How should I respond to legal demands?

What to do about legal demands – ATO Penalty Notices, Wind Up Notices and Statutory Demands.

If you have received a legal demand: an ATO Penalty Notice, Wind Up Notice, Statutory Demand or legal demands from solicitors, you need time to identify your options and time to work out the solution. If only the debt, creditor, legal claim and cash flow problems would go away for a while to give you some time. Unfortunately, they are not going away which is why you must act quickly to identify your best options before someone else makes that decision for you. But having said that, it may be possible to buy some. Obviously, it depends on the challenges you are facing, but the following are some common situations and some possible time creation techniques. Remember – there will be unique factors (and opportunities) to consider in your individual circumstances.

Let’s begin with the most urgent and critical challenges:

You have received (or expect to receive) a Director’s Penalty Notice from the ATO because of unpaid group tax debt.

In this case, there is no time to delay. Act now – call us immediately. Go to our information page on ‘Directors Penalty Notice’ for the reasons. Yes, we can still help save your business but do not delay.

You have received legal notice of an application to wind up the company in insolvency.

As above, call us immediately. You may have slightly more time on your side but the consequences of this creditors application following a judgment debt coming before the courts is usually (but not in all cases) the appointment of a liquidator chosen by an aggrieved creditor. The liquidator may be very aggressive and the (legal) charges will have already started. You and your business need careful, precise and strong advice now. If you take legal advice, make sure the solicitor has expertise in insolvency law.

You have received notice of an application to the courts for a Statutory Demand for payment.

This is also very serious. This is the step before the wind up application above. If the court agrees with the application, you have no option (in most cases) but to pay the debt to the creditor. However, in this situation, if there is a valid argument about the debt, you can present your counter claim, cross-claim or other objection to the court. You will require legal advice from a commercial solicitor. In the meantime, use the time to review the threats and opportunities to assets and income streams. Consider whether the company would be better to restructure now rather than have it forced upon it.

You have received a reissued tax assessment, solicitor’s demand, threats of legal action, continuous phone calls from multiple creditors.

It’s time to review the overall debt and creditor position and to determine whether the issue is a ‘timing’ or ‘ongoing problem’. In either case, the immediate problem needs to be addressed and changes put in place to safeguard the future and, most importantly, check that your personal position is insulated and secured. Use the current challenge to make real change and improve the future of your business. Did you know that experts like Harry Mills of the Mills Group, management consultants, believe that 80 percent of a typical business’s activities are not profitable? In other words, that 20% of the average business is subsidising the rest of it. That’s just one angle to look at once the short-term issue has been resolved. Moreover, you should analyse how your relationship with the business should be structured so that you receive the legal and financial priority you deserve. You need to look at the assets and liabilities and the opportunity for applying commercial valuations and realization to reflect your legal priority. Again, act now – resolve to make it better.

You are getting hostile legal claims or threats from creditors.

Some creditors are uninterested in negotiating with owners, or at least are just focussed on legal process outcomes. Most often they are not your key suppliers with leverage, but ones that can be substituted. They will issue a ‘Statutory Demand’. Once this lapses then they apply to the court to wind up the company.

Engaging professional advisors is a good signal to hostile creditors as they will see you are serious. Our immediate response will be negotiating with the creditors to defer or withdraw the application. This averts the crisis and provides time for us to develop a short-term remedy. Some creditors like the ATO & WorkCover are process driven, so be aware of their timetable.

Work out a strategic and tactical plan that best suits your situation, and with your approval get to work. The key is to regain control and buy some time.

You are experiencing disputes with other directors or shareholders.

Perhaps there has been a divorce or a breakdown in a friendship. This can be cancer in a business and often the more you trusted each other in the past, the more hurt, angry and vindictive people can become. You can never tell where such disputes will lead but whatever you do, allow for the worst (because it often happens), protect your position and try to make common sense decisions now. Often an expert third party can knock heads together and get a good resolution, thus avoiding the ultimate disaster of having to go to court and/or appoint an expensive liquidator to resolve the issues. Good people skills are a must. Experience and ‘authority’ are essential. There are many stages for possible resolution but if it gets serious, techniques can include the third party using the solicitors of the disputing parties getting agreement from the disputing parties to have legal authority to negotiate a resolution which binds the parties. We have seen this technique save so much money, time and get a good outcome.

You just don’t have enough cash to pay the bills – creditors, legal claims or the ATO debts, maybe even wages.

Not all is not lost. Again, you need to involve an expert third party to review the problem and propose some immediate cash flow solutions. Often a well-credentialed outside party can make the difficult calls to buy you enough time to make the right strategic calls, while refinancing or equity partners can be found, or the business is restructured. In the medium term, look at using creditors, (especially your good customers which people often resist approaching), to provide temporary extra time. Get a third party involved to pressure debtors to pay faster, issue low cost court documents to demand late debtors pay up now. There are solutions. A warning – please take care using your own (personal) credit lines to finance your company’s liabilities. If you have already done this, or are tempted to, then call us for some immediate paperwork you should put in place to protect your personal position against other creditors. It is so common to find directors have used their own credit cards without protecting their personal positions.