Analyzing Financial and Legal Implications of Business Insolvency

The assignment delves into the intricate landscape of corporate insolvency within Australian law, emphasizing the pivotal role directors play in managing financially distressed companies. It examines the legal obligations directors must adhere to under the Corporations Act 2001, particularly focusing on insolvent trading provisions and their implications for financial management. Furthermore, it explores the liquidation processes applicable to solvent companies, detailing procedural requirements and director duties. The Australian Securities and Investments Commission (ASIC) is highlighted as a crucial regulatory body that oversees corporate compliance, offering guidance and enforcing regulations to maintain market transparency. The assignment also addresses practical strategies directors can employ to navigate insolvency challenges effectively, drawing on case studies such as 'Hussain’s Case' to illustrate key points. Through this comprehensive analysis, the assignment aims to equip readers with a nuanced understanding of insolvency law in Australia, enhancing their ability to manage corporate crises responsibly and ethically.

Running head: BUSINESS LAW
Business law
Name of the Student
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Author Note

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A company is considered insolvent when it lacks the means to give back all its liabilities to the
respective creditors and is also unable to meet the basic requirements of a financial institution in
order to run it. Such a condition can be identified when a few hints are brought together, the fist
and the most obvious one would be when it’s bankrupt or simply when the bank refuses to offer
any more credit to the company in question. Another situation can be formed if the sellers are
unwilling to provide goods in load due to the lack of assets. Or, as seen in the case of
Harnahan., Ramsey. and Stapledon2017, when the entity is not able to reciprocate and pay the
lenders off, which might backfire as the threats and legal demands accumulate one atop another.
It can very well be said that when insolvent, the company cannot provide the workers with
payments, nor can it in any possible circumstance pay off the wages bill. There are three steps
that too might involve in the identification process:
1. Cash-flow test - If it is seen that the company is so broken that it may not pay off its debts
in the coming future, it by all means can be branded insolvent.
2. Balance Sheet test - An entity when seen to have its total liabilities greater than its total
assets, it’s considered insolvent.
3. Company Insolvency test - The insolvency of a company is seen when it cannot pay back
its liabilities due to the liabilities, already being more-so than the assets.
It is necessary that in the case if the company is insolvent, haste must be taken in all
possible situations and all possible measures. The directors are supposed to be calmly deduct the
worst case scenario and think of measures to deal with the threat. It is evident that detectors my
concentrate on the financial stability of the organization. It is important that the board keeps the
Cash-Liquidity ratio under surveillance and monitor the losses accumulated by credit trade, the
tax rate and the correct and regular financial status updates. It is necessary that the directorial

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board formulates strategies and plans from beforehand to deal with insolvency whenever and
wherever it may arise in a course of time, the directors understand very well that if insolvency
may arise, then it’s best to restructure and regroup all the processes involved in finance and
reform and utilize them with utmost patience and care (Brown 2015)
. It is expected of the directorial board to work in the most appropriate manner in order to
achieve the company’s best interest. Corporation Act 2001 (Cth) (CA) has imposed many rules
and regulations that play their part in the direction of a company by common law, in the
Australian continent. A breach of order may in most probable circumstances lead to the
disqualification of the directorial board along with facing several criminal charges and civil
penalties. Though, by the section 588 G in the said Corporation Act it became a necessary that
no director must engage the company in any form of trade what so ever if deemed insolvent or is
about to be insolvent. It is evident that the directorial board is bound to pay off the liabilities
personally when in solvency strikes. A company along with its parent was subject to trading
while insolvent and brought to face the court as committing breach of both sections 588G and
588V as per the directions of C by a liquidator. This was the case of Carrello as liquidator of
Perrinepod Pty Ltd v Perrine Architecture Pty Ltd (“Carrello’s case”) [2016] WASC145,
because of the lack of evidence, the case was unable to proceed, though the company in question
had to face adverse adjudications. A fine of $1.06 million was found to be involved in insolvent
trade, hence the liquidator's claim was finally met.
Similar to the laws that are directed in order to punish a breach and committing a breach or
getting involved in insolvent trading, the 588H helps the companies to defend themselves in the
following cases given below:

