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The term insolvency describes the situation where an individual or business cannot pay bills when they are due.

Take a look at some of the options and steps involved with the insolvency process if you are a business.

How do you know if you are insolvent?

The signs you are insolvent are:

  • If the number of overdue bills keeps building rather than dropping
  • If the total of your business debts is higher than the value of the assets, you own
  • If your sales figures and profits have been on a downward trend
  • If you don’t have the cash flow to cover your regular expenses
  • Your financial team is continually receiving phone calls and letters of demand from creditors

In some circumstances, multiple creditors may take action against a company that doesn’t repay its debts. This can result in what’s known as compulsory liquidation — and an order is issued by the court as a result of the creditors’ actions.

Otherwise, the company’s directors can start the insolvency process themselves, if they feel they need help to take stock of the situation and bring things under control.

Being insolvent doesn’t necessarily mean the end of the business. The first and most important step is to engage a team of legal professionals who are experienced in insolvency and can guide business directors through the process. Once someone is on board to help with the relevant steps and paperwork, here are the potential steps to move through:

Voluntary Administration

When a company goes into voluntary administration, the directors hand control to external administrators who start investigating financial details and working out how to deal with creditors. These experts are sometimes referred to as insolvency practitioners or receivers.

The company can continue trading during this time but there has to be a formal admission to the Australian Securities and Investments Commission, which will make a note that the company is in administration.

Once the administrators have completed their investigation, there will be a clearer picture of whether it is possible to pay creditors and move forward, or if liquidation is the best next step.

Receivership

If debts can be restructured, payment plans can be arranged and assets sold in order to pay off the creditors, or if the company can be acquired by another entity, it may be possible to get back on track and continue trading.

In these circumstances, a receiver is appointed to oversee the management of assets, potentially restructure the company and help take care of financial obligations.

Liquidation

The insolvency professionals you work with may determine liquidation as the best course of action if there is no way to escape the financial difficulties the business is facing.

Liquidation is also referred to as “winding up”. As part of this, items of value (assets) are sold to help repay debts, the company is closed, and it stops trading.

How to recover from insolvency

Recovering from insolvency is possible and many Australian companies have been able to do so. A positive outcome often depends on taking action sooner rather than later.

To avoid the threat of insolvency, careful financial management and a monetary ‘safety net’ are essential. It makes sense to work with a good accountant so you can be aware of spiralling costs before they are out of control.

Would you like more information about the steps to insolvency, contact Crest Lawyers today to discuss your options.

 

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.