Insolvency is the inability to pay all your debts as and when they fall due.
Insolvency is the inability to pay all your debts as and when they fall due.
It can apply to any legal entity but is most commonly used to describe the financial affairs of individuals and corporations.
Corporate insolvency in Australia is regulated by the Corporations Act 2001 (Cth) (the Act). Insolvency of an individual is dealt with according to the bankruptcy laws of Australia.
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What are the indicators of insolvency?
There is a checklist of insolvency indicators which is used to assess the financial situation of a company.
The indicators include:
Ongoing losses over a sustained period, without enough working capital to absorb them, can render a company insolvent.
Liquidity ratios below one
A company’s liquidity ratio is produced by comparing its current assets with its current liabilities, provided those assets can be realised quickly.
Other factors such as cash flow, the age of debtors, and availability of borrowed funds must also be considered.
Avoiding Commonwealth and State tax liabilities is a common but unsustainable way for a company to survive and maintain cash flow.
Poor relationship with current bank
A bank will have information not available to other creditors, such as available funds and cash flow. A company may have been refused further finance from the bank due to a history of loan defaults or dishonoured cheques, or because of the company’s deteriorating financial position.
No access to alternative finance
Insolvency is linked directly to an inability to obtain ready cash to cover debts. If a company in need of funds is unable to convert short-term debt to long-term debt, or borrow money from a non-bank source to overcome a cash crisis, this suggests a cash flow problem.
Inability to raise further equity capital
If potential equity investors known an eventual return may be delayed or uncertain, they will not be satisfied that the return outweighs the risk.
Suppliers imposing restricting trading terms
When a company is not paying debts on time, a creditor may institute terms such as payment on delivery of goods or stop supplying goods until the level of debt decreases.
Creditors unpaid outside trading terms
A company increasingly making payments outside trading terms shows it may be having difficulty paying debts when they fall due.
Post-dated and dishonoured cheques
A post-dated cheque flags to a creditor that the company does not have funds to pay its debt at that time but expects to have funds by the date of the cheque.
A dishonoured cheque demonstrates that the company does not have enough to pay in full.
Special arrangements with selected creditors
Creditors may agree to make special arrangements (such as a payment plans) to ensure that trade continues and that there is some repayment of debt.
This can include solicitors’ letters, summonses, judgments or warrants against the company, which imply that creditors have increasing concerns about the company’s ability to pay debts.
Payments of irreconcilable rounded sums
These are payments to a creditor that are not reconcilable to specific invoices. This is usually done because a company cannot pay its debt in full and has not been successful in negotiating a payment plan.
Inability to produce timely and accurate financial information
A company has an obligation to keep accurate financial records under the Act. If it fails to keep records, it will be deemed to have been insolvent for the period that the records were not kept.
If your company has any of these indicators, or you have concerns about how your company is travelling financially, call Gibbs Wright Litigation Lawyers for advice.
How we help
How we can help you
Gibbs Wright Litigation Lawyers can do a full review of both your debtors and creditors, as well as your overall financial circumstances. We are also diligent and flexible with our fees. We can advise on mechanisms provided by the Act for a company to secure protection from creditors’ claims and handle cash flow difficulties.
These mechanisms include:
Safe harbour provides company directors with protection from liability for insolvent trading while they take advice and devise a plan to restore the company and achieve a better outcome than liquidation.
Safe harbour can enable directors to undertake a corporate restructure outside a formal insolvency process.
To be eligible, a company must have all of its Australian Taxation Office reporting and lodgements up to date and not have any unpaid employee entitlements.
Voluntary administration enables an insolvent company to present a formal proposal to its creditors which will give them a greater return than if the company were liquidated.
If the proposal is accepted by creditors, the company usually continues to trade, and control of the company reverts to the directors once the proposal is completed.
If creditors do not accept the proposal, the company will be required to go into liquidation.
During the administration process there is a moratorium against creditors’ claims against the company and its directors.
Deed of company arrangement
The formal proposal put forward to creditors under a voluntary administration, if accepted, is formalised in a deed of company arrangement (also known as a “DOCA”).
The process set out in the deed must be strictly followed by the company to trade out of its financial difficulties. If the company breaches the terms of the deed, it may be placed into liquidation.
A company can enter liquidation voluntarily by resolution of the company directors and/or members, or as a result of its creditors applying to the court for an order that it be wound up.
Liquidation usually involves the closing down of the company’s business, the sale and distribution of the proceeds of its assets for the liquidator’s fees and creditors’ claims, and the deregistration of the company. Its affairs are then said to be “wound up” and it ceases to exist as a legal entity.
Protection from insolvent trading
If a liquidator finds that company’s directors continued to trade while the company was insolvent, the liquidator and/or the company’s creditors can sue the directors for compensation for insolvent trading under the Act. A primary defence to an insolvent trading claim is that the director reasonably believed the company was solvent at the time it incurred the debt or debts.
We want to help businesses stay afloat, and we know that in times of financial restraint, obtaining good legal advice can be a tough decision. Call us today for a no-obligation consultation about your insolvency matter.
Why choose Gibbs Wright Litigation Lawyers
Gibbs Wright Litigation Lawyers has experience in litigation using the procedures prescribed by the Act. We can provide corporate insolvency advice to small to medium corporate enterprises anywhere in Australia, from our Brisbane base.
- Commercially viable outcomes
- Dedicated litigation firm
- Outstanding client satisfaction
- High success rate
- Direct contact with your lawyer
- Brisbane-based litigation team
Frequently Asked Questions
Insolvency occurs when a person or company is not able to pay their debts as and when they fall due.
A lawyer is not necessarily required in an insolvency matter, but such a matter can often involve significant amounts of money, multiple parties and complex law, so having an experienced lawyer in your corner providing you with practical advice can help achieve a resolution quicker, and help to minimise stress and cost.
An insolvency lawyer can do a full review of both your debtors and creditors, as well as your overall financial circumstances.
They can advise on mechanisms provided by the Act for a company to secure protection from creditors’ claims and handle cash flow difficulties. At Gibbs Wright, we ensure that your interests are protected and that your dispute is handled swiftly and with the best possible outcome for you in mind.
Court proceedings can be costly, time-consuming and stressful, so our lawyers at Gibbs Wright will always attempt to negotiate a resolution before recommending your matter be litigated in a court.
At Gibbs Wright, we work closely with you to determine the best plan for your particular circumstances, taking into account your finances and expectations.
We will walk you through the steps of the journey, which begins with a free initial discussion to assess the strength of your case and your legal options.
We will request key documents such as contracts, invoices, financial statements or letters of demand to assess this. If we determine that we can help you, we can provide an estimate of fees, depending on the expected cost and complexity of the matter.
We are well versed in insolvency legislation, and we have an office conveniently located in Brisbane, but we can assist Australia-wide. So, if you’re looking for an insolvency lawyer, call us today to let us handle your matter.
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