Keeping a check on insolvent trading

FAILURE to keep proper records could strip small business directors of the liability protection they gain by operating their business through a limited liability company structure.

By failing to keep track of their business’ credit situation, directors risk falling foul of insolvent trading provisions within corporations law, which would make them personally liable for losses the business incurs if trading while insolvent.

And failing to keep track of their tax obligations also makes directors personally liable for any unpaid taxes.

Receipt of a 222AOE notice means the business has 14 days to respond or the Australian Tax Office will come after its money. Unfortunately, the notice does not come on the same blue paper most other tax notices arrive on, and can easily be missed.

The chances of small businesses trading while insolvent are growing because businesses are taking longer to pay their bills. Many small businesses only pay their creditors after they themselves have been paid.

According to Dun & Bradstreet’s Australian Trade Payment Analysis for February 1999 to February 2001, businesses are taking an average 10 per cent longer to pay.

Because many small businesses trading on credit often do so with paper-thin margins, a major event, such as a bank closing off their overdraft, can trigger a collapse.

Australian Institute of Company Directors chief executive officer John Hall said that, technically, many small businesses might be trading while insolvent and unaware of it.

“I think there is a lot of focus on this issue now,” Mr Hall said.

WA companies facing allegations of insolvent trading include Joyce Corporation, Farmer Furniture and HIH Constructions.

Australian Securities and Investments Commission acting re-gional commissioner Michael Geth-ing said businesses needed to be able to pay their debts when they fell due.

“The problem area is likely to be in quality record keeping. They need to have a good record keeping and credit control system to know when they’re getting into trouble,” he said.

“As a small business proprietor, if they feel they can’t pay all their debts they need to speak to an insolvency professional.

“The recent blow out in payment terms exacerbates the problem. It become like a house of cards.”

Small Business Development Corporation managing director George Etrelezis said small busi-nesses needed to keep a close eye on their balance of trade to avoid insolvency problems.

“Small business owners often tend to extend their debtor terms beyond what their business can handle,” Mr Etrelezis said.

“Extending debtors’ trade terms increase the risk of a bad debt, and that hurts the bottom line.

“They need to make sure their terms of trade with their creditors match their terms of trade with their debtors.

“They have to avoid becoming a bank for their debtors.

“You only need one creditor to start enforcing a 30 to 45-day payment schedule and you’ve got trouble.”

Besides the personal liability risks from insolvent trading, small business directors also seem to forget to insure themselves.

Few directors would consider going onto the board of a high profile public company without taking out some director’s liability cover.

The cover is designed to protect directors and company officers from actions brought predominantly from shareholders, but in the case of small businesses it could be disgruntled employees or government agencies.

It covers directors for errors and omissions but not criminal charges, so will be of little use in insolvent trading cases.

Smith Coffey Insurance Brokers director Wayne Holt said most directors acted honestly and in good faith, but still made errors.

“Directors are coming under more and more pressure and society is becoming more litigious,” he said.

“Directors’ liability insurance is a growing market.

“There are increasing actions being taken by regulators and business competitors and small businesses are not immune.”