2012 GUIDE TO CORPORATE INSOLVENCY

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1 2012 GUIDE TO CORPORATE INSOLVENCY worrells.net.au

2 PLAIN TALK. STRAIGHT ANSWERS. FAST RESULTS. EDITOR Chris Cook, Partner Worrells Brisbane DISCLAIMER The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission within this brochure. Liability limited by a scheme approved under Professional Standards Legislation.

3 1 2 3 GLOSSARY CORPORATE INSOLVENCY 10 INDICATORS OF INSOLVENCY 12 LIQUIDATION 16 VOLUNTARY ADMINISTRATION 19 DEEDS OF COMPANY ARRANGEMENT 22 MEMBERS VOLUNTARY WINDING UP 23 PREFERENCES IN LIQUIDATIONS 25 INSOLVENT TRADING 28 UNREASONABLE DIRECTOR RELATED TRANSACTIONS 31 UNCOMMERCIAL TRANSACTIONS 33 SECTION 588FH PREFERENCES TO RELATED PARTIES 35 DIRECTOR S LIABILITIES FOR COMPANY DEBTS 39 ENDING A LIQUIDATION 44 RELATED TOPICS 46 PRIORITY EMPLOYEE ENTITLEMENTS 48 DIRECTOR PENALTY NOTICES 52 LENDING MONEY 58 SUBCONTRACTORS CHARGES 61 SECURITIES OVER ASSETS 63 SECURED APPOINTMENTS 65 DETERMINING INSOLVENCY 67 LANDLORD RIGHTS 71 WORRELLS ARTICLES 74 SET-OFFS: WHEN ARE THEY AVAILABLE? 76 NEVER NEVER SAY NEVER 77 SUPERANNUATION CLAIMS IN INSOLVENCY 78 RECEIVERS, LIQUIDATORS AND EMPLOYEE ENTITLEMENTS 80 ATO GARNISHEE NOTICES 82 VOLUNTARY DEREGISTRATION OF COMPANIES AND DIRECTOR PENALTY NOTICES BEWARE!!!! 83 AM I LIABLE FOR THE COMPANY TAX? 84 86

4 A WORD FROM IVOR It has been said that our free enterprises, capitalist economy is the worst system of all... except for all of the others. But that is of little consolation to those who stand to lose all, or most, of their capital as a result of business failure and it is of no help to employees and creditors of failed businesses, who are left wondering what happened and how they can make good their losses. Worrells cannot change the way in which our economic system works. But what we can do, and what we have been doing for many years, is to bring to the insolvency profession a level of transparency and access to relevant information which is unparalleled. This latest volume of Worrells Corporate Insolvency Guide and its companion volume Worrells Personal Insolvency Guide seeks to explain, in simple terms, how the insolvency laws and processes work, and by doing so to demystify the topic. This, we believe, will allow all stake holders to better understand and cope with what is, for many, an extraordinarily stressful episode. Worrells Corporate Insolvency Guide has been prepared drawing on the combined experience of our 15 partners, who between them have managed more than 12,000 insolvencies over the 38 years since the inception of Worrells Solvency and Forensic Accountants. Our aim has been to produce an easily understood Guide providing dependable information relevant to corporate insolvency. Each topic is set out in a question and answer format and is explained in non technical terms, yet has sufficient detail to allow the reader to gain a broad understanding of insolvency concepts and practice. We have included with this Guide a selection of interesting and illuminating articles taken from our popular monthly Plain Talk e-updates. Our Guides are designed to assist both debtors and creditors and to provide a quick reference resource to our legal, accounting and banking colleagues. Our Guides contain an accurate yet broad statement of insolvency law and practice as it stands at the date of publication. Yet, each insolvency is unique in some way and insolvency laws change, which is why we encourage readers to obtain formal accounting or legal advice or to contact any of the Worrells partners for a confidential and obligation free consultation. Insolvency law is not about punishing business owners for commercial misjudgements, or lack of information. It s about removing impossible financial burdens in fair and transparent ways. We believe that our Insolvency Guides help demystify the insolvency process and so help all stakeholders deal with the inevitable pressures that accompany business failure. We believe also that our commitment to transparency in all we do is nowhere better exemplified than through the information shown on our web site (worrells.net.au) where a wealth of general and information is provided along with detailed daily updates on each current insolvency which we are managing. No other insolvency firm in Australia comes close to the level of disclosure which has been a feature of our operations for some over ten years. And if you like the e-update articles included in this Guide you will find many more at our web page. Although the practice of insolvency involves the interpretation and application of regulation and legislation, although it s to do with balance sheets, ledgers and accounts, at its base it is really about people. Businesses may founder and companies may be liquidated, but it is people that pay the price and feel the pain. Each of Worrells partners, and all of our staff members, recognises that both debtors and creditors must be treated with respect and consideration and that open and frequent communication is the key to a successful relationship. On a daily basis we strive to live up to our slogan of Plain Talk, Straight Answers and Fast Results. We see the publication and distribution of our Insolvency Guides as a practical way of doing this. We welcome feedback regarding these publications including suggestions on how we can improve subsequent editions. Finally, on behalf of all of the Worrells partners I would like to thank you for taking the time to review Worrells 2012 Guide to Corporate Insolvency. Ivor Worrell Coordinating Partner WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU

