Are You Prepared For Your Company To Fail?
All businesses run the risk of failure. You cant always predict what lies ahead; whether the economic climate will change, impacting poorly on your business cash flow and overall profitability. Whether that brilliant idea will fail to take off the way you expected. Thats the nature of the business world.
But you can take note of the early warning signs. And you should understand the insolvency process, regardless of the size of your business.
The Corporations Act sets out the legal obligations of company directors. And while the thought of wading through pages of legal speak may seem a boring waste of time, knowing the law before you commence operations is pretty important.
As a Director, its your legal obligation to stay on top of the companys finances and trading performance, which means keeping up-to-date books and records. If you dont, and the company continues to trade while it is insolvent (unable to pay its debts), there can be severe consequences. Directors can find themselves personally liable for the companys debts. The company may be wound up and cease to exist.
A report about insolvent trading, released in October 2010 by the Australian Investment and Securities Commission (ASIC), has a good summary of the signs that your business might be in financial trouble. Among others, these include cash flow problems, creditors not being paid on time, difficulty selling stock, dishonoured cheques, problems paying taxes on time (eg. GST), concerns being raised by your bookkeeper or accountant, and being unable to get further finance to fund operations.
If the signs are there, the first step is to seek professional advice, so that you can call the shots about how best to handle the situation.
You may be able to restructure the business, such as closing down an unprofitable department. You might be able to negotiate with creditors or the Australian Tax Office about the time frame for paying outstanding debts or taxes. Or you may decide to enter voluntary Administration, meaning that an Administrator is appointed to take charge of the companys affairs and try to find a way to satisfy the creditors, while the company carries on trading.
If your business receives a Creditors Statutory Demand and fails to have it set aside, or to pay the creditor within 21 days, the company is deemed to be insolvent. Continuing to trade under these circumstances is risky for both the company and its directors.
Court action could then be taken against you, with the result that the company is wound up and a liquidator appointed to sell off the assets, in order to pay the outstanding debts.
But putting procedures in place early could potentially save your company from this fate.