Closing a Business

and Insolvency / bankruptcy

COVID-19 and your business

The Federal Government has passed temporary amendments to the insolvency and bankruptcy laws during the Coronavirus pandemic. While these changes are aimed at offsetting early closure of businesses during restricted trading periods, directors and owner still have a duty of care to minimise the effect them and others and to not trade illegally Eg. take payment with no intent to supply.

Tips:

  • Be proactive, take control and plan to improve cash flow

  • Ensure financial records are up to date with known creditors and debtors.

  • Understand your financial reports and how money can move in your business. (If you don't know how to read your reports, learn now)

  • Seek assistance and insights from your accountant and business advisor

  • List possible impacts on the business and mitigation strategies

  • Do a budget with new trading assumptions and debtors payments

  • Make the most of the stimulus packages and emergency assistance

  • Talk to your bank and creditors with payment plans as required

  • Contact the ATO regarding payment of outstanding tax as required

Steps in closing a business

Closing a business can be a complex process, depending on your business structure and size.

Generally businesses close because the owners:

  • are not making enough money to keep operating, or

  • no longer want to run it.

There are some key tasks to consider including:

  • cancelling your business registrations

  • meeting your tax requirements

  • notifying employees and ensuring they receive their entitlements

  • ending or assigning lease agreements


ATO Considerations

When selling or closing your business you must contact the Australian Tax Office (ATO) to:

  • Lodge final returns - Lodge all activity statements, PAYG withholding reports, repay refunds of GST credits and pay outstanding tax debts.

  • Cancel GST - Within 21 days of ceasing business.

  • Cancel your ABN - Within 28 days of ceasing business. Cancelling your ABN also cancel your AUSkey and GST registrations.

  • Record keeping obligations - Keep records for five years. This includes records of sales including the sale of your business, payments to employees and payments to other businesses.

Closing a Sole traders Business

Conditions to be met before closing

  • Conclude any ongoing contracts

  • Sell stock

  • Collect outstanding debts and pay creditors

  • Notify interested parties, such as banks, suppliers, registering bodies

  • Cancel your registered business name with ASIC

Closing a Partnership

Generally a partnership can be dissolved if all partners agree, or in the following circumstances:

  • One partner gives written notice to the other partners

  • A partner can no longer legally own a business

  • The partnership term has expired

  • There is a court order

  • A partner dies

  • The business has become bankrupt

Closing a Company

To wind up a company you need to ensure the following conditions have been met:

  • All members of the company agree to deregister

  • The company is not carrying on the business

  • The company’s assets are worth less than $1,000

  • All fees and penalties payable under the Corporations Act 2001 have been paid

  • There are no outstanding liabilities

  • The company is not party to any legal proceedings

For more information visit ASIC.

Application for voluntary deregistration of a company (Form 6010).

Closing a Trust

You may be required to:

  • Lodge your final tax return with the ATO

  • Close bank accounts

  • Deregister your ABN

  • Wind up the trust

Are You Insolvent? (Company)

Insolvency is simply a situation where a company can no longer meet its debt obligations.

This can be caused by things like a large debtor failing to pay, decline in sales revenue. Companies in financial difficulty normally have ongoing losses, poor cash flow, unpaid creditors outside usual trading terms and problems obtaining finance.

Duty of care - As a company director, you have a legal obligation to take positive action without delay. Failing to do so may lead to the directors and officers of the company being joined to the recover of debts and cost.

Trading While Insolvent - There is often a belief that the company can trade out of insolvency. This may be the case if the shareholders or directors can financially prop-up the company up with further financial security. However, it's a risk that all the company directors assume with penalties and consequences of insolvent trading, include civil penalties, compensation proceedings and criminal charges. Declaring at the time of insolvency, in most cases will shelter the directors unless dishonesty is found to have cause the company to become insolvent.

Get advice now! - If you suspect your company is in financial difficulty, get proper professional accounting and legal advice as early as possible, as this increases the likelihood of the company surviving. One of the most common reasons for the inability to save a company in financial distress is that professional advice was sought too late.

Voluntary administration - is usually called by the directors when a company becomes insolvent. A registered insolvency practitioner (Administrator) shall review the company's affairs and outline options to the directors, so they can make informed decisions about the company’s future. Options may include refinancing, restructuring or changing your company’s activities, or appointing an external administrator.

Voluntary administration usually results in two outcomes: entering a Deed Of Company Arrangement (DOCA) or liquidation. (See below)

The administrator's role is to maximise the chances of the company continuing, or to provide a better return for creditors than an immediate winding up of the company.

Receivership - Receivers are usually appointed by a secured creditor Eg. Banks and security creditors.

The receiver’s key responsibilities are to collect and sell the charged assets in order to repay what’s owed to the secured creditor, and then to pay out the money in the order required by law.

Their responsibility is to the secured creditors only and not to the other parties who are connected to the company, such as other creditors or unsecured creditors.

Liquidation - Once a company is unable to pay all its debts as they become due, insolvent, the company is considered to be in Liquidation.

Note that company shareholders, creditors (including employees) or the court can also place the company into liquidation.

The purpose of liquidation of an insolvent company is to take control of the company so that its affairs can be wound up in an orderly and fair way for the benefit of all creditors. They will also take control over the company's assets to sell (Liquidate) on behalf of the creditors.

Are you Bankrupt?(Individual)

Bankruptcy is a legal process where a person declared they are unable to pay their debts. Declaring bankruptcy will impact a person ability to gain credit, travel overseas and gain certain types of employment.

Options - Declaring bankruptcy is not always the right option for everyone. Bankruptcy is just one formal option available under the Bankruptcy Act to manage your debt. There are many other options include six-month relief and a debt agreement.

Term - Bankruptcy usually last for three years, however, it will also be included on your credit report for up to five years, or longer in some circumstances.

Types - You can enter voluntary bankruptcy or be declared bankrupt by a creditor through the courts. (Creditor's petition). Voluntary bankruptcy normally provides you with more options and some control over the process.

Process - On declaring bankruptcy, a registered bankruptcy trustee firm is appointed or can be nominated by you. The Trustee manages your bankruptcy, temporary debt protection (TDP), debt agreements, personal insolvency agreements (PIA) and liquidate your personal asset to cover debts.

Advice & Help - While declaring bankruptcy can be a very difficult decision to make, get advice as early as possible, as this increases the likelihood of the surviving and holding on to your assets.

Free, independent and confidential advice can be obtained from:

The Australian Financial Security Authority https://www.afsa.gov.au/