What is Insolvency

Insolvency is a term that applies to both companies and to individuals who can no longer meet their financial obligations, however personal insolvency (also known as bankruptcy) only applies to individuals.

Whether you are a company or a person, insolvency is the legal term for the inability to pay your debts as they become due. Company insolvency does not necessarily lead to personal insolvency, but if you don’t get the right financial advice and act quickly it may well lead to bankruptcy.

How do I know if I am (or when I become) business insolvent?

You are business insolvent when your company can no longer meet its financial obligations and pay its debts when they are due.

Signs your company is in financial difficulty and might become insolvent may include problems with cash flow, extending payment terms with creditors, refinancing to pay bills, and even legal problems, such as solicitors’ letters, demands, summonses, judgements or warrants issued against your company. Find out more

What should I do if I think I am trading insolvently?

If you are a company owner or director it is imperative you understand whether your company is insolvent or not because it is an offence for you to continue to operate and incur more debts whilst insolvent.

If you are aware that your company is trading insolvently you may be held personally liable for unpaid debts incurred from the time the business became insolvent.

What is the difference between Liquidation, Receivership and Voluntary Administration?

If your company is found to be insolvent one of the following three things will occur.

1.    Voluntary Administration

If your company goes into voluntary administration a voluntary administrator is appointed by you (and any other directors). The voluntary administrator will take control of your company, investigate its history and financial situation and then recommend one of the following 3 options:

  •        To return your company to its directors (an unlikely scenario in most instances)
  •        To place the company into liquidation (where all assets are sold off and the company ceases to exist)
  •        To continue trading under a Deed of Company Arrangement (DOCA), which is a formal agreement between a company and its creditors establishing how the company’s affairs will be handled and allowing your company to, in effect, trade your way out of insolvency

2.    Liquidation or ‘winding up’

Liquidation or ‘winding up’ occurs either by court order or by voluntarily electing to go into liquidation and it involves a liquidator taking over your company. Your company will cease to operate, and any assets (including property) will be realised, with the resulting funds used to pay off as much of your debt as possible, including any shareholders.

Your company will then be deregistered and will cease to exist.

3.    Receivership

The main difference between receivership, liquidation and voluntary administration is that if your company goes into receivership it is a secured creditor (usually a bank) who chooses the receiver. A receiver purely acts on behalf of the secured creditor who appointed the receiver and does not act on behalf of the other creditors.

If you are placed into receivership the receiver will try to ensure the secured creditor gets paid by either securing your company assets or by taking control of your company to trade under the secured creditor.

What is the difference between and receiver and a liquidator?

A receiver’s responsibilities are usually to a single secured creditor, such as the bank, whereas a liquidator’s responsibilities are to the general body of unsecured creditors.

If your company goes into receivership then sometimes the other unsecured creditors (who did not appoint the receiver) will appoint a liquidator to act on their behalf.

What are the consequences for me, if my company becomes insolvent?

If you are an owner or director of a company that becomes insolvent the consequences can be very serious and may include:

  •        losing your job if the company is unable to recover
  •        trouble gaining future employment as the insolvency will be on public record and you may also be disqualified as a director
  •        losing your house and other assets in order to pay your company debts
  •        risk of severe fines and even possible criminal charges and jail time
  •        ongoing personal and financial implications for any company staff who will all lose their livelihood as a result of the insolvency
  •        personal insolvency or bankruptcy
  •        severe and long-term impacts on your personal relationships and the economic welfare of your family

If my company becomes insolvent will I also become bankrupt?

Generally speaking, if you have responsibly managed a company you are either own or are a director of, any debts the company accrues will remain with the company.

However there are certain circumstances where you may become personally liable as a director for the company’s debts and other losses, which may lead to your bankruptcy, such as:

  •        Your company has incurred debts while trading after it became insolvent
  •        You have caused the company to suffer some loss as a direct result of breaching your duties as a director
  •        You have given a personal guarantee of the company’s liabilities in order to secure finance
  •        You have used your family home or other personal assets as a form of security
  •        You have engaged in illegal phoenix activity, which involves the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements

You may also suffer personal insolvency as a ‘knock-on’ effect of the potential loss of income and inability to find another job or even potential criminal record.

What should I do now?

If you are a company owner or director who wants to avoid insolvency or if you have found yourself already in insolvency contact one of our insolvency lawyers now.

We have the experience to help you achieve the best possible outcome for your situation and can help you to immediately put into place processes and procedures designed to protect you and your company. Learn more about how we work with you.

Contact us now