5 TRANSPARENCY AND INFORMATION ARE THE KEYS TO A FAIRER INSOLVENCY REGIME 3

6 WORRELLS PARTNERS IT S OUR PEOPLE THAT DELIVER PLAIN TALK, STRAIGHT ANSWERS AND FAST RESULTS. WORRELLS ARE A TEAM OF FULL TIME SPECIALISTS. SOLVENCY MANAGEMENT, RESTRUCTURE OR INSOLVENCY ADMINISTRATION CAN BE A PERIOD OF GREAT STRESS. AN EXPERIENCED AND SPECIALIST TEAM CAN EASE THE PROCESS, ENSURING A FAIR OUTCOME FOR ALL PARTIES CONCERNED. At Worrells we re specialists - Solvency Accounting is all we do. 15 Partners, 15 Official & Registered Liquidators, 12 Registered Trustees, 3 Certified Fraud examiners, 5 east coast major metro locations, we can have experienced staff at any location, quickly. Quick decisive action by a highly skilled team acting in a caring, respectful and fair manner does make all the difference. Established over 38 years ago, Worrells draws upon over 200 years of experience. Using proprietary technology, our team have successfully completed over 25,000 assignments. Specialist accounting services, delivered by dedicated fulltime specialists, on time, on budget every time. 4 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU

7 IVOR WORRELL BRISBANE FCA Official Liquidator Registered Trustee Member IPA Forensic Accountant Justice of the Peace RAJ KHATRI BRISBANE FCA Official Liquidator Registered Trustee Member IPA Commissioner of Declarations MORGAN LANE BRISBANE CA CPA (Fellow) Official Liquidator Registered Trustee Member IPA Justice of the Peace Ivor Worrell is a Registered Trustee in Bankruptcy and Official Liquidator. Ivor is a leading Queensland insolvency practitioner and in a career spanning 38 years he has developed experience in Corporate and Personal Insolvency, Receivership and Litigation Support. Raj Khatri joined the firm in 1986 rising to become a Partner in His area of specialty is Corporate Insolvency and has over 26 years experience in the field. Raj is a fellow of the Australian Institute of Chartered Accountants, an associate of the New Zealand Society of Accountants and the Institute of Corporate Managers, Secretaries and Administrators. Morgan Lane joined the firm in 1992 and became a full partner in His wealth of experience gained in both the private and public sectors adds further depth to our insolvency division. Morgan is a Fellow of CPA Australia accredited as a Specialist in Insolvency & Reconstruction, an Associate of the Institute of Chartered Accountants and The Institute of Corporate Manager, Secretaries and Administrators. 5

8 WORRELLS PARTNERS MICHAEL GRIFFIN BRISBANE CA Registered Liquidator Official Liquidator Registered Trustee Certified Fraud Examiner Member IPA Commissioner of Declarations Michael is a Registered Liquidator, Official Liquidator and a Registered Trustee in Bankruptcy. Michael is also a Member of the Institute of Chartered Accountants and the Insolvency Practitioners Association. Michael s experience includes all forms of personal and corporate insolvency matters. MICHAEL PELDAN BRISBANE FCA Registered Liquidator Official Liquidator Registered Trustee Certified Fraud Examiner Member IPA Commissioner of Declarations michael.peldan@worrells.net.au Michael joined the firm as a graduate in 1991 after completing studies as a mature-aged student, and became a full partner in July Michael s experience includes all aspects of Corporate and Personal Insolvency and Financial Investigation. Michael is also engaged in Fraud Awareness Management and Education and is one of the firm s Certified Fraud Examiners. CHRIS COOK BRISBANE CPA CA Registered Liquidator Official Liquidator Member IPA Commissioner of Declarations chris.cook@worrells.net.au Chris is an Official Liquidator, Chartered Accountant, Certified Practising Accountant and a member of the Insolvency Practitioners Association of Australia. Chris joined the firm in February 1999 and has considerable experience in both the Corporate and Personal Insolvency Fields. Chris is the partner and heads a team that specialises in Corporate and Personal Insolvency. 6 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU