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1. Proof of solvency even after getting involved in a said trade activity with a company
without getting insolvent.
2. Providing proof of solvency before, during and after the trade took place between the
companies in question.
3. Further debt prevented by the application of necessary positive measures by the board of
directors in order to avoid further debts.
4. Taking a prudent minded person in for the deduction to whether they would make the
same decisions on the matter or not.
5. The directors are given the liberty to reach out to professionals to prove the fact that they
were either physically, mentally or economically sick or viable, and their said conditions
prevented them from making rational decisions when it came to the company’s welfare.
6. The directors are given the liberty to prove that they might have been listening to the
advice and working upon a said person’s jurisdiction, proving that the said person is
competent and is of a prudent mind and physical health.
Apart from the measures stated above, it is required of directors to hire a qualified manager or
administrator who would take appropriate financial measures in order for company to thrive, and
also percussionary and safety measures to avoid insolvency altogether. Hussain v CSR Building
Projects Limited; in the matter of FPJ Group Pty Ltd (in liq) (“Hussain’s case”) [2016] FCA
392 discussed the need of a prudent manager with financial expertise to advise the company in
question.
When total liabilities are greater than the total assets of a company, it is seen that the
company is unable to pay off its debts with the assets it has, in such cases the company is bound
to shut down/Wind up. Winding up is a process of selling off all the assets that the company may

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possess, paying off all the liabilities and shut down permanently. It has two types, Voluntary and
Involuntary. As the names suggest, voluntary winding up happens when the company members
voluntary agree to shut the company down, Involuntary is just the opposite (Brown 2015).
In the case of solvency, wither the member’s liquidation occurs or the creditors
liquidation, which are both cases of voluntary winding up. However, in the other case of
involuntary winding up, the members have to go through court of law by the said creditors, when
they are not able to pay their debts. The court of lay analyzes both the lack of conduct of the
organization and its debtors (Innes 2016).
As stated above, it may seem that creditor’s voluntary liquidation is a process that can
occur even when a company is insolvent, unlike that other processes that can only occur when
there is solvency. It has also been said that creditor’s voluntary liquidation is a process that helps
in the claiming of any type of misconduct seen in the company. The only problem this process
seems to have is, being expensive to a degree where even the directors have to voluntary use
their personal assets in order for the liquidation process to proceed and might also get affected in
a more drastic manner as they are now liable to all the company’s losses and liabilities and it
may also affect their career. Fraudulent trading by any debtor is considered punishable by law as
done in this particular process as per section 1317E. The disqualification of debtors can occur via
the CA Section of 206A.
It is seen by various polls that the companies going insolvent have drastically
increased in the Australian content since the last few years. But, it has also made it evident that
many companies are resorting administration to fix their insolvency, as in 10000 companies
yearly. It was found that 10212 as in April 2017 had entered a valid process of administration to
treat their condition. An average of 5% is recorded as an annual increase of these numbers with

