Not all businesses succeed; many will eventually end up in liquidation.
Often it can be difficult to determine whether your business is simply struggling, going through a rough patch, needs to go through some radical restructuring or requires an insolvency appointment.
Although it can be difficult to contemplate small or medium sized business owners do need to give serious consideration to liquidation at these times as:
- if your business continues to lose money this can often result in the bank being owed more (through overdrafts and business loans) which is usually secured by the mortgage over your house, acting early can reduce the risk of this occurring;
- some creditors will have personal guarantees if your company continues to incur more debts with these creditors this can result in your personal financial situation being affected as well;
- insolvent trading can be taken against directors by the liquidator for the further losses that were incurred after the company became insolvent, continuing to trade while your business loses money greatly increases the chances of an insolvent trading action will be taken against you.
In some instances, it is obvious that liquidation or administration is the only option. The most obvious example is if the Australian Tax Office issues a Director Penalty Notice against you personally which the company has no ability to repay. This has serious ramifications for the director and usually, the only alternative is to put the company into liquidation or administration.
Other examples when you should seriously consider liquidation are:
- if your business is failing to meet its costs each month;
- the company is unable to pay you a fair market salary for the work you do;
- the company is unable to meet basic obligations such as tax and super;
- the company is facing unsustainable cost increases from suppliers or landlords;
- the company is unable to recover enough funds from its debtors or work in progress to meet the cash flow requirements of the business.
- It should always be remembered that in any insolvency action against you personally, it is the cash flow analysis that is used by the courts to determine if you should be liable for insolvent trading. Therefore if your business cannot meet its basic cash flow needs and is incurring further losses these are matters you can be liable for.
Also in our experience acting early in relation to these matters can present most of these insolvency related problems and other personal debt related issues occurring in the first place.
If you wish to discuss any of the matters raised in this article with us or to discuss more generally any concerns over your company, please contact us today.
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