When unexpected events or unforeseen changes impact cashflow, you can seek relief from your payment obligations while you get your business back up and running.
Here are some steps you can take if you're experiencing financial hardship, as well as answers to other questions you may be asking.
Where to get help with financial hardship
The National Debt Helpline: The National Debt Helpline is a free service to connect individuals and small businesses with professional financial counsellors who work confidentially and independently to offer guidance on what you should do if you are experiencing financial hardship.
The Commission's Mediation Service: The NSW Small Business Commission's Mediation Service can provide personalised support to your business if you are facing financial hardship as a result of a dispute. There may also be specific aspects to consider if you operate in the building and construction industry.
The NSW Government: The NSW Government, through Business Connect, have a program where a business advisor can assist you in understanding what stage your business is at and what options are available.
Financial institutions and banks: Most banks will have specialised hardship teams that can assist their customers in dealing with financially difficult situations. There may be practical ways that you can move out of financial difficulty, which your bank’s team can discuss with you. Find your bank and their hardship team contact details here.
Debt agreement: If you are a sole trader or in a partnership, you may be able to create a debt agreement as a flexible way of settling debts before bankruptcy. This option will require the majority of creditors (those who you owe money to) to agree.
Temporary relief period: Temporary debt relief could also be an option, where a 21 day period will be given to a business where a creditor has a court order for payment. The 21 days allow you time to restructure your finances and consider all your options of payment.
Liquidator or lawyer: You should note that if you are trading insolvent and where you are unable to pay back the debts you owe, you could face civil penalties and even criminal charges. You may wish to seek professional support from a liquidator or lawyer.
What is the difference between insolvency and bankruptcy?
Insolvency refers to a company being unable to repay its debts on time. The Australian Securities & Investment Commission (ASIC) is the government body that regulates insolvent companies.
Bankruptcy refers to a sole trader or person declaring that they are unable to repay their debts. The Australian Financial Security Authority (AFSA) regulate sole trader and personal bankruptcy.
How can I protect myself from insolvency or bankruptcy?
You should consider creating monthly statements so you can act early if there are signs your business may be at risk of insolvency or bankruptcy.
It is essential that you and your business keep track of your financial records to be able to accurately explain your financial position and previous transactions.
If you are a company:
- ASIC requires that companies keep financial records for at least 7 years.
- Financial records can be electronic, though they need to be able to be printed into hard copy form.
If you are a sole trader:
- The ATO requires sole traders to keep records for 5 years.
- You can enter into a debt agreement before bankruptcy procedures begin.
If you have leased or loaned out property, you can register a security interest in the property through the Personal Property Securities Register (PPSR). This ensures where another business becomes insolvent or bankrupt, you have the first claim to get your property returned before other stakeholders (such as banks or liquidators).
Case Study - Registration on the PPSR
Nick owns Nick’s Construction which is a small business that has leased an excavator to a company called Sydney Diggers. Nick has registered his small business’s personal property (excavator) on the PPSR to ensure his security interest is held.
Sydney Diggers has become insolvent and all its assets now belongs to the bank. Normally, the bank would take possession of the excavator.
As Nick had registered the excavator on the PPSR before he leased it to Sydney Diggers, he was able to retrieve the excavator as the PPSR register showed he has a security interest in the property. Registering the excavator on the PPSR will trump all other interests from other stakeholders.
How do I find out if someone who owes me money is insolvent or bankrupt?
If you suspect that a business you have engaged with is insolvent or bankrupt, there are several registers where you can search the business’s details to see if they are listed:
- ASIC’s published notices: Insolvency and administration notices are required by law to be published here. You can search the notices by using ABN’s, ACN and business or personal name.
- AFSA’s bankruptcy register search: Sole traders and individuals who have applied for bankruptcy can be found by searching the first and last name of the person you believe may be bankrupt. Sole traders may still trade while bankrupt, though there are limitations placed on their ability to trade and they are obliged to inform you.
- Personal Properties Security Register (PPSR): You can search this register to see if someone has a security interest over personal property before leasing out property or making a purchase of personal property.
What does it mean to wind up my business?
