GLOSS Issue 19 DEC 2014-JAN 2015 - Page 46

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 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.