Have you received a Director Penalty Notice (DPN) or a Federal Court bankruptcy notice or windup because you have not paid a tax debt?

If so, the first thing to determine is whether you or your company is bankrupt or insolvent.  If not, then we should be able to organise a payment plan for you.

Individual bankruptcy

The test for whether a person is bankrupt is whether they are unable to pay their debts when they are due.

The time period within which you can liquidate or cash in assets to avoid bankruptcy can vary depending on several factors including the nature of your debts, the demands from creditors, and the legal processes involved. It’s important to recognize that there is no strict standard time frame for this, and every financial situation can be unique.

If the ATO has initiated legal action against you or if you’ve received formal demands for payment, this may limit the time you have available. Also, if you’re considering selling assets to avoid bankruptcy, it’s important to do so in a transparent and legal manner, as selling off assets under certain conditions could be viewed as an attempt to defraud creditors.

When is a company insolvent?

Section 95A of the Corporations Act 2001 (Cth) defines a company as being insolvent if it is unable to pay its debts as and when they become due and payable.

The cash flow test looks at whether a company can meet its liabilities as they fall due from the cash resources immediately available to the company, including the cash resources that the company can procure through the realization of its assets or borrowing.

However, in practice, determining bankruptcy or insolvency is not always straightforward.

Courts will typically consider a range of factors including:

1. Cash Flow Projections: Courts might examine the company’s cash flow forecasts to assess its ability to pay its debts in the near future.
2. Overdue Debts: A history of overdue debts, particularly where the company is not disputing them, might indicate insolvency.
3. Availability of Assets: The availability of assets which can be readily turned into cash, and the ability to obtain additional financing, can be relevant.
4. Financial Records: Inadequate financial records might be seen as indicative of insolvency.
5. Balance Sheet Test: While the cash flow test is the primary test, in some cases, courts might also consider the balance sheet test, which looks at whether a company’s liabilities exceed its assets.
6. Reliance on External Financing: A dependence on external financing to pay ordinary business debts might be taken as an indicator of insolvency.
7. Bad Faith Conduct: Evidence of conduct such as issuing bad checks, not paying tax, or entering into transactions that are intended to prefer certain creditors, might also be relevant.

Waterhouse Lawyers can assist to determine if your company is insolvent and if it is not arrange a payment plan with the ATO.