For the central bank, there is the uncomfortable position of having made a loss. Being public institutions, central banks are subject to scrutiny from the media and from the government itself.

Insolvent Trading Explained

What is Insolvency?

Insolvency is defined by the Corporations Act 2001 (Cth) (the Act) in that a company is solvent If it is able to pay all of its debts as and when they become due and payable. If a company is not solvent, it is insolvent.
Directors have a duty under the Act to prevent a company from trading if it is insolvent. This duty requires directors to be constantly aware of the company’s financial position as a director is required to prevent the company from incurring a debt if:

• The company is already insolvent at the time of incurring the debt; or
• By incurring the debt(s) the company will become insolvent; and
• At the time of incurring the debt(s) there are reasonable grounds for suspecting the company is already insolvent or would become insolvent by incurring the debt(s).

The Act sets out two levels of contravention (criminal and civil) which includes different penalties for each type of contravention. A civil contravention involves a director failing to prevent a debt being incurred where there was reasonable knowledge of the company being or becoming insolvent. A criminal contravention is based on the same failure however that failure must also be found to be dishonest.

Who is a Director for the purposes of Insolvent Trading?

The duty to prevent insolvent trading applies to persons appointed to the position of director or any alternate director appointed and acting in that capacity. However, the duty also applies to persons that are not formally or validly appointed as directors. This includes a De Facto Director (or commonly known as Shadow Director) who is someone that is not validly appointed but is acting in a position of director and is someone the appointed directors are accustomed to following directions from.

What are the consequences of Insolvent Trading?

As mentioned above the penalties differ depending on if the contravention is civil or criminal. The civil penalties include:

• An order to pay compensation to the company equivalent to the loss suffered as a result of the failure to prevent the company incurring debts whilst insolvent;
• Disqualification from managing companies; or
• Fines of up to $200,000
Criminal penalties include fines of up to $444,000 (current rate) and/or imprisonment for up to 5 years.

Who can commence an Insolvent Trading Action?

A liquidator of a company has the right to pursue an insolvent trading claim. A liquidator is not required to commence a legal action, but may do so to pursue the claim. In addition, a creditor of the company can commence an insolvent trading action themselves, if the liquidator does not pursue an insolvent trading claim. In this instance a creditor can only take action against a director in respect of the debt owed to them and cannot pursue claims on behalf of all creditors like a liquidator can.

Defences?

The Act also sets out a number of defences to civil contraventions that are available to directors if it can be proved at the time the debt was incurred that the director:

• Had reasonable grounds to suspect, and did expect, that the company was solvent and remain insolvent on incurring the debt(s);
• Had reasonable grounds to believe, and did believe, that a competent and reliable person who was responsible for providing adequate information about the company’s solvency was fulfilling that responsibility, and the director expected that, based on the information that person provided to the director, the company was, and would remain, solvent even if it incurred the debt(s);
• Because of illness or other good reason did not take part in the management of the company at that time;
• Took all reasonable steps to prevent the company incurring the debt.

What should I do if I suspect my company is Insolvent?

If your company is insolvent, or you suspect it may be insolvent, the first thing is to ensure is that your company does not incur any new debts. You should then seek professional advice on your options. You should consult a registered liquidator, appropriately qualified specialist insolvency accountant or lawyer, or financial advice service about your company’s financial situation as soon as you suspect your company cannot pay debts when they are due.

If you are concerned that you or a client may be trading whilst insolvent and would like assistance or more information regarding the possible implications, please get in touch with one of our qualified and experienced experts.

Director Penalty Regime and Becoming Personally Liable for Company Debts

Director Penalty Regime and Becoming Personally Liable for Company Debts

Directors of companies need to understand how they can become personally liable for outstanding company taxation debts in a post-COVID 19 business environment.
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Thursday, 13 May 2021
By Matthew Pease

With Jobkeeper now at an end, this seems like an opportune time to provide a refresher for directors to ensure they understand how they could become personally liable for outstanding company taxation debts.

In April 2020, the ATO widened the net for personal liability, from unpaid pay as you go “(PAYG”) withholding and superannuation, to now include goods and services tax (“GST”), wine equalisation tax (“WET”) and luxury car tax (“LCT”). The changes only apply for tax periods after 1 April 2020. As with PAYG and superannuation, personal liability for these new additions to the regime will be enforced automatically as soon as the debt becomes unpaid as at the due date.

Separate to this issue, the ATO provided directors with a once off opportunity to self-correct historical non-compliance of SGC lodgements relating to the period 1 July 1992 to 1 March 2018 only. The amnesty period ended on 6 September 2020 and if a company now lodges its SGC statement late, the company will be liable for a penalty up to 200% of the SCG amount owing for the relevant period.

Where a company has any unpaid taxation debts, the ATO can issue one of two types of penalty notices to a director; a lockdown or non-lockdown notice.

