Insolvency & Restructuring

What is insolvency?

Insolvency is an inability to pay all your debts as and when they fall due. It can apply to any legal entity. Most commonly it is a term used to describe the financial affairs of individuals and corporations who find themselves in that unfortunate situation.

It is important to note that an entity can be insolvent even though it has sufficient assets to cover its liabilities but is unable to liquidate those assets quickly to meet those liabilities as they fall due.

Insolvency of an individual is dealt with according to the bankruptcy laws of Australia. See our bankruptcy page for more information on that area.

Corporate insolvency in Australia is regulated by the Corporations Act 2001 (Cth).

Gibbs Wright Litigation Lawyers has extensive experience in litigation concerning the insolvency regime prescribed by the Corporations Act and providing small to medium corporate enterprises anywhere in Australia with insolvency advice.

Most of our clients are facing dire financial circumstances in the current economic environment, and we are here to give practical, sound and considered advice to help them navigate these unprecedented times.

In this current economic climate, you are not alone, and you have options.

Should I get legal advice?

This typically depends upon how serious your company’s financial circumstances are. The fact that you have searched for information regarding corporate insolvency indicates you already have a reasonable level of concern about how your company is travelling financially.

A list of insolvency indicators was compiled by the Victorian Supreme Court in ASIC v Plymin (2003) 46 ACSR 126. You should consider seeking advice if your company has any of the following indicators:

Corporate losses, on their own, are not enough to make a company insolvent. Availability of working capital to meet those losses can mean insolvency is avoided. However, continuing losses over a long period of time without sufficient working capital to absorb them can render a company insolvent.

A comparison of current assets against current liabilities represents a businesses’ liquidity ratio provided those assets can be realised quickly. If that ratio falls below one that may indicate an inability for a company to pay its debts. Other factors such as cashflow, the age of debtors, the liquidity of assets and the availability of borrowed funds and overdraft facilities must also be considered.

Unpaid Commonwealth and State taxes is a good indicator of insolvency. When companies decide not to pay GST or PAYG commitments as a way of ‘borrowing money from the government’, directors need to seriously consider whether the company is insolvent, and they should cease trading and enlist the help of insolvency professionals.

Banks are in the unique position of being able to analyse the flow of funds through a company’s accounts. If the company has borrowed funds, the bank will also have access to information the company’s other creditors do not. Therefore, an inability to borrow further funds due to overdue payments, dishonoured cheques and the bank’s assessment of the cashflow and management of the business; is a red flag for insolvency.

When this occurs, companies may seek to overcome cashflow issues by:

  • Converting short term debt to long term debt by re-negotiating payment terms

Borrowing to pay debts that are due – creating a new debt to pay an old debt, effectively

An inability to attract an equity investor in the company is a strong indicator that the company has a cashflow problem and is perhaps insolvent. An inability to borrow funds to pay debts is also an indicator of insolvency.

When a supplier of the company ceases supply until debt levels are decreased, or places a company on COD terms, that is a strong indicator of cashflow difficulties and insolvency.

Being the subject of collection activity by creditors who have not been paid within their terms of trade can indicate the company is short of money. If the frequency of demands, letters from debt collectors and even legal proceedings is increasing, that is a strong indication of insolvency.

Although the use of cheques is decreasing, it can still happen that creditors are sent post-dated cheques from a debtor. Effectively, this flags to the creditor that the company does not have the money in their account to pay them right now but expects to at the future date written on the cheque. As such it is a clear indicator of cashflow problems and potential insolvency.

When a cheque is dishonoured by the bank it is presented to, it means there was not enough money in the debtor company’s bank account for the proceeds of the cheque to be paid to the creditor it was sent to in full. This is another clear indicator of cashflow difficulties and possible insolvency.

By entering into a repayment agreement with a creditor a debtor company is admitting they cannot pay then debt when it was due and had to negotiate paying the debt off over time. This has the advantage of extending the debt terms meaning that it is no longer due and payable, but it is also evidence of the company’s cashflow difficulties.

Receipt of solicitor’s letters, Court proceedings, judgments and enforcement warrants from a number of sources creates a strong presumption of insolvency; compared to say one demand that was disputed. By allowing Court proceedings to reach the judgment stage, insolvency is all but confirmed.

These are payments to creditors which are not reconcilable to specific invoices. This is usually done because a company cannot pay the account in full, has not been successful in negotiating a payment arrangement, and is hoping to imply extended credit terms through making part-payments to the creditor as it can.

If a company fails to keep financial records for a specified period, the Corporations Act deems it to have been insolvent throughout that period. The Courts have also generally noted a correlation between deficient financial records and insolvency. Traditionally, insolvent entities have been shown to exhibit a reluctance to produce timely and reliable accounts, further preventing them from negotiating successful outcomes with their banks and creditors.

You may have these options

Depending upon your companies’ circumstances, it may be able to secure protection from creditor’s claims and current cashflow difficulties using the following mechanisms prescribed by the Corporations Act.

Safe harbour provides company directors with protection from liability for insolvent trading while they take advice and devise an action plan to turn the business of the company around which will achieve a better outcome for the company than simply liquidating the business. Safe harbour can enable directors to undertake a corporate restructure outside a formal insolvency process. To be eligible a company must have all its ATO reporting and lodgements up to date and have no unpaid employee entitlements.      

Voluntary administration is a process which enables an insolvent company to put forward a formal proposal to its creditors which will give them a greater return than liquidating the company. If the proposal is accepted by creditors, it usually enables the company to continue to trade, and control of the company will revert 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.

The formal proposal put forward to creditors under a voluntary administration, if accepted, is formalised in a deed of company arrangement. The process set out in the deed must be strictly followed by the company as it uses it to trade out of its financial difficulties. If the company breaches the terms of the deed, it may well 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 Supreme Court seeking and order for it to 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 de-registration of the company. As such, its affairs are said to be ‘wound up’ and it then ceases to exist as a legal entity.

If it is found by a company’s liquidator that its 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 Corporations Act. One of the primary defences to an insolvent trading claim is that the director reasonably believed at the time the company incurred the debt or debts in question, that the company was solvent. Therefore, a director confronted with such a claim should seek advice as to whether that defence, or any of the other defences available under the Act, can be raised on their behalf.   

Impact of COVID-19

At Gibbs Wright Litigation Lawyers we are staying abreast of the impact on disputes due to economic and legislative changes brought about by the COVID-19 pandemic. This includes re-evaluating the prospects of your insolvency matter and a consideration of the impact on the options available to you.

Rest assured that at Gibbs Wright Litigation Lawyers our considered and practical approach to your insolvency matter will include advice that is both timely and relevant to assist you and/or your company to navigate these trying economic times.

How we can help you

Gibbs Wright Litigation Lawyers are skilled negotiators; we negotiate multi-million-dollar lawsuits, so we know what it takes to get a deal done.

Negotiation is necessary, regardless of whether you’ve received a demand to pay a debt or are being threatened with winding up proceedings.

If you have any insolvency issues, as litigation and insolvency lawyers, Gibbs Wright can do a full review of both your debtors and creditors list, and overall financial circumstances, because we know that most businesses that are struggling financially can benefit from an objective assessment of their financial position and available options.

Our experienced lawyers can provide advice on any range of issues affecting your company from general insolvency advice, to vigorously pursuing or defending claims including those against you as a director and assisting you with any of the formal insolvency recovery and re-structuring options available under the Corporations Act.

We are also diligent and flexible with our fees. 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. Talk to us to see what solutions we can offer you.

Do you have an Insolvency matter?

We offer an initial, no cost, obligation-free consultation to assess the strength of your case.