Assignment on Corporate Law Insolvency of Corporations
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Added on 2020-04-07
Assignment on Corporate Law Insolvency of Corporations
Added on 2020-04-07
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Running head: INSOLVENCY0Corporate Law
INSOLVENCY1Insolvency of CorporationsA person who is capable of repaying his debts or loans on their due dates is considered as solvent under the Corporations Act 2001. Therefore, the person who is not able to repay his debts or loans on the due date is known as insolvent. According to the Australian law, corporations are considered as insolvent and individuals are considered a bankrupt. In Australia, the law of insolvency regulates the position of an organisation which is unable to pay back their debts or suffering from financial crises (Hensher, Jones and Greene 2007)According to the Australian Securities & Investments Commission 2014, the companies which are unable to repay their debts are considered as insolvent. The process of organisations insolvency is regulated by Corporations Act 2001 (Cth). As per Wood (2007), the primary objective of this act is to maintain a balance between the benefits of debtors, creditors, and the public, in the process of insolvency. The long-term objective of an insolvent corporation is not considered by the law of insolvency. The goal of directors to restart the business of the company by reorganisation its structure is not permitted by the law of insolvency. According to Ramsey and Sim (2010), the financial crisis faced by organisations in its day-to-day working is the primary sign of a corporation’s insolvency. The following can be considered as the sign for insolvency of a corporation:The decrease in the liquidity and reputation Constant financial losses and bouncing of chequesOverdue creditors payments or taxesLack of future planning and fundsIncomplete financial statementsNon-payment of taxesDifficulty is raising funding for operationsSummons or warrants issued by the court against the corporationLow value of company’s stocksThe commission of taxation, after realising the above-mentioned financial crises of a company, issued a penalty notice against the corporation. This notice served to the directors of the organisations regarding the non-payment of company’s debts. If the corporation failed
INSOLVENCY2to take proper measures in 21 days, the commissioner is authorised to recover the amount of unpaid taxes from the corporation (Australia 2015). After assessing the financial crises of a corporation, it is the duty of directors to seek professional advice from legal and financial experts to protect the solvency status of a corporation. According to Tomasic (2006), the legal professionals assist organisation by conducting a solvency review over the financial statements of the enterprise and provide alternative solutions to the directors. The Proper alert should be provided to the directors regarding the alternative available for the protection of the organisation. The alternative options include various processes such as reconstruction or internal management, reorganisation, refinancing, altering the company’s procedure or employing an external administrator for managing the process of the company.The directors became liable towards the shareholder and creditors of the organisation if the enterprise declared as insolvent or is presumed to be insolvent in the near future. As per Wyburn (2014), the director’s duty enforces them to stop any trading activity or carrying the business of the company when it is declared insolvent. The directors should collect all the necessary information regarding the financial status of the corporation. Further, if the trading conducted by a company after being declared as insolvent is not properly recorded, then legalactions can be taken against the directors of such organisation. There are several avenues available for an corporation to avoid the insolvency. According to Ziegel (1994), if the corporation is presumed to be declared as insolvent, the duty of directorsis to avoid acquiring any new debt or loan. There are various types of internal and external restructuring, such as selling-off, recapitalisation, swapping the debts for equity, spinning-off,equity carve-outs, purchasing the leverages, paying back the debts, refinancing the business and compromising the creditor's arrangements.After declaring the insolvency, the parties of a corporation may decide to liquidate the company. As per Tribe (2012), the voluntary liquidation is also called creditors’ voluntary liquidation, in which the creditor or shareholder decided to liquidate the organisation. The parties appoint an independent liquidator to perform the activities of liquidation. The liquidator sells the corporation’s assets and uses such money to pay back the debts of the company. Another type of liquidation is based upon the order of the court. This liquidation is involuntary in nature and the court decides to wind up the company for the interest of its parties and public. In involuntary liquidation, the independent liquidator is appointed by the
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