Lockdown Penalty Notice

Where a company does not report on PAYG or GST (and WET and LCT) within three months after the lodgement due date, or the superannuation is not reported within 1 month and 28 days after the end of the relevant quarter, a director can be immediately held personally liable and a lockdown penalty notice can be issued. This can only be satisfied with the payment of the outstanding debt.
Appointing a liquidator or voluntary administrator to a company will not avoid liability for lockdown Director Penalty Notice (“DPN”) amounts, and the ATO can:

  • Issue lockdown DPNs after a company is placed in liquidation or voluntary administration; and
  • If necessary, base lockdown DPNs on estimates of a company’s superannuation or PAYG liability.

Non-Lockdown Penalty Notice

In the instance where the lodgements have been made within the relevant timeframes but the accompanying debt is not paid on time, the ATO can then issue a non-lockdown notice. The director can avoid this liability by ensuring the company:

  • Pays the outstanding debts in full; or
  • Appoints a voluntary administrator; or
  • Appoints a small business restructuring practitioner; or
  • Appoints a liquidator.

These actions must be taken within 21 days starting on the date on which the ATO posts the notice.

New Directors

In a scenario where a new director has been appointed to a company with outstanding taxation obligations, that director will become personally liable for any debts that were incurred and unpaid prior to their appointment. The director can avoid this liability by ensuring the company:

  • Pays the outstanding debts in full; or
  • Appoints a voluntary administrator; or
  • Appoints a small business restructuring practitioner; or
  • Appoints a liquidator.

These actions must be taken within 30 days starting on the date of their appointment.

Received a DPN?

A penalty notice, irrespective of the type, can have serious implications for a director and their business. Any recipient of a penalty notice should immediately seek advice from a qualified professional advisor.

The team here at GT Advisory & Consulting are available to discuss any notices that have been received and provide alternative options that may be available. This initial consultation is obligation free and is provided at no charge, so please get in touch with one of our qualified and experienced experts.

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How are earnings multiples determined in business valuations?

How are earnings multiples determined in business valuations?

When adopting the capitalisation of earnings methodology, proper consideration needs to be given to appropriate earnings-multiples
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Wednesday, 7 April 2021
By James Cook

When adopting the capitalisation of earnings methodology for valuing a business, a valuer must determine an appropriate multiple to apply to the future maintainable earnings of the business.

The earnings multiple is designed to be a measure of risk. It assesses the riskiness of the maintainable earnings of the business and is typically described as the rate of return an investor would require for a particular investment, when having regard to the inherent risks of the business.

Factors Affecting the Multiple

In forming a view on an appropriate multiple, it is common for an earnings-multiple to be influenced by:

  1. The rate of return on virtually risk-free investments;
  2. The trading history of the business and its historical performance;
  3. The business’ position in the market;
  4. Client relationships and the expertise of management; and
  5. The growth and strategic direction of the business.

When determining an appropriate earnings-multiple to adopt, valuers are typically guided by the following 3-Step process.

Step 1: Assess Multiples of Comparable Listed Entities

As a starting point, it is common for valuers to be guided by earnings multiples which are implicit with publicly listed entities which operate comparable businesses.

Depending on the size of the dataset being analysed, valuers may incorporate a number of comparable entities into their analysis for comparison and adopt either a median value from the dataset, or take a simple average approach.

It should be noted however, that earnings multiples of publicly listed entities are typically based on minority shareholdings which do not include a premium for control.

Step 2: Premium for Control Assessment

If the business is being valued on a control basis, an adjustment is generally made to account for a control premium.

A Premium for Control is a factor which is applicable to minority shareholdings which reflects the additional value that an acquirer of the publicly listed entity would be willing to pay, over and above the minority value.

Control premiums are intended to represent the benefits that would flow to an acquirer from gaining full control over the finances and operations of the target company, its ability to make decisions, appoint directors and influence the strategic direction of the company.

Step 3: Private Company Discount

When having regard to the implied multiples of private companies when compared to their publicly listed counterparts, it is common to apply a discount to take into account the following factors which affect the value of a private company operating in the same market:

  1. The business’ size, scale and access to key markets;
  2. Quality of infrastructure, systems and management teams;
  3. The level of dependency on key persons associated with the business and differences in key person risk; and
  4. Access to capital.

Conclusion

The determination of an appropriate earnings-multiple is a function of multiples which are applicable to comparable listed entities, adjusted for a Premium for Control, and discounted to reflect the limitations inherent in private enterprise.

Proper consideration needs to be given to appropriate earnings-multiples and it is crucial that valuers properly consider the characteristics of the business being valued when undertaking their assessment.

For any specific or general business valuation queries, please get in touch with one of our qualified and experienced experts.

