Insolvency

I need assistance with Insolvency

Insolvency is a term which describes the inability of a company, business or individual that is unable to pay its debts. The consequences of insolvency can be significant and irreversible. 

It’s important to know the early warning signs of insolvency and to seek advice. Usually, more options are available when you seek advice as soon as financial difficulty appears. 

Slaven Torline is a firm dedicated to providing straightforward insolvency solutions for individuals, businesses and companies.

Corporate Insolvency

What is corporate insolvency?

Corporate insolvency refers to the insolvency of an incorporated entity against these tests:

  • cash-flow test: does the company have enough cash to pay its debts?
  • balance sheet test: is the value of the company’s assets less than its liabilities?

Warning signs of corporate insolvency:

  • continuing losses
  • liquidity ratios below one
  • overdue Commonwealth and State taxes
  • creditors paid outside trading terms
  • special arrangements with selected creditors
  • inability to produce timely and accurate financial information.

Consequences of Insolvency for Directors

The Insolvency of a company can trigger personal liabilities for directors. Directors have a duty to prevent a company from trading while insolvent. They may be held liable to compensate the company for the debts incurred for the period within which it traded while insolvent.

I’m a Creditor of an Insolvent Company

As a creditor of an insolvent company you have certain rights, including:

  • requesting information from the external administrator
  • requesting meetings of the creditors
  • in certain circumstances, giving directions to the external administrator
  • appoint a reviewing liquidator
  • replace the external administrator.

Enforcing your debt

You’re not allowed to enforce your debt against the company – with the exception of enforcing a valid security interest against property of the company if you’re a secured creditor.

Recourse

Generally, your only recourse is to lodge a claim in the liquidation of the company and prove for dividend.

Pursuing directors

You’re not restricted from pursuing directors for personal guarantees in your favour as a result of a company’s insolvency – with the exception being during the voluntary administration period.   

I’m an Employee of an Insolvent Company

Your job may cease to exist as a result of your employer’s failure.

Your entitlement

All employee entitlements are payable when a company enters external administration. Employees are considered priority creditors and are entitled to be paid before ordinary unsecured creditors.

Order of priority

  1. Wages and superannuation guarantee charge
  2. Leave entitlements (annual leave and long service leave)
  3. Retrenchment payments.

Fair Entitlements Guarantee Scheme

If there are insufficient assets to pay your outstanding entitlements, your entitlements (with the exception of superannuation) may be covered by the Commonwealth Government under its Fair Entitlements Guarantee Scheme.

Creditors' Voluntary Liquidation

A creditors’ voluntary liquidation is initiated by shareholders for the purposes of winding up an insolvent company and distributing its assets to its creditors.

Liquidator

Upon the appointment of a liquidator, the powers of the directors are suspended and the liquidator completely controls the company’s affairs.

Report to creditors

The liquidator reports to the company’s creditors and to ASIC about the reasons for the company’s failure and the extent to which a dividend may be payable.

Cessation

At the conclusion of a creditors’ voluntary liquidation, the company ceases to exist.

Voluntary Administration

Voluntary administration is a process initiated by the director or board of directors when they believe that their company is insolvent or likely to become insolvent.

Voluntary administrator

Upon the appointment of a voluntary administrator, the directors’ powers are suspended and the voluntary administrator takes control of the company’s affairs.

Greater return

If the business cannot be restructured, the voluntary administration process provides an opportunity for greater return to creditors than if the company was immediately wound up.

Purpose

To maximise the chances that the company’s business will survive or provide a greater return than if it was immediately wound up.

Investigations

This is usually for a period of 25 to 30 business days while investigations are undertaken and a report is prepared for creditors.

Recommendations

The voluntary administrator recommends whether creditors should:

  • accept a proposal to restructuring the business through a deed of company arrangement
  • wind up the company
  • allow the administration to end.

Creditors vote on one of the above options.

Provisional Liquidation

A provisional liquidation is the court appointment of a liquidator when it believes that the business and assets of the company are at risk of being dissipated or consumed prior to a hearing of a winding up application by the court.

Application

An application to appoint a provisional liquidator may be made by a creditor, its shareholders or its directors.

Purpose

The purpose is to protect the Company’s assets and business during the period within which the winding up application is filed and heard.

Provisional liquidator

The provisional liquidator takes control of the company. They conduct an investigation into the affairs of the company and prepare a report for consideration by the court.

Court Liquidation

A court liquidation is a winding up commenced by court order.

Motivations

Court liquidations are generally commenced by a creditor seeking to have the company wound up on the grounds that it is insolvent. The court may also order a winding up when there are irreconcilable disputes between directors or between shareholders.

Insolvency

The applicant creditor must demonstrate that the company is insolvent before the court will make an order for the company to be wound up. The court will also order that a liquidator be appointed, usually nominated by the applicant.

