Many businesses, both small and big, are confronted with many challenges during this COVID-19 outbreak. Most of the companies have been asked to shut down, which essentially cripples their business operations. While some companies continue to operate, a few others are forced to find alternatives, such as utilising online platforms instead.
The problem is when businesses have to keep up with their financial obligations, even during this coronavirus crisis. For this reason, business owners need to understand what business insolvency is and what relief may be available to them during this global pandemic.
In this article, we will share with you more about business insolvency and what alternatives are available for your business.
Business insolvency explained
As a business owner, the first thing that comes into your mind is whether or not your company can pay off its debts or financial obligations if and when a payment is due. If you are unable to do so, this is where insolvency comes into the picture.
Insolvency is the state of being unable to pay the money owed by your company. This can be in two forms: cash-flow insolvency and balance-sheet insolvency. The first is when your company has assets to pay but doesn't have the right payment form, while the latter is when your company does not have enough assets to pay the debts at all.
What your obligations as a director are
As the director of an insolvent business, take note of the following:
You are responsible for preventing your company from trading so that you won’t be held personally liable for the debt.
You are responsible for providing proper consideration to the interests of your creditors if your company is in financial trouble.
There are also two vital steps that you can take in case of business insolvency, as follows:
You can engage with your creditors to make temporary financial arrangements.
You can appoint a Voluntary Administrator.
Failure to do any of these may lead you to be disqualified as a director, even fined and imprisoned in the event of a serious breach.
Alternative solutions to business insolvency
Now, here's what you can do if your business is insolvent during this COVID-19 crisis:
Temporary suspension of liability: The Australian Federal Government provides measures to help businesses during this crisis. One way is through the temporary suspension of personal liability for directors for trading while the company is insolvent for the next six months. This is why it's necessary to engage with your banks to ask for temporary relief, such as deferring loans for the next six months.
Voluntary Administration (VA) process: This process entails appointing an insolvency practitioner or voluntary administrator to take control of your company in the hopes of saving your business. The administrator's job is to decide whether your company can be salvaged, should be placed into liquidation, or is solvent and should not be in administration, to begin with.
Conclusion
At this point, you now know a little more about business insolvency and the alternatives that you can look at to help your business. We hope this blog has shed some light on what you need to do when your business has become insolvent during this COVID-19 outbreak.
If you're looking for a professional e-commerce accountant in Australia to aid your business, get in touch with us today to see how we can help!