Lack of advice leads to liquidation

Not seeking professional financial advice to lay out a comprehensive financial plan is one of the main reasons companies go into liquidation, according to national accounting and financial advisory firm William Buck.

The comments come as the firm urged the Federal Government to implement the safe harbour recommendations as outlined in the Productivity Commission report released last week to save billions of dollars by preventing companies going into liquidation.

The report said there should be a safe harbour provision that lets company directors look at restructuring options "without liability for insolvent trading".

Insolvency principal Sean Wengel said companies also become insolvent because they overcapitalise, and grow too rapidly.

Last year, the Financial System Inquiry recommended the Corporations Act 2001, should be altered to include safe harbour. It recommended that an insolvent director should still be able to trade while insolvent if they have set up a comprehensive financial plan.

The firm quoted the corporate regulator's figures to highlight that in the last financial year, insolvent companies with deficiencies, where liabilities surpass assets, totalling around $11.5 billion were placed into liquidation.

Over half of these were small to medium enterprises.

Professional services and health and lifestyle businesses made up 26 per cent of companies placed into liquidation, while building and construction made up 23 per cent.

Wengel estimates that the Insolvent Trading Safe Harbour recommendations could have saved over one third of these companies from going into liquidation.

"If a company can be saved, the government should be putting in every measure it possibly can to save it," he said.

"Companies in liquidation won't help stimulate the economy. The UK and US have both successfully encouraged similar measures to Safe Harbour which have significantly benefited those economies."


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