Corporate Law Assignment - Insolvency

Running head: CORPORATE LAW
Corporate Law
Name of the Student
Name of the University
Author Note

1CORPORATE LAW
Table of Contents
Introduction......................................................................................................................................2
Conclusion.......................................................................................................................................8
Reference List..................................................................................................................................9

2CORPORATE LAW
Introduction
A company becomes insolvent when it becomes incapable of paying debts. The liabilities of
the company become bigger than the assets of the company, which makes the company
incapable to pay the debts to its creditors, further making it incompetent to fulfill the basic
requirements that are indispensible for carrying on the operations of the company. Several
circumstances in a company indicate the signs of insolvency. Such circumstances entail
maximum borrowing of the company when the company has reached the limit of the bank
overdraft and it is unable to borrow without providing personal guarantees. the suppliers of the
company refuses to supply credits and the company lacks adequate assets to obtain a secured
short-term loan.
Another instance that indicates the company is about to become insolvent is when the
organization is unable to pay off its lenders, which further acts as a threat, and entitles the
company to legal proceedings. While the company becomes insolvent, it becomes unable to
make payments to its employees and workers as well. The following are the two tests, which
determines the insolvency of the company:
a) Balance sheet test- this indicates that the amount of liabilities of the company is more
than the amount of assets of the company. the liabilities includes the uncertain and future
liabilities of the company as well;
b) Cash-flow test- this test determines whether the company be able to pay off its debts in
future by all it means. If the company is in a condition that disables the company to pay
off its debts in present as well as in the future, it can be said to be insolvent;

3CORPORATE LAW
After the company is declared as insolvent, it becomes imperative for the company to take
necessary measures to deal with the situation reinstate the company to the position as it was prior
to such insolvency. The directors have significant role to play when it comes to the insolvency of
the company. They are required to act wisely and with diligence to deal with the situation and
take measures that is in the best interest of the company and its members (Asic.gov.au. 2017).
The directors are required to concentrate on the financial status of the organization for which it is
important that Cash liquidity ratio is subjected to strict mentoring and placed under surveillance.
The directors must not allow the company to incur any further debts and until it becomes feasible
for the company to refinance, restructure or obtain equity funding for recapitalizing the
company, the company may appoint either a liquidator or a voluntary administration.
Voluntary administration enables a company to resolve the future direction of the company
where a responsible person is appointed who exercises control over the company with a view to
prevent the company and its business. In the case FPJ Group Pty Ltd (in liq) (“Hussain’s
case”) [2016] FCA 392, it was held that the person appointed shall be responsible for conducting
the business operations in a way that produces better results and provides better return to the
creditors of the company. A liquidator shall take control of the company to wind up the affairs of
the company in a fair and orderly manner, thus ensuring benefits of the creditors
(Asic.gov.au.2017).
The directors of a company are required to act in a manner that is in the best interest of the
company. The Corporation Act 2001 (Cth) (CA) has stipulated several statutory provisions that
must be followed by the directors of the company. In the event of non-compliance of such
statutory rules, the statute penalizes the directors to the extent of exclusion of the
director/directors from the board of the company. Under section, 588 G of the Corporation Act it