What is Insolvency
Have you ever asked yourself “what is insolvency?”
What does Insolvent Mean?
It is said that a business becomes insolvent when it cannot pay its bills when they are due for payment. Under current legislation, it is an offence for the directors of the company to continue to trade and incur even more debts, when they are deemed to be insolvent.
This is also known as insolvent trading.
What is insolvency in Australia?
There are three main types of formal administration, which a company that is having financial difficulties may find itself in, especially if its creditors or directors think that it is, or might well become insolvent. These are:
- Liquidation, this is also called winding up;
- Receivership; or
- Voluntary Administration or Deed of Company Arrangement.
There are two ways in which an external administrator can be appointed, voluntarily and involuntarily. A formal administrator can be appointed voluntarily (voluntary administration) when the company, or the directors of the company put itself into administration. A formal administrator can be appointed involuntarily (involuntary administration) at the request of a person or company which is owed money (also known as a creditor) by the indebted company (also known as the debtor).
The Options for a Business that is Insolvent
If a business is insolvent there are a few options open to it, these include:
What is Insolvency – Liquidation
When a company goes into liquidation, a liquidator is appointed to wind-up the company and sells the assets of the company to pay off any debts incurred. At this point, the company no longer exists, is deregistered and can no longer trade.
Usually, but not always, a company is liquidated by either Court ordered liquidations or creditors’ voluntary liquidations.
What is Insolvency – Voluntary Administration
Voluntary administration is a type of administration where an appointed professional does a thorough investigation of the financial position of the company and compiles a report outlining the history, financial position and status of the company and makes recommendations moving forward to the creditors of the company.
After the report has been compiled for the creditors, those creditors then decide if they will secure a deed of company arrangement, arrange for the liquidation of the company, or give the company back to the control of the directors.
What is Insolvency – Deed of Company Arrangement
What is insolvency? A deed of company arrangement is an undertaking to compromise on behalf of the company that is also binding on all of the creditors. This way a company may still be allowed to trade, pursuant to the arrangement contained in the deed, to make good the payments to the creditors.
What is Insolvency – Receivership
What is insolvency? Generally, a receiver is appointed by the secured creditor or some instances by the Court. When a receiver is appointed, their job is to realise the assets of the debtor company in favour of the secured creditor. The appointment of a receiver occurs at about the same time as the company is liquidated or goes into voluntary administration.
Call 1300 30 66 49 and speak to one of our experienced insolvency professionals today and we can explain what is insolvency.