INSOLVENCY2Insolvency refers to such a situation in which the person is unable to pay back the money whichthey owed to the others. In terms of a company’s insolvency, the company is unable to pay thedebts owed by it, to different stakeholders. Insolvency broadly has two forms, i.e., the cash flowinsolvency and the balance sheet insolvency (Omar, 2017). In the former, the company has assetsto repay the debts; though, it does not have the right form to make payment. In the latter, thecompany does not have the requisite assets for repaying its debts. In Australia, the directors havebeen embarked with certain duties, which include not trading when the company is insolvent.The ASIC, i.e., Australian Securities and Investments Commission, along with the otherstatutory authorities play a key role in this regard (Keay, Murray and Harris, 2013). In thefollowing parts, a discussion has been carried whereby the different aspects of insolvency of thecompany have been discussed. This discussion would not only highlight the very basics ofinsolvency, but would also present the current state of company insolvency in the nation. An insolvent company fails in paying their debts when the payment is due. There are threecommon procedures for corporate insolvency, which includes voluntary administration,receivership and liquidation. A company does not become insolvent in a single day; there aresigns which often present as the possibility of a company being insolvent. There are always signspresent which show that the company is facing financial difficulties (ASIC, 2014a). Some of thesigns which indicate towards financial difficulty include poor cash flow, continued losses,creditors not being paid even out of their usual terms, lack of cash flow, debts continuouslyrising, absence of business plan, suppliers putting the company on Cash on Delivery terms,dishonouring cheques or issuing post dated cheques, problems in collecting debts or sellingstocks, inability in raising funds from the shareholders, unrecoverable loans to associated parties,overdue taxes and superannuation liabilities, problems in getting finance, expecting that the next
INSOLVENCY3big contact would save the company, disputes in board or with suppliers, and overdraft limitbeing reached (ASIC, 2016). In case the directors of the company suspect that the company is facing financial difficulties,there is a need to attain legal and accounting advice at the earliest, so that the chances of thecompany’s survival are increased. Amongst the leading reasons for a company not being savedin time includes the lack of seeking professional advice in timely manner. By appointing aninsolvency practitioner, the solvency review of the company can be conducted, who couldoutline the options which are available for the company. These held in making informeddecisions regarding the future of the company. When it is clear that the company is insolvent, itis of utmost importance that no further debts are incurred (ASIC, 2014b). The directors have a key role to play when the company is about to be insolvent. Section 588Gof the Corporations Act, 2001 (Cth) imposes a duty on the directors to prevent insolvent tradingby the company. As per this section, the directors have the duty to stop the company fromincurring debts at such a time period when the company is insolvent or by incurring such debt,becomes insolvent. As per subsection (2) of this section, the person would breach this sectionwhen they were aware of the company’s situation or had grounds for suspecting such, and that aprudent person would have been aware of such situation of the company. Subsection (3) attractscriminal liability and the person would commit an offence, when the requirements set out insubsection (1) are breached, along with the failure of the director in preventing insolvent tradingbeing dishonest. For breaching this section, the ASIC has the power of initiating a case againstthe directors for filing in fulfilling their duties (Australian Institute of Company Directors, 2014).Section 1317G allows the civil penalty of up to A$200,000 be imposed on the directors. In ASICv Rich [2003] NSWSC 328; 44 ACSR 682, ASIC initiated proceedings against the former
INSOLVENCY4chairman and sought not only pecuniary penalty, but also a disqualification order (Walker,2012). The directors, not only have to comply with the general and specific laws which are applicableon the operations of the company, but also owe a duty towards the shareholders. When thecompany is facing a risk of insolvency, the duties of the directors expand towards the creditorsand also towards the employees who have outstanding entitlements. The duty of not tradingwhile the company is insolvent has already been discussed. The other duty includes the duty ofkeeping the books and records (ASIC, 2014c). So, the directors need to ensure that the financialrecords of the company are maintained properly and show the true financial position andperformance of the company. When it is presumed that the company is insolvent, the directorshave different options available to them, which include restructuring the company, changing theactivities of the company, refinancing, or the last one, which is appointment of an externaladministrator (ASIC, 2014b). As has been stated earlier also, a company can be voluntary liquidated or can be liquatedexternally through appointing a receiver or liquidator. The voluntary intervention in case of apossible insolvency of the company is also known as the creditor’s voluntary liquidation. Theprocess under this is started by the members of the company and a resolution is passed by thedirectors for winding up the company and ultimately appointing a liquidator. In the liquidationinitiated by the creditors, the directors and members can choose the liquidator. The creditors alsohave the option of initiating involuntary company liquidation. When the money of the creditor isunpaid, they can start an involuntary liquidation of the company by making an application to thecourt for passing a winding up order. The judgment has to be firstly obtained for the particulardebt for the district or local court, and depends upon the amount which is owed or the statutory
End of preview
Want to access all the pages? Upload your documents or become a member.
Related Documents
Understanding Commercial Insolvency and Corporation Lawlg...
|8
|2887
|249
Assignment on Corporate Law Insolvency of Corporationslg...
|8
|2786
|39
claw314 : corporate law assignmentlg...
|10
|2856
|220
Corporate Law Instructors Name Institution Supervisors Name Course Introductionlg...