Liquidator

The powers of the directors cease and the liquidator takes control of the company’s affairs for the purposes of winding up the company and distributing its assets to its creditors.

Report to creditors

The liquidator reports to the company’s creditors and to ASIC about the reasons for the company’s failure and the extent to which a dividend may be payable.

Cessation

At the conclusion of a court liquidation, the company ceases to exist.

More information

Court Liquidation

Receiverships

Receivership is when an independent qualified person – generally a Registered Liquidator (the Receiver) – is appointed by a secured creditor (or court) to take control of some or all of the company’s assets.

Receiver and Manager

If a receiver has the power to manage the company’s affairs, they are known as a Receiver and Manager.

Role

Generally, a Receiver’s role is to realise the company’s secured assets and pay the secured creditor from the realisation proceeds. In some circumstances, a receiver may be appointed by a court for the purposes of protecting assets pending a resolution of a dispute or in family law proceedings. 

Obligations

Receivers are not required to account to the general body of unsecured creditors, however, they have certain obligations to pay priority employee entitlement claims before returning any funds to the secured creditor.

Personal Insolvency

Learn More About Personal Insolvency

Personal insolvency refers to individuals who cannot pay their debts.

Individuals facing personal financial pressure may have the option to negotiate directly with their creditors to reach suitable repayments. But typically one of these three options happen:

  • individuals are forced to take formal steps of becoming Bankrupt
  • are made Bankrupt by their creditors
  • undertake a formal arrangement with their creditors under the Australian Bankruptcy Legislation.

Bankruptcy

Voluntary or involuntary

Bankruptcy is either initiated either voluntarily in circumstances where an individual is unable to pay their debts or where a creditor successfully applies to the Court for an order that a person be made bankrupt.

Appointment of Trustee

In both cases, a qualified person known as a Trustee in Bankruptcy is appointed to administer bankruptcy.

Restrictions

For the duration of bankruptcy (generally 3 years) all bankrupts are subject to certain restrictions and must report to their Trustee about their affairs, such as income earned.

Formal Part X (Part 10) Arrangement with Creditors

The Bankruptcy Act 1966 contains provisions which allow an individual facing bankruptcy to enter into a formal arrangement with their creditors to satisfy their debts without being made bankrupt.

Personal Insolvency Agreement

This arrangement is called a Personal Insolvency Agreement. It documents the arrangement between the debtor and their creditors as to how they will satisfy their debts.

The Controlling Trustee is required to provide a report to the debtor’s creditors setting out certain facts and recommending whether to accept the debtor’s proposal.

More information

Alternatives to Bankruptcy

Fact Sheets

Indicators of Insolvency

There is no hard and fast rule in determining the insolvent state of a company, however, it is important to understand and be aware of the early warning signs of insolvency.

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Director Penalty Notice

A Director’s Penalty Notice (“DPN”) is issued by the Australian Taxation Office under Section 222AOE of the Income Tax Assessment Act 1936 which makes directors personally liable for two types of tax debts, Pay as You Go (“PAYG”) withholding and Superannuation Guarantee Charge (“SGC”).

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Creditors’ Voluntary Liquidation

A creditors’ voluntary liquidation is initiated by a company when the directors believe that the company is insolvent, or likely to become insolvent in the near future, and the company and/or business should not remain in existence.

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Voluntary Administration

A voluntary administration is an option for an entity experiencing financial difficulty to appoint an independent external administrator to take control of the affairs of the company to determine the future direction of the company.

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Deed of Company Arrangement

A deed of company arrangement (DOCA) is a binding arrangement between a company and its creditors setting out how the company’s affairs will be dealt with to resolve the company’s debt problems without having to liquidate the company.

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Court Liquidation

A court liquidation is a Court appointment that takes place as a consequence of an applicant, usually a creditor, applying to the Court for an order that a company be wound up in insolvency.

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Alternatives to Bankruptcy

The bankruptcy legislation provides the option for a person unable to pay his/her debts (‘debtor’) to put forward a proposal to creditors for a Personal Insolvency Agreement (‘PIA’) as an alternative to going bankrupt.

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Consequences of Bankruptcy

It goes without saying that becoming bankrupt has significant consequences. Advice should be sought from us when contemplating bankruptcy as your particular circumstances will have to be assessed and advice provided specific to your particular circumstances.

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How do I become bankrupt?

Bankruptcy is either initiated either voluntarily in circumstances where you are unable to pay your debts or where a creditor successfully applies to the Court for an order that you be made bankrupt.

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Getting out of Bankruptcy

Usually bankruptcy runs for a period of three years and one day, however if your circumstances allow it you may be able to have your bankruptcy annulled (cancelled).

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