10 Lawyers’ Tips to Avoid Bankruptcy or Liquidation
Navigating financial distress can be challenging, but with the right strategies and professional guidance, bankruptcy and liquidation can often be avoided. At Chamberlains Law Firm, our experienced insolvency lawyers are here to help individuals and businesses regain control of their financial future. Below are ten practical tips to help you avoid bankruptcy and liquidation, based on our longstanding experience in this area.
When experiencing financial distress, engaging a lawyer who specialises in insolvency matters can make a significant difference in the outcome of your matter. Although you may not currently be experiencing bankruptcy or liquidation, proactively seeking a lawyer will assist in ensuring that you don’t fall short in complying with your future obligations. Lawyers will comprehensively assess your financial situation, provide you with tailored advice and assist with steps including the early restructuring of certain debts and creditor negotiation strategies. If such preliminary measures are unsuccessful, lawyers may guide you through the voluntary administration process (for companies) or seek debt agreements (for individuals) to provide temporary relief. Ultimately, early legal advice is the best course of action to pursue if one wants to minimise the risks of bankruptcy or liquidation.
Understanding your financial position is crucial to the avoidance of bankruptcy or liquidation. It forms the foundation of any preliminary assessment of financial distress by ensuring you are aware of your assets, liabilities, income and expenses. Conducting a comprehensive review of financial statements and forecasts will allow you to pre-empt risks that could, if unchecked, have otherwise resulted in insolvency. Engaging an insolvency lawyer can facilitate this process. If engaged to act on your behalf, an insolvency lawyer can assist by liaising with your accountant to help identify financial risk and implementing insolvency avoidance strategies. By understanding your current financial position, you can avoid bankruptcy or liquidation by making informed decisions, negotiating with creditors, and implementing effective restructuring strategies.
Once you have assessed your financial position, the next step is to consider your liquidity and short-term solvency. To monitor this, you should constantly review your cash flow to determine whether your business can meet its short-term financial obligations. Conducting regular reviews of cash inflows, outflows and current liabilities are vital, since they are used to determine whether the company is showing early warning signs of financial distress. By taking proactive steps to minimise instances of illiquidity, you can conduct early creditor negotiations, reduce unnecessary expenses, and improve the operational stability of your company. An insolvency lawyer can assist in creating detailed cash-flow management plans to ensure you avoid illiquidity, ultimately supporting the long-term viability of your business.
Open communication with creditors is crucial when experiencing financial distress. Typically, many creditors prefer to resolve payment disputes through informal negotiations rather than following the formal insolvency process to recover debts. By proactively engaging in creditor negotiations, you may be able to renegotiate more favourable terms such as extended payment deadlines, lower interest rates, or partial relief of the debt. Insolvency lawyers can facilitate these negotiations, ensuring that the terms agreed upon protect your interests and are fair based on the circumstances. Proactive negotiation not only upholds your existing relationships with creditors but also provides an alternative solution to formal insolvency agreements.
Debt agreements (as defined in Part IX and X of the Bankruptcy Act 1966) offer individuals an alternative to bankruptcy. Which option will best suit your financial circumstances will largely depend on the size of your assets, with Part IX agreements reserved for smaller asset pools and Part X agreements available to those of larger size. When a debt agreement is entered into, creditors cannot seek further recovery on unsecured debts. This provides the debtor with relief while avoiding many of the consequences associated with bankruptcy.
The Corporations Act 2001 allows for companies experiencing financial distress to enter into voluntary administration, a formal process aimed at assisting them to avoid liquidation. Typically, directors who suspect the company is insolvent or likely to become insolvent appoint a voluntary administrator who is an ASIC registered liquidator. Upon appointment of the administrator, a moratorium takes immediate effect in which all unsecured creditor claims are paused. This provides the company with temporary relief by preventing unsecured creditors from enforcing debts while the company’s affairs are being investigated. Voluntary administration leaves the administrator with one of three outcomes after they have considered the company’s affairs: execute a deed of company arrangement (DOCA), return the company to directors, or pursue liquidation. The main objectives of voluntary administration are to maximise the chances of the company continuing to exist and – if this is not achievable – ensure creditors receive the best possible outcome.
Engaging a restructuring practitioner can be a highly effective strategy for a small business experiencing financial distress and wishing to avoid liquidation. The Corporations Act 2001 introduced a simplified debt restructuring process, which allows certain companies to restructure its affairs through engaging the assistance of a restructuring practitioner. It allows the company to continue trading while simultaneously negotiating with creditors over existing company debts. This process – in which the company’s directors continue in their managerial role – differs from voluntary administration, in which the powers of the company’s directors are suspended. A restructuring practitioner will ensure that you are fulfilling your legal obligations while also providing your business with the best chance of avoiding insolvency.
Under the Corporations Act 2001, directors have a legal duty to prevent their company from incurring debts when it is insolvent or if there are reasonable grounds to suspect insolvency. If a company cannot pay its debts as they fall due and incurs additional debts during this period, directors may face civil or criminal liability. To avoid being held liable under such breaches, directors should continually review their company’s assets, liabilities, cash flow, income, and expenses prior to binding the company to any further transactions. An insolvency lawyer can facilitate this process by ensuring that you are legally complying with your duties as a director, avoiding any instances of liability.
If directors are held liable for insolvent trading, they can rely on certain defences to exonerate them from liability such as the safe harbour provisions listed in Section 588GA of the Corporations Act 2001. This section provides relief for directors if they proactively develop a course of action that is reasonably likely to result in a better outcome for the company than liquidation or administration. Relief is only granted for debts incurred directly or indirectly in connection with the course of action that has been developed. To qualify for this defence, directors must ensure – among other things – that employee entitlements and taxes are up to date, that they maintain accurate financial records, and that they seek qualified advice when developing a course of action. Ultimately, the safe harbour provisions were introduced to encourage directors to take proactive steps to prevent insolvency without the fear of liability, maximising the chances of company recovery.
Alternative Dispute Resolution (ADR) can be a highly effective way to resolve existing disputes with creditors or other stakeholders. Litigation typically involves higher legal fees and costs to the opposing party, while ADR often proves to be a more financially viable alternative. ADR can also preserve existing relationships with creditors or stakeholders through engagement with methods such as mediation, negotiation and arbitration. ADR encourages parties to cooperate and develop mutually beneficial solutions, unlike litigation which is typically more adversarial in nature. An insolvency lawyer can guide you through the ADR process, ensuring that you achieve an outcome that is enforceable and in your best interests.
At Chamberlains Law Firm, our team of insolvency and litigation lawyers are dedicated to providing tailored solutions to help you avoid bankruptcy and liquidation. Whether you are an individual or a business, we are here to support you every step of the way. Contact us today to learn more about how we can assist you.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. For personalised advice, please consult a qualified insolvency lawyer.
If you have any questions contact Stipe Vuleta, Managing Director of our Insolvency Team on 1300 676 823