Employee Entitlements
Employee entitlements can also be a significant liability in the books
of a business. These amounts include:
• Unpaid Wages;
• Unpaid Superannuation; and
• Unpaid Leave (including provisions for Long Service Leave).
When a business is subject to a bankruptcy or liquidation, the
government may pay out certain amounts owing to employees
(excluding superannuation) via the Fair Entitlements Guarantee
(“FEG”) scheme.
This scheme allows employees to be paid their entitlements earlier than
they might otherwise be paid through the liquidation or bankruptcy
and the government then stands in the employees’ shoes (including
with respect to their priority) for the purposes of dividends from the
bankruptcy or liquidation.
Further, the Australian Securities and Investments Commission (“ASIC”)
now has the power to liquidate companies in the situation where there
they have ceased trading and owe entitlements to their employees, so
that the employees can benefit from the FEG scheme.
Beneficiary Loan Accounts
Many businesses are traded through a discretionary
trust with a corporate trustee. It is common place
that the distributions that are made out of the trust to
beneficiaries are “loaned back” to the business which
generates a beneficiary loan account. Although many
accountants may advise that these distributions and
loan backs are merely “paper transactions” or “journal
entries” it is important that these loan accounts are
treated as any other liability account in the balance
sheet, for analysis purposes. They can be called upon
at a future point in time
Insolvent Trading
It is vital that accounting records for an entity are
properly kept so that directors are conscious of the
solvency position of their entities on a regular basis.
This is vital in business operations, as if a company is
trading whilst insolvent, the directors personally can
be sued by either a liquidator or a creditor for any
liabilities that have been incurred during the period
that the company was insolvent. It is for this reason
that as soon as directors identify that their company
is insolvent or about to become insolvent they must
discuss the issues with their advisers and/or a suitably
qualified insolvency practitioner.
Please note that there are a number of “Pre-Insolvency
Advisers” who may claim that they can assist
companies with their insolvency situations. Unless you
are dealing with a qualified insolvency practitioner,
however, these business relationships can cause more
harm than good. “Pre-Insolvency Advisers” are often
unqualified, unregulated and charge a substantial
amount to “prepare your business for an insolvency
appointment”. Unbeknown to many business owners
that deal with these “Pre-Insolvency Advisers”, many
of the actions that they attempt to take to “protect” a
business from the powers of a liquidator are voidable
by the liquidators. This means that the business
owners may have spent a considerable amount of
money to put them in the same position they were in
at the start. A reputable insolvency practitioner who
is qualified to advise on these matters generally are a
registered or official liquidator or a registered trustee
in bankruptcy and be a member of the industry body,
the Australian Restructuring Insolvency and Turnaround
Association (“ARITA”).
Sum-up
The above issues are relevant to most businesses,
however at different levels of significance. Whenever
in doubt, always seek further advice from your advisers,
and if warranted, seek a second opinion.
If you have queries with respect to any issues outlined
above or insolvency in general, please do not hesitate
to contact me on [email protected]
This article is intended to provide general information
only in summary format on relevant issues. It does not
constitute legal or financial advice, and should not be
relied on as such.