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Sterling Legal’s insolvency lawyers assist company owners or directors in efficiently resolving their financial shortfalls.

Insolvency is defined by ss 95A (1) – (2) of the Corporations Act (2001) as an entity or person unable to pay debts ‘as and when they become due and payable’.

In ascertaining whether a company is insolvent, the following factors are considered:

  • Available capital at time debts are payable;
  • Predicted cash flow based on past trends;
  • Access to funding;
  • Assets available to cover debts;
  • Borrowing capacity;
  • Debt extension options
  • ongoing losses
  • poor cash flow
  • absence of a business plan
  • incomplete financial records or disorganised internal accounting procedures
  • lack of cash-flow forecasts and other budgets
  • increasing debt (liabilities greater than assets)
  • problems selling stock or collecting debts
  • unrecoverable loans to associated parties
  • creditors unpaid outside usual terms
  • solicitors’ letters, demands, summonses, judgements or warrants issued against your company
  • suppliers placing your company on cash-on-delivery (COD) terms
  • issuing post-dated cheques or dishonouring cheques
  • special arrangements with selected creditors
  • payments to creditors of rounded sums that are not reconcilable to specific invoices
  • overdraft limit reached or defaults on loan or interest payments
  • problems obtaining finance
  • change of bank, lender or increased monitoring/involvement by financier
  • inability to raise funds from shareholders
  • overdue taxes and superannuation liabilities
  • board disputes and director resignations, or loss of management personnel
  • increased level of complaints or queries raised with suppliers
  • an expectation that the ‘next’ big job/sale/contract will save the company
  • Lose their job
  • Lose their assets as a means to repay debts
  • Be disqualified as a director and unable to become a director again
  • Face fines and/or jailtime

Indicators of insolvency

ASIC has listed the following as indicators of insolvency:

Implications of insolvency

Directors found to be operating an insolvent company in a debt-incurring manner may be held liable and subject to the following penalties and consequences

Civil Penalties

Under the Corporations Act 2001, operating insolvently can result in pecuniary penalties of up to $200,000 imposed against directors.

Compensation proceedings

Creditors can instigate proceedings against directors personally to recuperate their losses. This can occur alongside civil penalties.

Criminal charges

If an additional factor, such as dishonesty, is found in the insolvent operation of a company, a director may face criminal charges including fines and/or imprisonment.

If you suspect your company or business may be operating insolvently, contact the professionals at Sterling Legal to ensure you avoid these penalties.

If you suspect insolvency

If you’re a director who suspects your company is insolvent, contact Sterling Legal experts to help you carry out the following options:

  • Voluntary administration
  • Liquidation
  • Receivership

Voluntary administration evidences a director’s actions to avoid incurring further debt. This process places the company in the care of a voluntary assessor who determines the best course of action for the company.

Liquidation, also known as the ‘Winding Up’ of a company, is the process whereby an independent qualified liquidator administers the assets of a company to the benefit of its creditors. Following the administration of assets, the company is deregistered.

Receivership refers to the state of a company being dealt with by a legally appointed receiver. The receiver is appointed by a secured creditor who holds part or all of the company’s assets. Here, the receiver deals with the company’s assets to repay the debts owed to the secured creditor.

Unlike liquidators receivers deal with the debts owed to one creditor, rather than the body of unsecured creditors.

The insolvent individual

If an individual (as opposed to a company or businesses) becomes insolvent, he or she has the following personal insolvency administration options

Bankruptcy

A creditor who is owed at least $5,000.00 by a person unable to pay this debt, the creditor may place the debtor into bankruptcy by applying for a court order sequestering the debtors estate. To avoid this, a debtor can file a debtors petition admitting his state of bankruptcy. To avoid the harsh measures of bankruptcy, a debtor may enter into debt agreements or personal insolvency agreements.

Personal Insolvency agreements

Personal insolvency agreements are legally binding between the debtor and their creditors. Here, a trustee is appointed to control the property of the debtor and make offer to creditors as a repayment of debts in an agreed form (instalments or lump sum)

You’re personally insolvent. What now?

Personal insolvency results in forfeiture of assets for distribution to creditors. Those deemed personally insolvent may not engage in activities which will incur debt (e.g. application for loans).

Insolvent Directors

Directors who become insolvent may:

  1. Lose their job
  2. Lose their assets as a means to repay debts
  3. Be disqualified as a director and unable to become a director again
  4. Face fines and/or jailtime