If your company is in financial difficulty and heading towards insolvency, there are options available which allow a company to be guided through its financial distress. The best option for your company depends on the solvency of the company and the broad range of director duties and obligations.
Section 95A of the Corporations Act 2001 defines solvency as the ability of a company to pay their debts as and when they become due and payable. Insolvent is simply defined as not solvent.
In this article, we examine the three most common insolvency procedures:
A company will be placed in voluntary administration if the directors make a decision that the company is insolvent, or likely to become insolvent.
If the directors place the company into voluntary administration a voluntary administrator takes control of the company, investigates the company’s affairs and provides recommendations to creditors.
The aim of voluntary administration is to solve the debt problems of the company and bring the company back to life, if possible.
There are three possible outcomes to voluntary administration:
During voluntary administration there is a moratorium on unsecured creditors pursuing their debts owed by the company.
Liquidation involves winding up the company’s affairs, dismantling the company structure, selling the company’s assets and distributing the proceeds of sale to the company’s creditors. Liquidation is considered a last resort for a company in financial difficulty.There are three types of liquidation:
A receivership occurs when a secured creditor appoints an external person to collect and sell the company’s assets, after the company has defaulted on its contract either through non-payment or breach of other terms.
The receiver acts in the interests of the appointing party to ensure that the secured creditor obtains the debt which is owed to it. When the receiver has collected and sold enough assets to pay the debt to the secured creditor, the receivership terminates and full control of the company returns to the directors.
There are significant penalties for allowing your company to trade whilst insolvent. For example, a breach of the duty to avoid incurring any debts if a director is aware that a company is insolvent can give rise to civil and/or criminal penalties that may lead to personal liability for the company directors.
If your company is facing financial difficulty or you are unsure about the solvency of your company, we recommend that you seek immediate legal or financial advice.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9274 8820 or email email@example.com.