9 ADAM WARD IPSWICH CPA Registered Liquidator Official Liquidator Registered Trustee Member IPA Commissioner of Declarations Adam Ward joined the firm in 2001 and became a partner in Adam is a Registered Liquidator, Official Liquidator and is a member of both CPA Australia and the Insolvency Practitioners Association. His experience includes all forms of Corporate and Personal insolvency matters. Adam is the Partner that leads a team at our Worrells Ipswich Office. JASON BETTLES GOLD COAST CA Official Liquidator Registered Trustee Member IPA Commissioner of Declarations jason.bettles@worrells.net.au Jason is an Official Liquidator, Registered Liquidator, Registered Bankruptcy Trustee, Chartered Accountant and a member of the Insolvency Practitioners Association of Australia. He has worked exclusively in the field of insolvency since 1995, managing the Gold Coast Insolvency Division of a second tier accounting firm for two years before joining us in October Jason has experience in all forms of corporate and personal insolvency matters. He has provided recommendations on the most appropriate solutions to deal with insolvency issues to all types of parties. Jason s knowledge and experience allows him to consider informal arrangements to solve insolvency problems, as well as the formal insolvency administrations. PAUL NOGUEIRA SUNSHINE COAST CPA CA Registered Liquidator Official Liquidator Registered Trustee Member IPA Commissioner of Declarations paul.nogueira@worrells.net.au Paul joined Worrells in 1999 after completing his degree with the Queensland University of Technology. He was appointed a Partner in 2006 and opened the Worrells Sunshine Coast office in Paul is experienced in all forms of Corporate and Personal insolvency administrations over various industries and specialises in small to medium business turnaround management and solvency solutions. Paul adheres to the firm s Plain Talk, Straight Answers, Fast Results approach and is available to provide no obligation advice to any party that may find themselves faced with solvency problems. 7

10 WORRELLS PARTNERS NICHOLAS MALANOS SYDNEY CPA Registered Liquidator Official Liquidator Registered Trustee Certified Fraud Examiner Member IPA CHRISTOPHER DARIN SYDNEY CA Registered Liquidator Official Liquidator Justice of the Peace STEPHEN HUNDY CANBERRA CA Registered Liquidator Official Liquidator Registered Trustee Member IPA Nick has in excess of 27 years experience in all aspects of corporate insolvency. He has particular expertise in the areas of Voluntary Administration and Deeds of Company Arrangement which has now enabled numerous businesses to successfully continue on over the years. Chris is a Registered Liquidator, Official Liquidator and associate member of the Institute of Chartered Accountants in Australia. Chris joined the firm as partner of the Sydney firm in July 2008 having been in practice on his own account since Chris experience includes all aspects of corporate insolvency and adopts a consultative approach when exploring all financial avenues available to a distressed company. Chris also undertakes corporate advocacy appointments, assisting directors and companies in dealing with their debtors, creditors and other insolvency practitioners. Stephen Hundy joined Worrells Solvency & Forensic Accountants in 2011 as a partner and leads our Canberra office. Stephen has worked exclusively in the insolvency industry since 1995 and is able to provide assistance in all areas of personal and corporate insolvency. Stephen specialises in the provision of clear practical commercial advice on a wide range of business issues for individuals and small to medium enterprises. He adopts a hands-on approach being involved in all aspects of an appointment. In addition, Stephen also has experience in preparing fraud and financial investigation reports, undertaking financial viability reviews and has assisted with shareholder and partnership disputes. 8 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU

