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:
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
Under the Corporations Act 2001, operating insolvently can result in pecuniary penalties of up to $200,000 imposed against directors.
Creditors can instigate proceedings against directors personally to recuperate their losses. This can occur alongside civil penalties.
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 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
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).
Directors who become insolvent may: