Are you at risk of insolvency?

An individual or business is insolvent if they cannot pay all of their debts as and when they fall due. This simple definition has resulted in the evolution of much case law over the years.

Perhaps the best known case on the issue of ‘insolvency’ is the Water Wheel case [ASIC v Plymin & Ors (2003) 46 ASCR 126]. From this case ASIC has reproduced in its Information Sheet 42 – Insolvency: a guide for directors.

Directors of all companies should be familiar with this document.

Insolvency terminology includes a number of key terms – liquidation, voluntary administration, receivership and bankruptcy and many people don’t know the differences between them and how each process works.

The most important point to note is that each involves the appointment of an insolvency practitioner, who is bound to act in the best interests of the stakeholders generally.

Bankruptcy applies only to ‘natural’ persons and generally lasts for a set period of time (generally 3 years), during which a trustee will realise a bankrupts assets (subject to some exclusions) and divide those assets among the bankrupt’s creditors.

Liquidation (also known as ‘winding up’), is a process that applies to companies and requires a liquidator to sell a company’s assets and divide the proceeds amongst the company’s creditors. A company does not emerge from a liquidation and is generally deregistered at its completion.

A receiver (or receiver and manager) is generally appointed by a secured creditor (e.g. a bank) to recover a specific asset or group of assets. Companies can emerge from receivership, although another insolvency appointment (such as liquidation) will often happen concurrently.

Finally, voluntary administration is a process where an administrator is appointed to a financially troubled company to investigate, report and recommend a course of action to creditors on the company’s future. Often a company will proceed from administration into liquidation, but not always.

If you find yourself dipping into your GST account, tax reserves or, your employee super obligations to meet your immediate debts hoping that the next sale will get you back on track. Then you're definitely at risk. I would encourage you to consult early and seek advice promptly. There may be a way out.