Corporate Insolvency

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.

Click here to find out more about insolvent trading.  

Company Liquidation

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

A Creditors’ Voluntary Liquidation process is designed to help successfully realise and liquidate company assets in order to satisfy the needs of creditors. Creditors’ Voluntary Liquidation (also known as CVL) usually begins when company shareholders voluntarily agree to liquidation or when creditors agree to proceed with liquidation as a result of voluntary administration. It is typically the most common form of liquidation as it often represents the most feasible and efficient course of action when a company becomes insolvent. Directors are likely to pursue this option rather than wait for a court-ordered liquidation and risk appearing unresponsive to insolvency, which may result in penalties under the Corporations Act 2001.

Liquidation is not always the final and unavoidable nail in the coffin for an insolvent company. Sometimes a company can still be solvent when its members decide to wind things up. When this occurs, company directors and members can agree to Members’ Voluntary Liquidation (or MVL). This process is the best way to realise and liquidate a solvent company’s assets before distributing them amongst creditors and company members as required.

As the name implies, Court Liquidation is a court-ordered process and usually comes at the request of creditors who have determined a company is insolvent. Creditors who can verify a company is insolvent may have concerns or priorities regarding debt and can therefore get the courts involved to see the company wound up. Court Liquidation involves a court-appointed liquidator to administer the insolvency process.

Find out more about Court Liquidation.

Voluntary Administration

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.

Find out more about Voluntary Administration.

Receivership

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 

 Voluntary Administration and Company Liquidation are serious financial procedures that must be approached with the highest standards of openness, honest and integrity. That is why those who administer these procedures are typically third-party appointees who are certified and can work independently from the influence of external parties, like banks and other creditors.

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.

Find out more about the Administrator’s role.

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 Advisory Accountants 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.