What is Corporate Insolvency?
Corporate insolvency is where a company is unable to pay its debts when they fall due for payment.
A company is solvent if it can pay its debts when they fall due and insolvent if it can’t. The financial state of the company is important because it determines what kind of liquidation the company will enter, as well as the types of investigations that a liquidator will undertake.
Three of the most common methods for coporate insolvency are voluntary adminstration, liqudation and recivership.
The Voluntary Administration or VA as it is often referred to, provides sufficient protection and flexibility to restructure a business with the view to save as much of the company’s business as possible and achieve a better outcome for the company, its creditors and shareholders than would occur if the company entered directly into liquidation.
Liquidation also refferred to as ‘winding up’ is the process by which a company is brought to an end and in which the company’s assests and property of the company are redistriubted.
Receivership is a legal process where an external party is appointed to sell or safeguard the assets of a company or business. The external party is called a Receiver if the role is simply to sell assets, or a Receiver and Manager if the role is extended to managing a business. The Receiver can be appointed by a Secured Creditor, usually a Bank, or the Courts.
Under Australian Legislation a director of a company that is insolvent or likely to enter insolvency in the forseeable future acts responsibily. Australian Corporate Legislation specifically states that a director must not trade a company whilst insolvent. There is a fiduciary duty upon a director to take action in these circumstances. This may involve appointing an administrator or liquidator.
There are a number of factors that can indicate that your company is experiencing financial distress. Being unable to pay critical creditors, staff superannuation and the Australian Taxation Office are the most common. Below are some of the signs the Australian Securities and Investments Commission (ASIC) states can indicate your company is undergoing financial difficulty:
- ongoing losses
- poor cash flow
- lack of cash-flow forecasts and other budgets
- 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
- overdraft limit reached or defaults on loan or interest payments, or
- overdue taxes and superannuation liabilities.
If a director believes their company is headed towards insolvency, it is imperetive they seek immediate advice on the company’s solvency status and what options are available.
Timely advice usually results in more options being available to the company and mitigates further losses to key stakeholders. E-Solvency can help find a low cost, online liquidation solution for companies facing financial trouble. That solution is eSolvency.