Winding up a business refers to the number of legal steps you need to take to close your business.
The decision to wind up your business is one where you will need to consider and understand your obligations and rights, such as if you have any personal guarantees (e.g. personal assets, such as a house) attached to the business.
The steps to wind up your business differ depending on the type of business you operate - if you are trading as a company or trust, sole trader or partnership.
Winding up your business can be complicated. There are resources to help you.
Who can help me wind up my business?
There are different paths you can take to wind up a business. The steps you need to take will depend on whether it is a company, trust, sole trader or partnership.
If your business is set up as a company or trust:
- ASIC have set procedures for closing a small business. A business can be wound up a number of different ways.
- You should get professional advice from a liquidator. ASIC have a list of registered liquidators on their site if you want professional advice on how to begin winding up your company. Liquidators must be registered with ASIC to be able to wind up a company.
- You should consider speaking to a lawyer to ensure you are complying with federal winding up laws, which can be complicated. The Law Society of NSW can help you find independent legal advice, relevant to your location and area of law.
If you are a sole trader or partnership:
- Bankruptcy may be an option to consider if you are unable to make payments on time as a sole trader or a partnership business. There is no minimum or maximum amount of debt that you owe before you can declare yourself bankrupt.
- The National Debt Helpline is a free service to connect individuals and small businesses with professional financial counsellors who work confidentially and independently to step you through the debt management and bankruptcy process.
- The Law Society of NSW can help you find a qualified lawyer.
- As part of the process, you may wish to appoint a private trustee. Australian Financial Security Authority (AFSA) have a register of trustees. The trustee will work to lessen both professional and personal losses.
Should the winding up of your business take a personal toll on your mental health and well-being, Beyond Blue have resources tailored for small business owners. You can also choose to call or chat online with a trained counsellor.
Is there additional support during the COVID-19 pandemic for companies?
The Federal Government has made some temporary changes to insolvency laws for small businesses. These changes come into effect from 1 January 2021. Eligible businesses will need to apply for relief before 31 March 2021.
Case Study - Company
Vic, Raj and Emma own a small company which operated a chain of restaurants throughout NSW. Given the recent restrictions placed on capacity limits at certain venues, the restaurant was only able to serve a small number of customers which resulted in a substantial reduction in its turnover. Because of the reduced turnover, their company has been unable to pay their debts on time and continues to incur debt.
Under the Corporations Act, the three company owners would be personally liable should their business incur further debt while not paying its existing debts. The owners would need to begin insolvency procedures, such as liquidation or administration.
Vic, Raj and Emma have engaged a restructuring practitioner and applied for restructuring relief before the 31 March 2021 cut-off date. The relief means the company can continue to operate their restaurants in order to generate income even though they are still incurring further debt during this time. The restructure relief creates a temporary safe harbour from personal liability for the three company directors.
What support is available for sole traders, trusts, or partnerships?
Sole traders should contact the National Debt Helpline to connect with a financial counsellor.
Case Study - Sole trader, trust or partnership
Mario is a self-employed tradesman completing small trade jobs for clients in the Northern Beaches. Mario focuses a lot of his attention on operating his business and as a result has failed to see the financial stress his business is under.
Until recently, Mario has always paid his debts on time. As a result of COVID-19, demand for Mario’s services has begun to decline, resulting in reduced income where Mario is unable to pay his debts on time.
Most creditors have been supportive of Mario and have negotiated new payment terms with him. One creditor has instead obtained a court order against Mario to have the debt paid.
Mario contacted the National Debt Helpline for financial counselling. After speaking with a counsellor, Mario applied for temporary debt protection to ensure his personal assets were not seized and the judgement could not be enforced for 21 days.
During the temporary debt relief period of 21 days, Mario considered the following options:
Option 1: Mario used the extra time to consider how he could restructure his finances to pay the debt back to the creditor. He also has the option to apply for bankruptcy if he feels he is unable to continue trading with the amount of debt that he owes; OR
Option 2: Mario used the extra time to consider how he could restructure his finances to pay the debt back to the creditor. His creditors have been able to agree to payment terms now that Mario has received advice.