11 PAUL BURNESS MELBOURNE CPA Official Liquidator Registered Liquidator Registered Trustee Certified Fraud Examiner Member IPA MATTHEW JESS MELBOURNE CPA Registered Liquidator Official Liquidator Registered Trustee Member IPA CON KOKKINOS MELBOURNE CPA Registered Liquidator Official Liquidator Paul Burness is a Certified Practising Accountant, an Official Liquidator and a Registered Trustee in Bankruptcy. He is also a member of the Insolvency Practitioners Association of Australia. Paul has considerable experience in all forms of Corporate and Personal Insolvency and Reconstruction, specialising in insolvency since graduating. Paul is the managing partner of the Melbourne firm. Matthew is an Official Liquidator and Certified Practising Accountant, who has considerable experience in the Insolvency, Commercial Accounting and Corporate Finance fields. Matthew s experience includes due diligence investigations, sale of business transactions, corporate reconstructions and financial turnarounds. Matthew has also completed the Advanced Insolvency Course with the Insolvency Practitioners Association of Australia. Con Kokkinos joined the Melbourne office on a full time basis in April Con has been a Liquidator since November 2001 and is a member of CPA Australia. Con brings with him over 15 years of insolvency experience with an emphasis in all aspects of corporate insolvency. 9

12 CORPORATE INSOLVENCY NUMBERS CONTINUE TO INCREASE, THAT S WHY AN UNDERSTANDING IN THIS AREA IS VITAL. WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU

13 1 CORPORATE INSOLVENCY INDICATORS OF INSOLVENCY 12 LIQUIDATION 16 VOLUNTARY ADMINISTRATION 19 DEEDS OF COMPANY ARRANGEMENT 22 MEMBERS VOLUNTARY WINDING UP 23 PREFERENCES IN LIQUIDATIONS 25 INSOLVENT TRADING 28 UNREASONABLE DIRECTOR RELATED TRANSACTIONS 31 UNCOMMERCIAL TRANSACTIONS 33 SECTION 588FH PREFERENCES TO RELATED PARTIES 35 DIRECTOR S LIABILITIES FOR COMPANY DEBTS 39 ENDING A LIQUIDATION 44 11

14 1 INDICATORS OF INSOLVENCY INDICATORS OF INSOLVENCY OVERVIEW The Courts frequently assess whether or not a company or individual is insolvent and if so, when that insolvency started and when various stakeholders should have suspected it. This usually occurs when a liquidator commences a recovery action. It is also a critical factor for directors, when liquidators or creditors commence recovery actions for damages arising from insolvent trading or related claims. Some judges have developed a schedule of indicators of insolvency that are considered in the claim. These should be readily and frequently used by all parties concerned when considering whether a person or business is insolvent. This issue was discussed in detail in ASIC v Plymin (2003) 46 ACSR 126, with the Judge referring to a checklist of 14 indicators of insolvency. These indicators were identified as the following: 1. Continuing losses 2. Liquidity ration below 1 3. Overdue Commonwealth & State taxes 4. Poor relationship with present bank including inability to borrow additional funds 5. No access to alternative finance 6. Inability to raise further equity capital 7. Supplier placing the debtor on COD terms, other otherwise demanding special payments before resuming supply 8. Creditors unpaid outside trading terms 9. Issuing of post dated cheques 10.Dishonoured cheques 11. Special arrangements with selected creditors 12. Solicitors letter, summons(es), judgments or warrants issued against the company 13. Payments to creditors of rounded figures, which are irreconcilable to specific invoices 14. Inability to produce timely and accurate financial information to display the company s trading performance and financial position, and make reliable forecasts. These are discussed in more detail below. 1. CONTINUING LOSSES Not every business that makes a loss, or a series of losses, is insolvent. As long as working capital is available to meet those losses, insolvency can be avoided. Losses by themselves do not cause insolvency. Rather, insolvency is usually brought about by a combination of losses and insufficient working capital. This statement may seem obvious, however some people concentrate solely on the losses without considering the capacity to absorb those losses. On the other hand, one large loss or series of losses may illustrate a trend which counters any defence that expected future profits will overcome what otherwise might be a shortterm problem, and raises questions of whether working capital is truly sufficient to absorb those losses. When assessing insolvency, consideration should be given to working capital and the extent to which it can absorb trading or other losses. 2. LIQUIDITY RATIO BELOW 1 Liquidity is a measure of the extent that liquid assets are available to cover payable debts. The business s liquidity ratio is a comparison of its current assets and current liabilities. If the ratio is greater than 1, there are more current or liquid assets than current or payable debts and an indication that the business should be able to pay debts from available assets. If the ratio is less than 1, the reverse applies. Whilst the liquidity ratio provides a pointer to solvency, it is by no means conclusive. A liquidity ratio measures available assets at a specific point in time and does not factor in the dynamics of cash flow and whether current debt is actually payable at that particular time. A further difficulty is that the ratio is usually determined using funds in the bank, rather than allowing for funds that might be borrowed from the bank. Amounts such as unused overdraft facilities will need to be included in a consideration of solvency. It also does not take into account whether some current assets (stock and receivables) are truly liquid. Business owners should examine the reasons for a liquidity ratio that is less than 1 and determine whether action needs to be taken. 3. OVERDUE COMMONWEALTH AND STATE TAXES Many short-of-cash businesses regard the non-payment of taxes as the easiest way of saving some cash flow that may be essential to survival. They see it as borrowing the money from the government. Rationale being that unlike general lending terms; there are no application forms, no valuations, no bank fees to pay and no recourse of non-supply or repossession, and in the case of interest its application could be delayed and potentially negotiable. So is non-payment of tax commitments (GST or PAYG) a good indicator of insolvency? The short answer is, yes. Putting aside those who simply have an extreme aversion to paying tax, businesses will normally meet their obligations to the tax office by the due date or soon thereafter if they have the ability to do so. 12 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU

