligible companies with debts of less than $1 million to creditors (excluding employees) and before a plan is offered to creditors are able to pay all outstanding employee entitlements and lodge all outstanding documentation and returns with the ATO.

   
   

2. Simplified liquidation – a faster and arguably cheaper process for **eligible companies that will not be able to pay their debts in full within 12 months from the start of liquidation, with no more than $1 million in debts (including amounts for termination of employees), and the company is up to date with taxation obligations and lodgements.

**This is a high-level guide only and independent legal advice should be sought as to whether the eligibility criteria has been met.

The above graph illustrates that most companies are exploring voluntary insolvency options where they can, be it in the form of a creditors’ voluntary liquidation, voluntary administration/Deed of Company Arrangement or Restructurings.

However, it indicates that secured creditors and unsecured creditors are not prepared to wait any longer and are now taking steps to approach the Court, via Court and Controller appointments.

Vicious cycle to continue and increase

The ATO’s systematic recovery action will have a domino effect on companies and directors.

Businesses that are not proactive, put their businesses at significant risk, and may create personal liability exposures to the company’s directors and officers by continuing to trade.

What Can I do now?

If you would like to make an informed decision on how to move forward, please arrange a confidential consultation with Evatt Styles.

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to change. You should seek independent legal advice before embarking upon any course of action.

[1] https://www.ato.gov.au/individuals-and-families/paying-the-ato/if-you-don-t-pay

[2] https://www.afr.com/policy/tax-and-super/court-actions-reveal-ato-crackdown-on-unpaid-tax-20230731-p5dsne ; https://svpartners.com.au/lockdown-and-non-lockdown-director-penalty-notices/