1.What does insolvency mean? 2. Accepted indicators of insolvency 3. What is a shadow director? 4. Could a book-keeper be a shadow director?

Introduction Brendan Nixon and Dikesh Bulsara, Directors. Stanley Morgan Accountants is an insolvency accounting practice. Personal and corporate insolvency administrations (bankruptcy, liquidation, administration, personal insolvency agreements). Other related services (solvency reports). Located in Upper Edward Street, Spring Hill.

What does insolvency mean? Formal definition is simply the inability to pay a debt as and when it falls due. Inherently, this definition implies greater importance on cash-flow (liquidity) over the balance sheet position. Solvency analysis usually examines aged accounts payable, cash-flow forecasts, current liquidity ratios, profit margins, lending facilities, trading performance history, related party loan accounts. A business may be ‘asset rich’, but ‘cash poor’. Enforcement action by the court is based on whether a particular debt has been paid or not. Solvency may be raised as a defence, but can be difficult to prove.

Implications of insolvency 1.Business failure 2.Lifts the corporate veil 3.Limitation on future entrepreneurialism

Indicia of insolvency i. Sustained losses ii. Liquidity ration below 1 iii. Overdue taxes iv. Poor relationship with financiers, including inability to borrow additional funds v. No access to alternative finance vi. Inability to raise further equity capital vii. Supplier placing the debtor on COD terms, other otherwise demanding special payments before resuming supply viii. Creditors unpaid outside trading terms ix. Issuing of post dated cheques x. Dishonoured cheques xi. Special arrangements with selected creditors xii. Solicitors’ letter, summonses, judgments or warrants issued against the company xiii. Payments to creditors of rounded figures, which are irreconcilable to specific invoices xiv. Inability to produce timely and accurate financial information.

What we find in practice Disputes between parties. Inadequate budgets & planning. Not acting in the best interests of shareholders or creditors. Poor relationships with important creditors.

What is a shadow director? People who “act in the position of a director” or who have such an influence that the formally appointed directors act “in accordance with the person’s instructions or wishes”. Shadow directors have duties to a company and may be pursued personally the same as a properly appointed director. Corporations Act does accept that external expertise is required in the ordinary course of a business, and that people who provide such expertise will not automatically be considered shadow directors. Protection for those who explicitly make others aware that their powers are constrained and their role within the company is subject to a specific scope of engagement.

Could a book-keeper be a shadow director? Consider the following typical tasks of a book-keeper and the implication for being deemed a shadow director: Attending board meetings Paying creditors Reporting to the ATO & ASIC Communicating on behalf of a company Perceived managerial role.

Suggested action if insolvency suspected Bring concerns to the Company’s directors. Be informed of options. Be proactive with creditors. Obtain legal advice as to potential personal implications. Don’t necessarily rely entirely on a written agreement in respect of a shadow director defence.

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