Insolvency and Liquidation: Your Legal Protections and Rights in Australia

This article will explore the legal protections and rights available to individuals and businesses facing insolvency and liquidation in Australia. Understanding the legal framework and safeguards is crucial for those navigating the complexities of financial distress and the prospect of liquidation.

Insolvency and Liquidation Overview

Insolvency occurs when a business cannot pay its debts to suppliers, staff, or creditors as they become due. It is illegal for a business to trade insolent in Australia, so this becomes a severe issue. Several options are available to an insolvent company, such as business restructuring, voluntary administration, or receivership, but if the business cannot be saved, then the process of business liquidation may follow. Company liquidation involves the sale of assets to pay off creditors and the winding up of the company’s operations.

Legal Protections and Rights

When facing insolvency and potential liquidation in Australia, individuals and businesses have several legal protections and rights to consider:

Voluntary Administration

For companies facing financial difficulties but believing they can still turn things around, voluntary administration is an option that can provide temporary relief. During voluntary administration, an independent administrator is appointed to assess the company’s financial position and explore opportunities for a viable future, which may include a deed of company arrangement (DOCA) and a liquidation of certain company assets. This process maximises the return to creditors and saves the company from winding up or closing down the business.

Rights of Creditors

Creditors, whether secured or unsecured, have rights during the insolvency process. Once informed of the situation, they can participate in meetings to vote on important decisions, such as accepting a DOCA, voluntary administration, or appointing a liquidator. Creditors should also file proof of debts to establish their claims with the liquidator.

Winding Up Petitions

Creditors may file winding-up petitions in court to force the initiation of the process of compulsory liquidation of a company. However, legal protections are in place for business owners and company directors to challenge such petitions, and the company can apply to have the petition set aside if it has a genuine dispute about the debt or other valid reasons.

Directors’ Duties and Liabilities

Company directors have legal duties and responsibilities during periods of insolvency. They must act in the company’s and its creditors’ best interests, and failure to do so can result in personal liability for company debts. However, defences are available to directors who can demonstrate they acted honestly and reasonably in the circumstances.

Protection of Employee Entitlements

In the event of company liquidation, employees’ entitlements, such as unpaid wages and accrued leave, are prioritised over other unsecured creditors. The Fair Entitlements Guarantee (FEG) scheme provides a safety net for employees in case their employer cannot meet these entitlements.

Insolvency Advice

Seeking advice from an insolvency professional, such as the team at the Insolvency Advisory Centre, is essential when navigating the complexities of insolvency and liquidation. With over 30 years of expertise in insolvency law, we can help company owners and directors understand their rights, obligations, and available options.

Facing insolvency and potential liquidation can be a challenging and complex process in Australia. However, the legal protections and rights are designed to ensure fairness and maximise the return to creditors. Understanding these legal safeguards and seeking professional legal advice can help guide you through this challenging financial situation and make informed decisions about your future.