Corporate Insolvency Explained

When a business finds itself in financial difficulty, there are many reasons. It could be due to poor cash flow resulting from adverse economic conditions, an unfavourable legal action against the company, unpaid creditors, or ATO debt issues, which arise when people can’t pay their taxes on time. Early signs this may be happening to your business include:

• Business debts are piling up.
• Cash flow problems.
• Unable to pay your employees and suppliers.
• Being chased for money by creditors, government agencies or suppliers.
• You have lost the passion or motivation that you first had for your business.

It can be a tough decision to make, but several options are available for you. These include assistance in reaching an arrangement with your creditors, getting the help required when winding down business operations or support during Bankruptcy proceedings, Voluntary Administration or Company Liquidation. Getting the right advice and guidance can make all the difference to the outcome and your peace of mind.

Insolvent Company Trading

An insolvent company is a business that cannot pay its debts when they fall due for payment. Generally, this occurs because the entity has insufficient liquid funds available, and there are no plans on how the restructuring of finances might take place if one were even possible. An investigation into insolvency is focused on the inability to pay significant debts and how this can be resolved.

Insolvent company trading occurs when company directors allow their company to incur debts when the company is insolvent, resulting in civil penalties, compensation proceedings and possible criminal charges.

A liquidator can then claim compensation against a director if those debts are unpaid when insolvency or the liquidation of assets commences. In such a situation, a director may be held personally liable to compensate creditors for the outstanding debts incurred from when the corporation became insolvent to the start of the liquidation.

Insolvency Explained – Trading Claims?

The Insolvent Company Trading Act allows the Liquidators to make insolvent trading claims. If they decide not to make a claim, creditors may start their actions, but creditors’ claims are limited to the amount of their debt.

By law, liquidators are obliged under the specific provisions of the Corporations Act 2001 to investigate the existence of an insolvent company trading claim and, if so, take appropriate action.

Company Directors have a positive duty to prevent the company from trading if it is insolvent. Under the Corporations Act, failing to stop a company from incurring debts if it cannot pay is a breach of the directors’ duty. Directors may have to compensate the company for losses creditors have incurred under that breach of duty.

What Are the Signs of Corporate Insolvency?

• The company cannot pay its debts as and when they are due and are meant to be paid promptly.
• The company cannot offload assets at short notice to meet any debts owed without affecting the ability of the company to continue to trade comfortably at a reasonable profit margin.
• Key internal stakeholders have resigned, citing concerns about the company’s financial health or trading position.
• Agreements with financiers have gone into default or are likely to default.
• Trading losses are continually occurring, and cash flow is problematic. The sale of stock is slow, and debts aren’t collected systematically.
• An absence of a budget or business plan or insufficient to monitor operations and the company’s financial position is unknown.
• Funding facilities have reached their limit, and you cannot negotiate a new limit or further financing.
• The company cannot produce accurate financial information timely to comply with regulatory or other third-party requirements.
• Even though directors are considering continued funding for trading losses, there is no recovery plan.
• The company is paying your creditors outside of agreed terms or in amounts not specific to invoices, or your suppliers have placed you on cash-on-delivery (COD) terms only.
• Taxation obligations aren’t being paid when due, such as PAYG, GST or Superannuation, due to cash flow or the reluctance of the directors to lodge such returns.
• Legal actions have been taken, or notice has been made of such action against your company.
• The company is making frequent credit payment arrangements and is in default.

What Are the Next Steps if Facing Corporate Insolvency?

Unless you can restructure, refinance, or obtain further equity funding, you should consider going into Voluntary Administration or Liquidating your assets or company.

The Insolvency Advisory Centre has the expertise to guide you through these processes, insolvency law, and insolvency proceedings and relieve some of your financial burdens. We encourage those who need our assistance to call us at 1300 887 210 for a complimentary, no-obligation discussion about how we can help with Bankruptcy, Insolvency and Liquidation.