Consequences of Insolvency in Australia
Insolvency happens when an individual or a business is unable to repay their debts as they start becoming due and payable. People often get confused between bankruptcy and insolvency, but there is a clear distinction between the two according to Australian law.
Bankruptcy applies to individuals and insolvency applies to organisations, with each having a particular process. Just like declaring bankruptcy has its consequences, a company becoming insolvent also has to deal with the consequences.
Insolvency is the generic name for entities that can pay their debts. Within that, personal insolvency relates to bankruptcy, debt agreements, Personal Insolvency Agreements and ‘corporate insolvency’ relates liquidations, receiverships, DOCAs etc.
What is Insolvency in Australia?
Insolvency happens when an entity faces financial distress and fails to repay its debts. It is essential to note that corporations are treated differently compared to individuals in such cases. The court interprets corporate insolvency through the usage of a cash-flow test – this only happens when assessing when a company became insolvent and generally only when a Court is considering a ‘voidable transaction.’
There are numerous consequences for companies that become insolvent. The Corporations Act does include certain statutory defences for the company directors. However, it would be difficult for the directors to use these defences to their benefit if they had failed to stay informed about the company’s financial position.
Some of the major consequences of insolvency in Australia include:
If the company is found to be conflicting with the insolvent provisions as specified in the Corporations Act, it will result in civil penalties that would be charged against the director of the company. These penalties might include pecuniary penalties that could be up to $200,000.
These proceedings for the money lost by the creditors could be initiated personally against the director of the company by a creditor, liquidator, or ASIC. Aside from the penalties, the compensation proceedings order might be made.
These payments could be unlimited and often result in the personal bankruptcy of the company’s director. The director’s personal bankruptcy would further disqualify them from acting as a director of the company or managing a company.
If the court finds one of the factors of insolvency to be dishonesty, it might lead to criminal charges being filed against the company’s director. This can result in imprisonment of around five years, a fine up to 2,000 penalty points, or both.
If the director is found guilty of a criminal offence, it can result in the disqualification of the director. ASIC has prosecuted numerous directors who were found guilty of letting their companies incur more debts when it was already insolvent. Liquidators have successfully sought orders to make the company directors personally liable for the debts incurred by the company.
Fortunately, there are steps that the company can take to protect itself from financial distress and reduce the possibility of entering insolvency.
How To Identify Insolvency?
The best way to prevent the insolvency of your company is to learn how to identify the major signs. It is also important to consult a bankruptcy or insolvency expert to ensure the survival of the company.
Many companies try to resolve the problem themselves without seeking expert consultation and end up worsening the situation. Some of the major warning signs include the following:
l Poor cash flow
l Ongoing losses
l Not managing financial records or not organising the internal accounting processes
l Overdraft limit reached or defaults on a loan or interest payments
l Increasing queries or complaints by the suppliers
l Lack of or poor business plan
l Continuously mounting debt where the liabilities are becoming greater than the assets
l Neglecting to create budgets and cash-flow forecasts
l Unrecoverable loans
l Difficulties in collecting debts or selling stock
l Letters, summonses, demands, warrants or judgements from solicitors piling up against the company
l Inability of obtaining finance
l Difficulties in raising funds from shareholders
l Overdue superannuation liabilities and taxes
l Director resignations, board disputes and/or management personnel loss
Is Insolvency Right For Your Company?
The best way to determine whether or not insolvency is right for your company is to consult a registered insolvency expert who can evaluate the current financial situation of your company.
It is important to be aware of the problems, find the root cause and determine your options. This will help you make informed choices and might help you save your company. Some possible options might include modifying the activities of your company, restructuring the company, refinancing, or appointing an administrator.
There are multiple ways of dealing with insolvency based on your situation to avoid insolvency. Using the right professional insolvency assistance, you would be able to make an informed decision and come out of your financial problems. You can get a no-obligation, free consultation with our experts to discuss your insolvency problems.
As a Trustee in Bankruptcy, Ross Thomson is often required to think outside the box. As well as creative thinking, Ross brings compassion to the table.
For Ross, it’s important to see the people behind the financial problem –not just numbers.
Ross recently helped a bankrupt client who lives in a retirement village with her seriously ill husband.
The unit she & her husband live in is not owned by them, but subject to a 20-year lease.
The money to be repaid by the management was due only at sale, when the client finally left the retirement village.
Sale of the unit was likely to take several years &, if he did sell the couple’s unit, Ross realised he would be effectively evicting them from their home, without resources or family to help them.
Ross decided to contact the retirement village management & put a proposal to them that they prepay some of the moneys they would otherwise pay the client.
The village management considered the proposal & have agreed to prepay some of the moneys otherwise due.
The client is relieved that she will not be evicted & can now concentrate on helping her husband through his health issues.
The moneys paid represented about 75% of what would have been available to creditors if they waited two years.
It is a win for the client and for the creditors.
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