Insolvency occurs if a person, a business or a company is unable to pay their debts as and when they become due and payable.
It may be an offence under S. 588G of the Corporations Act if the director(s) of a company continues to operate and incur more debts when a company is insolvent.
Directors who fail to take appropriate steps to stop a Company trading whilst insolvent could:-
- become personally liable for the Company’s debts;
- face civil penalties including pecuniary penalties of up to $200,000;
- face criminal charges which could lead to a fine of about $220,000 or imprisonment for up to 5 years, or both.
If a company is facing financial difficulties and the directors or creditors believe that it is, or may become, insolvent, it may end up in one of the following types of formal administration:
- Liquidation, also known as winding up;
- Voluntary Administration or Deed of Company Arrangement; or
The appointment of a formal administrator may be voluntary, when it is initiated by the company itself, or involuntary when it is made by a person or organisation that is owed money, or by the courts.
Insolvent individual – Bankruptcy
An individual facing financial difficulties may take steps to declare themselves bankrupt by lodging a Debtors’ Petition with Insolvency and Trustee Service Australia (ITSA). Alternatively, a creditor who is owed money may make an application to the Court to make its debtor bankrupt.
On bankruptcy, a Trustee will take over and manage the bankruptcy property and assets. The trustee’s role is to sell the assets to raise money to pay the creditors as much of the money owed as possible.
A bankrupt may not be allowed to travel overseas, or to work in certain professions. Bankruptcy usually lasts for three years, after which the individual may be discharged – although it will remain on their records for 7 years. If all the debts are paid in full, the Trustee can annul the bankruptcy.
There may be alternatives to being declared bankrupt including: financial counselling, debt agreements, or a controlling trustee/personal insolvency agreement.
Creditor to an insolvent company or individual
If you are owed money by a company or individual then you are a creditor.There are generally two categories of creditor: secured and unsecured.
A secured creditor is someone who has security – such as a mortgage – over assets to secure a debt owed. An unsecured creditoris someone who does not have security over an asset.
Employees owed money for wages and other entitlements are also creditors, however they receive a priority to unsecured creditors and are entitled to be paid before them, if there is sufficient money available.
The distribution of money to repay debts will depend on whether you are a secured or unsecured creditor, or an employee, and if the debtor is a company, whether the company has been placed into voluntary administration, receivership or liquidation.
PWD can provide overall assistance in this area.