I’m not sure if the company has enough money to last the month.

When a company goes through lean times, there is a natural tendency to believe that, despite the present troubles, it will eventually come through and survive. Many times this attitude does result in the survival of the company. Many times it will mean that the company is technically insolvent during that period.

What does being involvent mean? Section 95A of the Corporations Act 2001 gives the broad principle, and provides as follows:

Solvency and insolvency

  1. person is solvent if, and only if, the person is able to pay all the person 's debts, as and when they become due and payable.

  2. person who is not solvent is insolvent

The problem for a director is that if a company continues to incur debt whilst it is insolvent, the director can be personally liable to creditors for losses incurred in that period.

There are many factors which should be considered when a company is in a difficult position.

Contact us as soon as you consider you have a problem and we can advise you.

This text is subject to our disclaimer.

Should I go for an injunction?

Before you will be granted an injunction in a civil court, you will usually be required to promise that if a person suffers damage as a result of a successful injunction, that that person will pay compensation for the loss. Are you really ready to do this?

A court will generally require the applicant to give an "undertaking as to damages" before it makes an injunction. The meaning of this term in the Federal Court is here.  The range of matters for which damages can be sought can be very wide indeed. For example, if you seek to prevent the sale of real property, there could be possible claims for damages from the following:

  • from the vendor - because, for example, it had entered into a contract of sale for a high price and that contract was lost because of an injunction
  • from the purchaser - because, for example, it did not get the property and had to purchase another property.  

If you are not prepared to give this undertaking, then an injunction should not be considered.

Separately, an injunction is an extraordinary remedy. It is asking the Court to intervene to require someone to do, or refrain from doing something. The granting of injunctions are subject to strict rules and are not granted as a matter of course. They are only granted in exceptional circumstances.  Even if you case is otherwise meritorious, the fact that you have delayed in bringing a proceeding (for example) may be enough to prevent you obtaining an injunction.  

 Some recent examples of cases where injunctions have been applied for:

We have run a number of injunctions this year and can advise you if you need help. 

This text is subject to our disclaimer. 

I’m a director and shareholder and I’ve been locked out of company accounts.

The first thing to remember is that corporations operate according to internal rules. The company will have a constitution, which lays out clearly how meetings of directors are to be convened and conducted. It will also spell out the rights of the shareholders of the company.

There are also obligations imposed on directors arising from other sources, the most significant being the Corporations Act 2001 . That legislation also gives certain rights to directors to inspect the books of the company.

Ultimately, the company is governed by the directors. If one director or a group of directors act in a way contrary to the wishes of the majority, or in breach of the rules of the company, then they may be liable to the company, and are also acting contrary to their authority.

The difficult thing is that when such directors are actually exercising their powers to prevent access, it will require a significant amount of persuasion to change their minds. If that fails, Courts will act in aid of directors who can prove breaches of company rules as well as detriment arising from same.

Another complicating factor is that in many cases, all directors have tools available to them equal to yours as director and shareholder.

Before action is taken, the position must be very carefully examined. It may be that the directors believe that they are acting consistently with their duties as directors. In other words, both sides may believe they are acting in the interests of the company.

When this situation arises, contact us to seek our advice on a strategy to restore the company back to its ordinary operating position.

This text is subject to our disclaimer.

My company has just received a statutory demand.

One thing is certain. If you do nothing about it, then 21 days after you received it, the company is presumed to be insolvent regardless of whether you agree with the debt. It is then almost inevitable that the person claiming the debt will seek to have a liquidator appointed to your company by the Court.

This application will generally succeed if a presumption of insolvency arises. The Courts are extremely loath to grant the company permission to rebut the presumption after the 21 days has expired. Not only that, but even if you did get permission to do so, it is actually a very difficult task to prove that a company is solvent.

The worse news is that even if you pay out the creditor who has commenced the winding up proceeding, another creditor can step into the shoes of that creditor and proceed with a winding up based on the same presumption of insolvency.

You must take action if you want the company to remain. The action can include:

  • If you agree the debt is owed, then you can pay it before the 21 days expires and the matter comes to an end.

  • If you disagree that the debt is owed in that amount or at all, or you have an independent claim against that party, then you can commence a proceeding to set aside the demand, either in whole or in part.

Contact us as soon as you get the statutory demand and we can advise you.

This text is subject to our disclaimer.

I want to collect a debt from a company.

You have tried and tried but they're not paying. What next? There are two main ways to collect a debt. You can take the low risk way (slower and more expensive), or the higher risk way (faster and cheaper, but riskier). What would you rather?

Firstly, we assume that you do not have security which you can enforce, such as a personal guarantee, mortgage or bank guarantee.

The first is the conventional way, which is to sue the debtor in an appropriate Court. If you succeed in your claim, you will obtain a judgment debt for your claim plus costs. Depending on the size of the debt, it will take at least 6 months. The costs you are entitled to recover are almost inevitably less than what you have paid). If the debtor does not pay, then you can engage the Sheriff to seize goods, or if the debt is $2,000 or over, you can serve a company with a statutory demand. If it still remains unpaid, you have the right to apply to the Court to place the debtor into insolvency.  

The second is a little unconventional and riskier. It is based on issuing a statutory demand without a judgment debt. This saves on  the costs and time of issuing and running a legal proceedings.

You do not need to have a judgment against the company before you issue a statutory demand. You have to swear an affidavit that the debt is owed, and that there is no cross-claim, but otherwise there is no impediment.

The problem for the company receiving the demand is that if it does nothing about it, then 21 days after receipt, it is presumed to be insolvent and it is liable to be would up and have a liquidator appointed.

It is an extremely effective method of getting a recalcitrant debtor to pay its debts because if it is not paid, the company may ultimately dissolve into insolvency.

However, it is not without its problems. If there is any doubt about the debt, or there is a cross claim against you, then a Court will set aside the demand on the application of the debtor, and compel you to pay the costs of the other side in going to that trouble. At the end of the process, you are left exactly where you were in the first place.

This enforcement process can be high risk, but it pays high rewards.

Contact us for advice on your specific position.  

This text is subject to our disclaimer.

I have received a section 222AOE notice from the ATO at home

Years ago, the ATO was a priority creditor in liquidations, ranking ahead of ordinary unsecured creditors. What is well known is that the ATO gave up its priority and became equal in ranking to other creditors. What is less well known is that the ATO obtained the right to pursue directors for some debts of a company. What is little known is the ease with which these provisions operate against directors, and exactly how a section 222AOE notice operates. 

The notice is issued by the ATO pursuant to section 222AOE of the Income Tax Assessment Act 1936. The most significant onerous element of the notice is the short time period allowed to deal with it. If one of the events out in the notice does not occur within 14 days, then the director becomes unable to resist the personal liability of the company as set out in the notice.

Effectively, a director has to do one of the following 4 things within those 14 days:

  • arrange for the company to discharge the liability. This is often not possible, because if the debt was able to be paid, it probably would have been. However, there is nothing like personal liability for a director to encourage the payment of a tax liability by a company.
  • an agreement under section 222ALA has been entered into. This is effectively an instalment arrangement. If it is not complied with, trouble is simply postponed.
  • the company is under administration . This is a very serious step to take, but if the debt is large enough or the company faces other problems, it may be the best way forward. Sometimes a secured creditor will take this step if there are discussions between directions and the creditor.
  • the company is being wound up. This means "being wound up" - not in the process of application being made for this to occur (for reasons of insolvency, or a corporate freeze, or other reasons). Regardless of the reasons for a winding up, it is very difficult to achieve within 14 days. 

Contact us for immediate advice if you get one of these notices. 

This text is subject to our disclaimer.