Corporate Law Instructors Name Institution Supervisors Name Course Introduction

Running head: CORPORATE LAW
Corporate Law
Author’s Name
Institution
Supervisor’s Name
Course
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CORPORATE LAW
Table of Contents
Introduction......................................................................................................................................3
Signs of Insolvency along with Required Actions of the Directors................................................3
The Potential Liabilities of Company Directors When a Company becomes Insolvent.................4
The Different Avenues Available to the Director Or Company if it presumes to be Insolvent......5
Difference between Voluntary and Involuntary Interventions Aligned with Organization’s
Potential Insolvency.........................................................................................................................6
Voluntary Liquidations................................................................................................................6
Involuntary Liquidations.............................................................................................................7
Outcomes Other than Winding Up of a Company during Insolvency.............................................7
The Statistics on Insolvency Regarding Australian Companies......................................................8
Role of ASIC Along with Other Statutory Authorities Considering Insolvent Company..............9
Conclusion.......................................................................................................................................9
References......................................................................................................................................11
Appendices....................................................................................................................................15
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Introduction
Solvency is referred as the abilities of an organization or its members for paying out all their
debts that are due as well as unpaid till the date mentioned under section 95 A(1) of the
Corporations Act 2001. Here, the value of assets is always higher than that of liabilities, which
indicates that dues can be easily payable by the solvent organization. However, in section 95A(2)
of the Corporations Act, a person unable to pay the dues or debts on time is termed as an
insolvent and the situation is known as insolvency. Here, the situation is completely vice-versa,
where liabilities exceed the assets in an organization (Australian Institute of Company Directors,
2012). Additionally, liquidation of a company means winding up, the last step taken into
consideration in case the debt amount is left unpaid. Here, the assets are sold at a discounted rate
to recover the due amount leading to company disclosure (ASIC, 2017; Australian Institute of
Company Directors, 2012). The paper explores diverse concepts related to insolvency and its
impact in Australia. Moreover, Australian Securities & Investment Commission (ASIC)’s role in
insolvency issues are analyzed within real life situations, which finally helps in the
accomplishment of the paper objective.
Signs of Insolvency along with Required Actions of the Directors
Warning signs related to the insolvency risks are situations in business, which indicates the
inability to pay off debts. Few of the signs are inability to pay the due taxes, where the
organization starts ignoring the tax payments because they are bound to pay wages of the
employees, supplier along with creditor demands. Usage of superannuation contribution of the
employees for trading, experiencing continuing losses along with reduced cash flow as well as
receiving legal notices on behalf of the creditors are few signs that push the business towards
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CORPORATE LAW
insolvency. For instance, if an organization does not pay the creditors on due date of 25-30 days,
suppliers will further push them to pay or demand Cash on delivery for the next orders.
Therefore, credit supply will be over, which will badly affect the already unbalanced cash flow
(BTSA, 2017) Some additional signs include inadequate amount of sales along with lack in sales
forecast and increased in the account receivable with the passage of time, thereby relying on
obtaining finance or loans at high interest rates. Besides, financial records stay incomplete while
the organization is found to be incapable of selling any further stock as stock turnover is quite
low. All these signs align with the causes of insolvency of an organization (BTSA, 2017a).
Directors need to understand the application of five rules to handle the insolvent situation in an
organization starting with avoiding the resistance to acknowledge as well as to display pro-
activeness by acting quickly and as early as possible. Additionally, the directors should look for
adopting vigorous standards, where monitoring will be improved by considering the assets,
liabilities, cash flows and bank facilities of the organization. The board of directors must further
seek financial along with legal advice for developing alternative plan, when the existing plan is
about to fail. At such instances, they can inject fresh funds to overcome the situations of financial
difficulties. Moreover, directors should ensure that the banks are informed and engaged in the
complex situations, where possibilities of short term loans may be provided to their organization
for restructure and for turning-around the situation. The turnaround as well as restructuring
strategies will take time and therefore directors need to keep patience and ensure engagement of
stakeholders for its successful implementation (Corrs, 2017).
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The Potential Liabilities of Company Directors When a Company becomes Insolvent
A director will be personally liable for breaching the rules and regulations of the organizations,
based on the need to take potential action for recovering the debts. It is the legal duty as well as
obligations of a director to act for company’s benefit pertaining to the organizational objective.
Directors are in turn responsible for administering the organization in support of the
shareholders. According to the Corporations Act 2001 and common law, a director needs to
uphold certain duties, which additionally considers limited liability of the corporate entity. Any
breach of these duties can lead to legal consequences, which will in turn include civil along with
criminal penalties, sanctions as well as director’s disqualification for their post (Moroney, 2017,
ASIC, 2016).
Some of the potential liabilities of a director starts with delivering security or acting like a
guarantor over asset’s of the shareholders in the company. Additionally, directors need to ensure
that no trading take place, when the company has already become insolvent and determines the
debts incurred. Moreover, a director is liable due to the losses caused by the breach of their
duties. Besides phoenix activity also takes place in illegal terms, where transfer of assets to a
new organization undertakes intentionally for saving tax and avoiding payment to creditors along
with employee entitlements. Furthermore, a director is personally liable under ATO’s Director
Penalty Regime for withholding the amount of Superannuation Guarantee Charge (SGC) or Pay
As You Go (PAYG), in case the company is unable to repay the amount. Hence, organizations
ensure enough assets to pay off these debts (Moroney, 2017, ASIC, 2016).
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The Different Avenues Available to the Director Or Company if it presumes to be Insolvent
There are three different avenues available for a director, if the company is presumed to be
insolvent, which include voluntary administration, liquidation along with receivership. Voluntary
administration is a process, where future direction of the company is resolved at a quicker pace.
Here, voluntary administrator, an independent as well as suitably qualified individual work and
control the entire company to save its business by making a way out. Here, the voluntary
administrator further takes the responsibility to pay off the creditors in a better way. A director
can also act as a voluntary administrator after obtaining a written consent from registered
liquidator. The second option is liquidation, where a liquidator is appointed to control the
insolvent company and work accordingly for the creditor’s benefit on fair basis. A director needs
to call a meeting with the other member if they initiate the liquidation process. Here votes are
considered for permanently winding up the company by the liquidator or taking the help of court
for completing the process. The last option is receivership, where a secured creditor appoints a
receiver to collect as well as sell assets of an organization to repay the owed debt (ASIC, 2014;
ASIC, 2017a). This can be inferred from the topical issue of Value-stream Investment
Management Ltd v Richmond Management Pty Ltd [2012] FCA 898 (Federal Court of Australia,
2012). Hence, a secure creditor needs to hold some security on few assets of the company to
complete the process. A director can also be a secured creditor but requires seeking advice prior
to the appointment of any receiver (ASIC, 2014; ASIC, 2017a).
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