15 CORPORATE INSOLVENCY 1 In most cases those businesses that do not pay tax, cannot pay tax. Business owners need to carefully consider solvency whenever taxes remain unpaid. 4. POOR RELATIONSHIP WITH PRESENT BANK INCLUDING INABILITY TO BORROW FURTHER FUNDS Banks have a distinct advantage over the other creditors. The bank knows what funds are on hand and can analyse the flow of funds through the bank account. If the business has borrowed money from the bank, the business owners will usually have had to provide financial information from time to time. Usually none of this information is available to other creditors. A poor relationship with a bank usually stems from either: 1. the non-repayment of monies due to the bank, 2. the bank being placed in a position where it must regularly dishonour cheques, or 3. the bank s assessment of the financial position or management of the business. A strained relationship with a bank does not prove that the customer is insolvent, just as a good relationship is not proof of solvency. Cases occur where the bank is amongst the last to know of a customer s insolvency because the customer has operated within agreed limits with the bank, while not paying other creditors. Although a poor relationship may be the result of other factors, it may be the result of the bank s lack of confidence in the business and its solvency. Certainly if a bank refuses to advance further funds or calls up a loan or overdraft, the reasons for this needs to be established. Furthermore, the result of the bank refusing further funding may - and often will - cause insolvency. 5. NO ACCESS TO ALTERNATIVE FINANCE & 6. INABILITY TO RAISE FURTHER EQUITY CAPITAL Insolvency is determined on a cash flow basis - an ability to pay debts. This is reflected in the definitions contained in the Corporations Act (for companies) and the Bankruptcy Act (for individuals). An entity is insolvent if it cannot pay its debts as they fall due. The inability to pay debts is linked directly to the inability to obtain ready cash and to debts being due and payable. Three financing alternatives are available to businesses in need of cash: 1. The debtor can convert short-term debt to long term debt - repayable at a date in the future or intermittently over a period. If a debt is no longer due and payable it does not form part of a strict solvency calculation. But when creditors doing nothing to collect debts that are outside of agreed terms, it cannot be taken as an implied agreement to extend trading terms. 2. Businesses may borrow funds to be used to pay due debts. Essentially this is creating a new debt to pay an old debt. But care must be taken not to mislead the lender, even if the loan is to satisfy current debt and alleviate a current cash flow problem. If the entity eventually fails, the obtaining of the new loan may have consequences to the business owner or director. 3. The debtor can obtain funds in the form of equity capital. The Equity investor, while seeking an eventual return from profits, does not compete with the priority of repayments of debts. Potential equity investors, knowing that an eventual return may be delayed or uncertain, are likely to be diligent in reviewing the finances and prospects of the venture in an effort to be satisfied that the return is commensurate with the risk. Being unable to sufficiently convert a short-term debt to long term debt, or borrow money to overcome a cash crisis, or is unable to replace debt with equity to cure the lack of funds is a strong indicator that the business has at least a cash flow problem and is possibly insolvent - rather than simply suffering a cash flow problem that can be resolved in the short-term. If business owners cannot obtain funding from any of these sources to pay outstanding debts, they should at least suspect that they are insolvent. 7. SUPPLIERS PLACING THE DEBTOR ON COD, OR OTHERWISE DEMANDING SPECIAL PAYMENTS BEFORE RESUMING SUPPLY & 8. CREDITORS UNPAID OUTSIDE TRADING TERMS Creditors are the first to know that their invoices are not being paid on time. An efficient credit manager or business operator will have systems that identify overdue accounts and prompt collection action. Action may consist of collection letters or calls and may involve limiting further supply to a COD basis or ceasing supply entirely. Being placed on COD terms tells the customer that, at least temporarily, the supplier has no faith in the customer s ability to meet further credit commitments. Suspicion may be aroused when there are a range of creditors with outstanding accounts, that business must be insolvent. However, care must be taken to determine whether the business is just a habitual late payer of accounts, even when sufficient funds exist. Business owners have to determine whether debts are not being paid because there is no money to pay them or if there is another reason. INDICATORS OF INSOLVENCY 13

