Corporate Insolvency occurs when a company is no longer able to maintain its financial commitments as and when they fall due.
In other words, if a company cannot pay off current debts on time and appears to be unable to pay off debt in the future, then it is considered insolvent.
Corporate insolvency can be the result of a number of circumstances, like poor risk assessment, cost of operational expenses or an unexpected drop in business revenue. Whatever the reason, it is vital to take appropriate action and to know what options are available to rectify corporate insolvency.
Is your company insolvent? Act now
By law, a company director’s duty is to prevent insolvent trading, which refers to when a company continues activities that incur debt while insolvent. Under Section 588G of the Corporations Act 2001 (Cth) (Act), it is an offence to continue trading while fully aware that your company is insolvent. Therefore, if your company incurs debts during a time when there are reasonable grounds to suspect that it is or could be insolvent, you could face civil penalties, compensation proceedings or criminal charges.
Company liquidation, or business liquidation, is a suitable options for your company when it is no longer profitable. Liquidation is the orderly ‘winding up’ of company affairs, and typically involves realising company assets, distributing owed realisation to creditors, distributing surplus realisation to shareholders and the sale or cessation of company operations in order to end an insolvent company’s existence. Commencing liquidation, in many cases, will also cease creditors from proceeding with legal action. There are three main types of liquidation: Creditors’ Voluntary Liquidation, Members’ Voluntary Liquidation and Court Liquidation.
Creditors’ Voluntary Liquidation
Members’ Voluntary Liquidation.
Voluntary Administration is suitable for your company if you are unsure what path the company should proceed with; it provides a moratorium period for the directors to consult with creditors and other stakeholders and agree on the most appropriate financial strategy.
The Voluntary Administration period is one of negotiation and requires a qualified and independent administrator to take full control of an insolvent company to determine the most appropriate course of action. This may result in strategic decisions that secure a company’s future or an insolvency plan that administers company affairs in a way that best suits creditors.
Receivership occurs when a secured creditor wants to reclaim the funds owed to them. The receiver will collect and sell sufficient assets to meet the debt owed to the creditor and is obliged by law to report their findings to ASIC. Receivership allows a company the opportunity to put a proposal to creditors rather than going into liquidation. The receiver’s appointment is usually subject to the terms of a charge, such as a mortgage or a fixed and floating charge over the company’s assets.
Liquidators and Administrators
Administrators take on the powers that a director would normally have over their company on appointment and have the ability to make executive decisions regarding the company’s financial future. Administrators must also be certified liquidators and are registered with ASIC. An Administrator’s acts a liaison between creditors and company directors and will determine if a company must be liquidated, be returned to directors, or if a Deed of Company Arrangement is required. Administrators also manage company property as they hold legal titles and effectively act as property agents.
Liquidators are responsible for overseeing the process of company liquidation. The Liquidator will realise all assets, make all recoveries, distribute resources to creditors, conduct all relevant investigations into the financial affairs of the company and distribute any surplus to shareholders. Liquidators will investigate the financial affairs of the company and ascertain whether or not improper or illegal transactions have been made. They will also be responsible for a thorough investigation of the books and records of the company, to establish when and under what circumstances the company became insolvent.
When your company is insolvent there is no need to feel guilt, shame or embarrassment about your situation. You are not alone; Insolvency Guardian is on your side and can guide you through your corporate insolvency today. We can put you back on the path to financial stability now, call us today.