What is corporate insolvency?
Pursuant to s95 of the Corporations Act 2001 “a person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.”
Type of insolvency
There are 3 types of insolvency, they are
- voluntary administration
- liquidation or winding up and
Voluntary administration is where the board of directors resolve the company is insolvent, or is likely to become insolvent at some future time, to appoint by writing, an administrator of the company.
The appointed administration will have control of the company’s business, property and affairs and may carry on that business and manage that property.
Liquidation or winding up
Winding up by Court
On an application under the Act, the Court may order an insolvent company be wound up.
Winding up by ASIC
ASIC may order the winding up a company under certain circumstances, for example, if a company has not lodged any other documents under the Act in the last 18 months or ASIC has reason to believe the company is not carrying on business or ASIC has reason to believe that it is in the public interest to wind up the company, etc.
Winding up Voluntarily
A company may be wound up voluntarily by special resolution.
A secured creditor of a company may appoint a receiver to collect and sell property of the company to repay the debt owed to the secured creditor.
A Deed of Company Arrangement
A deed of company arrangement is an agreement between a company and its creditors to govern how the company’s affairs would be dealt with with a view to provide a better return for creditors rather than an immediate winding up of the company.
Assessment of Insolvency
The assessment of solvency or insolvency is mostly focused on cash flow and the debtor’s liquidity to meet its expenses and liabilities when they are due and payable.
List of Indication of Insolvency
(Mandie J in ASIC v Plymin  VSC 123 at 386
- Continuing losses
- Liquidity ratios below 1
- Overdue Commonwealth and State taxes
- Poor relationship with present bank, including inability to borrow further funds
- No access to alternative finance
- Inability to raise further equity capital
- Suppliers placing the debtor on COD or otherwise demanding special payments before resuming supply
- Creditors unpaid outside trading terms
- Issuing of post-dated cheques
- Dishonour cheques
- Special arrangements with selected creditors
- Solicitor’s letters, summonses, judgments or warrants issued against the company
- Payments to creditors of rounded sums which are not reconcilable to specific invoices
- Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.
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