16 1 INDICATORS OF INSOLVENCY INDICATORS OF INSOLVENCY 9. ISSUING OF POST-DATED CHEQUES The issuing of a post-dated cheque for current debt is one of the classic signs of insolvency. It is also one of the major signs of optimism by both the debtor and the creditor that the money will be readily available when the cheque is presented. Understandably, some creditors take the receipt of a post-dated as a sign that their account will eventually be paid, but it must be remembered that the issuing of a post-dated cheque amounts to an admission by the debtor that there are insufficient funds to pay now. Whether it also amounts to a creditor extending the credit terms to the date shown on the cheque is far less certain. Solvent debtors very rarely issue post-dated cheques so these cheques (should) immediately raise suspicions of insolvency. A debtor who has a long history of issuing post-dated cheques is almost certainly insolvent and relies on future monies to pay current commitments. Comparatively, a debtor who infrequently resorts to post-dated cheques is more likely to be suffering a short-term cash flow problem rather than insolvency. 10. DISHONOURED CHEQUES Many post-dated cheques end up being dishonoured on presentation. The issuing of post-dated cheques often is sign of misplaced optimism and a strong indicator of insolvency. The dishonouring of a post-dated cheque sends a very clear message that the debtor s problems are more than simply a short-term cash flow problem. The dishonouring of a post dated cheque tells us that the debtor s cash flow is at best inadequate and that the debtor s bank has limited faith in the debtor arranging for funds to pay the account. Generally a cheque is dishonoured by the bank because there are insufficient funds available to cover the payment. Naturally on occasion, this can result inadvertently through no fault of the debtor. Accordingly the dishonour of one cheque or even a few cheques at the one-time should not necessarily be taken as clear evidence of insolvency. But when the debtor s bank repeatedly dishonours cheques the conclusion of insolvency is unavoidable. The lack of sufficient funds to cover cheques issued must equate to an inability to meet all debts when they fall due. That is the classic definition of insolvency. Business owners need to quickly establish why their cheques are being dishonoured, and determine whether they are still solvent or not. 11. SPECIAL ARRANGEMENTS WITH SELECTED CREDITORS & 13. PAYMENTS TO CREDITORS OF ROUNDED SUMS, WHICH ARE NOT RECONCILABLE TO SPECIFIC INVOICES Not all demands from creditors end in summons and judgments. If the debtor does not dispute the existence of the debt, but cannot arrange immediate payment, creditors demands may result in some form of repayment agreement. These repayment agreements usually allow for payments to be made over an extended period of time, and it is not unusual for the payments to be made in round dollar amounts. Entering into such an arrangement is an admission that the business cannot meet the full debt when due, otherwise the arrangement would not be necessary. It is not uncommon for such an arrangement to be completed as planned, with both parties satisfied with the outcome. Can a debtor cure its insolvency by negotiating extended payment terms with creditors? In our view the answer is yes, on the proviso that a clear agreement is made by the creditor to provide extended terms. Once the terms of a debt are extended, the full amount is no longer due and payable. Round payments may be made towards the reduction of a debt with the agreement of the creditor. But it is not unusual to find round amount payments being made without such an agreement. The payments are usually made in that fashion because the debtor cannot pay the debt in full and that the debtor is no longer confident of negotiating extended arrangements with creditors and hopes to obtain extended credit terms by making part-payment. This debtor is almost certainly insolvent. If business owners are shuffling the small amount of cash that they have to pay the large amount of debts outstanding, they are almost definitely insolvent. 12. SOLICITORS LETTERS, SUMMONS(ES), JUDGMENTS OR WARRANTS ISSUED AGAINST THE COMPANY. A single letter of demand from a creditor or their solicitor is not proof of insolvency, as there may be a dispute between the parties. A series of demands from a number of solicitors, however, should create a strong presumption of insolvency. It would be unusual for a business to have several of disputes with their suppliers at the same time. If the creditor progresses beyond the demand stage and obtains a judgment that remains unpaid, the presumption of insolvency is all but confirmed. When execution of the judgment is undertaken by the creditor, a state of insolvency is certain. 14 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU

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