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Temporary Insolvent Trading Moratorium Update

Temporary Insolvent Trading Moratorium Update

Directors seeking to rely on the temporary relief from insolvent trading may only be able to do so if the company enters voluntary administration or liquidation prior to 31 December 2020
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Tuesday, 13 October 2020
By Christine Stead

Earlier this year, the Australian Government introduced the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) which was designed to provide temporary relief to businesses and stimulate economic activity. As touched on in our earlier article, this bill included a temporary COVID-19 safe harbour defence for directors from insolvent trading liability where ordinarily a director of a company in liquidation can be held personally liable for debts incurred when they should have suspected their company was insolvent.

Whilst the legislation has ultimately achieved its intended purpose, the Australian Restructuring Insolvency & Turnaround Association (ARITA), the professional body for insolvency practitioners, last month raised awareness to its members about the limitation of the defence.

ARITA outlined the specific amendment to the Corporations Act 2001 that provides temporary relief for insolvent trading as noted below:

588GAAA  Safe harbour—temporary relief in response to the coronavirus

  • Subsection 588G(2) does not apply in relation to a person and a debt incurred by a company if the debt is incurred:
  • in the ordinary course of the company’s business; and
  • during;
  • the 6 month period starting on the day this section commences; or
  • any longer period that starts on the day this section commences and that is prescribed by the regulations for the purposes of this subparagraph; and
  • before any appointment during that period of an administrator, or liquidator, of the company. “

Essentially, the relief measures may only apply if the company enters voluntary administration or liquidation prior to the expiry of the temporary measures, which is currently 31 December 2020.  If an appointment is not made prior to this expiry a director may not be protected by the moratorium and is exposed to the insolvent trading provisions.

The new defence will be subject to the interpretation of the courts but could also yet be updated or clarified by the Government under the recently announced insolvency reforms to introduce a simplified restructuring process. The Government have acknowledged there will be transitional issues between the moratorium ending and the new reforms commencing and have indicated a business will be able to declare its intention to access the simplified restructuring process. Following the declaration an extension to the temporary insolvency relief would then apply for a maximum period of 3 months.

What does this mean if you are wanting to take advantage of the reforms? If your business is facing challenging operating conditions you should seek prompt, specialist advice to reduce the risks and consequences of financial failure and increase the options available.

For any specific or general queries regarding your business, or to discuss the availability of the defence, please get in touch with one of our qualified and experienced experts.

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Understanding Goodwill

Understanding Goodwill

When determining the Goodwill of a business, it is important to understand the characteristics of the business and the different types of Goodwill that may exist.
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Tuesday, 29 September 2020
By James Cook

As noted in our previous article, when undertaking a business valuation, valuers are guided by common market practice and the valuation methodologies recommended in the ASIC Regulatory Guide 111.

When adopting the Capitalisation of Earnings Methodology, it is not uncommon for the calculation to deviate from the business’ net operational business assets. In circumstances where the value calculated under the Capitalisation of Earnings Methodology exceeds the net operational assets of the business, the excess or premium is typically referred to as the Goodwill component.

In many small businesses, Goodwill can represent a significant amount of a business’ value, however its intangible nature can lead to disagreement between parties.

When determining the Goodwill of a business, it is important to understand the different types of Goodwill that may exist in a business. Common types of Goodwill will include:

Personal Goodwill

Where the owners of the business have personal followings of clients such as professional services firms, this is typically attributable to Personal Goodwill.  The risk (which is typically built into any earnings multiple) is that when businesses are sold or key personnel exit the business, there is a risk that clients may also leave.

Values which are attributable to Personal Goodwill should be carefully considered by a valuer and have regard to the existence of restrictive covenants or guarantees that a vendor is willing to provide.

Corporate Goodwill

Corporate Goodwill will generally attach to the business independent of its owners and arises from having an established brand or reputation, key product lines or a loyal customer base.

Corporate Goodwill commonly exists with businesses in the wholesale and manufacturing industry where reliance on key business owners is less critical to client retention and the operations of the business.

Location Goodwill

Where businesses operate from strategically located premises, Goodwill can sometimes be attributable to Location Goodwill.

Businesses which possess Location Goodwill may include Aged Care Facilities, Motels and Childcare Centres, however when attributing some or all of the Goodwill of a business to its location, a valuer should have regard to the following risk factors that may have an effect on this assessment:

  • Length of time remaining under the current lease and the existence of options;
  • Any identifiable deterioration of the commercial value of the location such as a permanent diversion of traffic flows;
  • Any changes in regulations requiring an upgrade of the premises; or
  • Any difficulties posed by the landlord in effecting a transfer of the lease.

 Conclusion

The different types of Goodwill extend beyond those listed above and it is crucial that valuers properly consider the characteristics of the business being valued when undertaking their assessment.

For any specific or general business valuation queries, please get in touch with one of our qualified and experienced experts.

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