What is insolvency?

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You often hear about a company going into insolvency or being insolvent, but what actually is insolvency?

Insolvency occurs when a company or an individual is unable to pay debts as and when they are due. When a company is insolvent, it is required to take action to minimise risks and legal wrongdoing. There can be significant penalties for a company and its directors if trading whilst insolvent.

There are two main options for an insolvent company:

1.      voluntary administration; and

2.     liquidation.

Voluntary administration is a process where an administrator is voluntarily appointed to take control of the company’s property and financial affairs and make a report to the company’s creditors on their findings. The report may recommend to the creditors to enter into a deed of company arrangement or for the company to go into liquidation. The deed of company arrangement is binding between a company and the creditors and determines how the company will address debt repayment and future business management.

Liquidation is a process where a liquidator is appointed through an application to court by a credtior or multiple creditors to wind up the company. The liquidator is tasked to take control of the company and collect and sell the company’s assets in the goal of repaying creditors with the sold assets. After the liquidation process is complete, the liquidator files a form to ASIC which leads to the company being deregistered.

Next steps

It is important to seek legal advice as a director of a company facing financial difficulties to ensure that you are not trading whilst insolvent and to ensure that all required duties are being met.

If you are a creditor where an insolvent company owes a debt to you, it is important to receive legal advice at an early stage to assess the successfulness and next steps to recover the debt owed. The longer a debt is outstanding, the more limited recovery options may be and this can decrease the likelihood of recovering the debt in full or at all.

If you have any queries in relation to insolvency or outstanding debts, please contact the team at Scanlan Carroll.