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the previous year’s going up to 6%. Secured creditors, mostly banks, appointed an average of
almost 1356 workers in April 2017 that is result to an increase of 73% since half a decade. The
following statistics were taken from the official report of the Australian Investment and the
Security Commission (AISC) linked - (Asic.gov.au.2017).
There are various issues that lead to insolvency in the country and continent of
Australia, but the most prominent one was seen to be inadequate cash flow in the company
accounts as provided by the AISC, which results in non-fulfillment of creditor demands due to
lack of cash inflow and will have to eventually go through winding-up. Insolvency is most
evident if the organization is managed in a poor and irrational manner or by a not prudent person,
which strengthens that fact that improper management will always lead to a considerable loss.
But, above all, it is most seen in Australia that various companies end up in the court law due to
the conduct of forbidden insolvent trade. It was seen that assets costing more than 200 million
were frozen in the case of the Queensland Nickel company that happened quite recently for the
same reason. It is important to decide who will be chosen to select as a prefered payment
candidate during the winding up, Blakeley and Australian Music Pty Ltd v Yamaha Music
Australia Pty Ltd (“Blakeley’s Case”) [2016] VSC 231 is a recent case that discusses this topic
in detail.
The guardian the financial world of Australia is the Australian Investment and the Security
Commission that has the responsibility to maintain proper transparency in the market by
managing the flow of capital and looking for any breach in laws and other threats that may come
to pass on its watch. The role of it is to act in order to manage any case where a company is
supposed to get insolvent or is already insolvent and act a s regulator between them and the
market or the society altogether. It works for the enhancement and improvement of the

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organization from inside and out and provides all the provisions that are legally viable and
defines insolvency depending on the debt accumulated by the company in its long run and
mentions measures to repay them. It also has the other goal of enhancing the competency and the
ability to understand and work accordingly in Australia such that more companies become self-
reliant. Most prominent features would be the three procedures of insolvency:
1. Liquidation
2. Receivership
3. Administration
The commission helps insolvent companies by publishing statistical reports and insolvency
sheets for information if the companies are unaware of how to proceed. It guides the directors,
administrators, stockholders, workers etc. if they become insolvent (Asic.gov.au. 2017).

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References
Asic.gov.au. (2017). Insolvency for directors | ASIC - Australian Securities and Investments
Commission. [online] Available at:
http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/ [Accessed 18 Sep.
2017].
Asic.gov.au. (2017). Winding up a solvent company | ASIC - Australian Securities and
Investments Commission. [online] Available at: http://asic.gov.au/for-business/closing-your-
company/deregistration/winding-up-a-solvent-company/ [Accessed 18 Sep. 2017].
Australia, C.P.A., 2015. Small business survey program: Financial management, insolvency and
fraud.
Blakeley and Australian Music Pty Ltd v Yamaha Music Australia Pty Ltd (“Blakeley’s Case”)
[2016] VSC 231.
Brown, A., 2015. ASIC: From little things, big things grow-lodging and publishing. Australian
Insolvency Journal, 27(1), p.42.
Brown, A., 2016. ASIC: Better communication, insolvent trading and notices to creditors.
Australian Restructuring Insolvency & Turnaround Association Journal, 28(1), p.42.
Carrello as liquidator of Perrinepod Pty Ltd v Perrine Architecture Pty Ltd (“Carrello’s case”)
[2016] WASC145
Coggins, J., Teng, B. and Rameezdeen, R., 2016. Construction insolvency in Australia: reining in
the beast. Construction Economics and Building, 16(3), pp.38-56.
Corporation Act 2001 (Cth)

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Elks, S. and Elks, S. (2017). Clive faces ‘massive mega trial’. [online] Theaustralian.com.au.
Available at: http://www.theaustralian.com.au/news/nation/clive-palmer-faces-court-set-for-one-
massive-mega-trial/news-story/52d0666f855e0d54151da588928cab31 [Accessed 18 Sep. 2017].
Harnahan, P., Ramsey, I. and Stapledon, G. (2017). COMMERCIAL APPLICATION OF
COMPANY LAW. 18th ed. Oxford University Press.
Hussain v CSR Building Projects Limited; in the matter of FPJ Group Pty Ltd (in liq)
(“Hussain’s case”) [2016] FCA 392.
Innes, K., 2016. Australian insolvency law: Cases and materials [Book Review]. Ethos: Official
Publication of the Law Society of the Australian Capital Territory, (240), p.61.
Osborne, M., 2016. Bankruptcy administration in Australia. Australian Restructuring Insolvency
& Turnaround Association Journal, 28(2), p.22.