NEWSLETTER | Insolvency Insight

Insolvency Insight – August 2014
It is that time of the year when people generally start considering their tax affairs and get them into some sort of order. It is also an appropriate time to review your client’s affairs from an insolvency point of view. The best time to protect your clients against the effects of insolvency is when they, or the entity through which they operate, is solvent. We have numerous examples of transactions which have been carried out in a solvent company and subsequently forgotten about, causing real difficulty during insolvency. Some of the areas that should be looked at include the following:

Related Party Loans
It is not unusual for companies within the group to loan each other funds. Whilst there is absolutely no problem when companies are solvent, difficulties can arise when one or more members of the group become insolvent. This is particularly the case when the insolvent entity has a number of loans from members of the group and in turn has lent funds to other members of the group. Once a company has passed into insolvency the members of the group are unable to offset the loans against each other. If a liquidator is appointed he/she would look to recover the loans lent to the members of the group. However, those entities that have lent funds to the insolvent entity would be treated the same as any other unsecured creditor and would have to wait for the liquidator to declare a dividend in the liquidation before they saw any payment of their loan. We would suggest that the end of each financial year related party loans are as much as possible, offset so as to leave if possible, no more than one related party creditor or debtor in each entity. Whilst this outcome is often attempted as a company moves towards insolvency those transactions are often attackable by a liquidator. Regular housekeeping, particularly started when a company is solvent, is a much more defendable position.

Director/Shareholder Loans
We are often appointed to companies that have a large debtor loan that is styled either Director Loan or Shareholder Loan. Whilst this is not a problem in a one director, one shareholder company it can cause grief when companies go insolvent with multiple directors or shareholders. It is not inconceivable that one party which has minimal assets has had a majority use of the loan whilst the asset rich party has had minimal transactions on the loan. If the loan is not properly identified they may well be jointly or jointly and severally liable for repayment of the loan. In companies where record keeping is of a high standard it may be possible to forensically determine the respective balances within the loan, however, this becomes problematic when the quality of record keeping decreases or time passes. It is generally preferable to identify loans against an individual rather than potentially larger group.

Whilst you are meeting with your clients, it may be advisable where they have moved house during the year, to ensure that they have updated their details with the Australian Securities & Investments Commission. As you would be aware the Australian Taxation Office issues Director Penalty Notices to the directors’ address as maintained by ASIC. As less and less accountants and advisers act as Registered Offices for their client’s companies, the responsibility for maintaining secretarial records has in the main part shifted towards the directors. If an incorrect address remains on the ASIC database the issuing of the DPN to that address is still effective against the director and may well see them incur personal liability that may otherwise have been avoided.

Should you wish to discuss any of the content of this newsletter or any insolvency matter relating to any of your clients please do not hesitate to contact our principals or senior staff.