Case study 1 – Statutory Demand
Company A operated a small plumbing business in Western Australia. Due to a downturn in the housing market, Company A experienced a significant decline in sales resulting in the Company making losses.
The Company started to fall behind in payments to its suppliers and the Australian Taxation Office (ATO). As a result, the ATO issued the Company a Creditors Statutory Demand for payment of unpaid tax debts of approximately $100,000.
As the Company’s financial position was deteriorating and it had no means of complying with the Creditors Statutory Demand, the Director took steps to place the Company into liquidation, therefore ceasing any further action by the ATO in relation to the Creditors Statutory Demand. This action also prevented the Company from incurring further losses and avoided potential exposure for the directors to breaches of director duties including insolvent trading.
Case study 2 – Garnishee Notice
A local builder (Company) contracted to a third party (Customer) to undertake the construction of residential dwellings.
Although the Company had been trading profitable for some period of time, it soon found itself subject to a significant claim brought by a home owner in relation to alleged defects. After paying substantial amounts defending the claim, the Company started experiencing financial problems. As a result, the Company started falling behind in meeting its taxation obligations. Soon thereafter the Australian Taxation Office (ATO) issued a Garnishee Order on the Company’s Customer requiring all monies currently owed and future monies be paid to the ATO in reduction of the Company’s debt.
As a result of the Garnishee Order, the Company was no longer able to rely on the monies owed to it by the Customer to be used as working capital in the business and as such, the Company immediately became insolvent. After seeking advice in relation to the solvency of the Company and the options available, the Director of the Company, resolved to place the Company into liquidation.
Case Study 3 – Director Penalty Notice
The owner of a hair dressing salon had been successfully running the business for many years. Recently, due to increased competition in the local market, the hair dressing salon lowered its prices to remain competitive. As a result, profits deteriorated and the Company soon found itself in financial distress. Although the Director was continuing to lodge her Business Activity Statements on time, she failed to make any payments to the ATO in respect of the resulting liability.
The ATO subsequently issued the Director with a Director Penalty Notice requiring her to attend to one of the following three options within 21 days;
- Pay the debt in full;
- Enter into an arrangement to pay the debt off over a period of time; or
- Place the Company into liquidation.
As the Company was not in a position to pay the debt in full or enter into a payment arrangement, the Director resolved to place the Company into liquidation. As a result she avoided any potential personal liability under the Director Penalty Notice provisions.
Case Study 4 – Employee Entitlements
The Director of a Company had recently been diagnosed with a terminal illness. As a result of lengthy treatment, he was absent from the business for extended periods of time. During such absences, turnover decreased as the Director was the main point of contact with the customers and as such the Company started to experience significant financial concerns.
Upon return to the business, the Director decided to attend to an orderly closure of the business by completing all current orders. Several weeks passed and the final order was completed. All liabilities with the exception of employee entitlements were paid. As the Company no longer had any funds available to pay termination payments due to employees, the Company was insolvent and after seeking advice the Director resolved to place the company into liquidation.
By placing the company into liquidation, employees were eligible to participate in the Governments Fair Entitlement Guarantee Scheme (FEGS) for payment of their eligible outstanding employee entitlements.
Case Study 5 – Insurance Claim
Company Y was established for the sole purpose of managing a series of outdoor obstacle events on a twelve month contract.
The events held were successful and at the end of the contact, the Company had extinguished all its liabilities and distributed all surplus assets to its Shareholders.
Although the Company had ceased operating the Director wanted to maintain the Company as a vehicle to undertake future projects. 6 months later the Company was served with an insurance claim in respect of an injury sustained by a participant in one of the events held by the Company during the period it was trading. The claim was large and as the Company had ceased trading it did not have the financial capacity to pay the claim or defend the claim.
The Director resolved to place the Company into liquidation to avoid the cost of litigation and to deal with the claim of insurance company.